What is Euler Finance (EUL)?

The Decentralised Finance (DeFi) ecosystem promises a new global financial system—one that is permissionless, non-custodial, and accessible to everyone, shattering the closed, intermediated structure of traditional finance. Among the projects at the forefront of this revolution is Euler Finance (EUL).

Euler Finance is a non-custodial and permissionless lending protocol built on the Ethereum blockchain. Simply put, it is an autonomous, smart contract-driven financial marketplace that allows users to lend their crypto assets for interest or borrow against collateral without needing a trusted third party. However, Euler is equipped with a suite of innovative features that distinguish it from its competitors in the DeFi lending landscape.

Decentralised Lending and the Euler Difference

One of the fundamental pillars of DeFi is the lending/borrowing protocol. These protocols allow users to earn interest by locking their idle cryptocurrencies into liquidity pools (lending). Simultaneously, other users can borrow funds by providing these locked assets as collateral.

Euler Finance’s core philosophy is to completely divest the process of creating lending markets from any central authority. In previous protocols, the governance structure (EUL token holders) typically had to vote on which crypto assets could be listed for lending and borrowing. This process could be slow and restrictive.

Euler’s Revolutionary Approach:

Euler permits any crypto asset that has a WETH trading pair on Uniswap V3 to automatically generate a lending market on the platform. This instantly boosts liquidity and use-case diversity, positioning it as one of the lending platforms with the broadest range of supported assets in the DeFi space. This permissionless listing feature makes Euler a truly decentralised and dynamic financial marketplace.

Key Features and Innovative Mechanisms

Several technical and architectural innovations make Euler Finance stand out among DeFi lending protocols.

1. The Asset Tiers Mechanism

Permissionless listing necessarily involves risk management. Euler mitigates this risk by dividing assets into three distinct tiers:

Isolation-tier: Includes permissionlessly listed assets, generally those with lower liquidity and higher volatility. Assets in this tier can only be borrowed, but cannot be used as collateral.
Cross-tier: Includes medium-risk assets. They can be borrowed and lent, and they can be used as cross-collateral.
Collateral-tier: Includes low-risk, highly liquid, and stable assets such as ETH and USDC. They can be borrowed, lent, and, crucially, used as collateral for other assets on the platform.

This tiered system enables users to trade with a wide range of assets while keeping the system’s overall risk under control.

2. Protected Collateral

Euler also allows users to keep their deposited collateral in a “protected” position, meaning it cannot be lent out from the liquidity pool. This prevents the user’s collateral from being borrowed by another party, offering a more secure position against market volatility.

3. Sub-Accounts

When an asset from the isolation tier is borrowed, the user’s main account is locked from taking on additional borrowing (to manage isolation risk). To bypass this restriction, Euler allows each Ethereum account to create up to 256 sub-accounts on the platform. This enables users to manage multiple positions more flexibly by segregating risky positions from safer ones.

4. Reactive Interest Rates and Dynamic Risk Management

Euler employs reactive interest rates that can instantly adapt to market conditions. It also applies a risk model that adapts to price volatility using principles from Control Theory. This means that interest rates and collateral requirements are continuously adjusted based on market demand and perceived risk level. This dynamic structure creates a fairer and more sustainable market environment for both lenders and borrowers.

The EUL Token: The Key to Governance

The EUL token is the native governance token of the Euler Finance protocol. Owning a governance token in a DeFi project means having a say in the project’s future.

The Role of the EUL Token:

Governance and Decision-Making: EUL holders have the right to vote on crucial decisions regarding the protocol’s future. These decisions may include:
- Changing system parameters (e.g., interest rate models, liquidation thresholds).
- Promoting new assets to less risky tiers (e.g., from Isolation to Cross-tier).
- Determining how protocol fees and revenue should be used.
- Approving protocol upgrades and new features.
Share of Protocol Fees: Fees generated by the Euler protocol can accrue to EUL token holders. This is a significant economic model that incentivises token ownership.
Community Ownership: The EUL token reinforces the protocol’s decentralisation, effectively making it a fully community-owned asset.

Total Supply: The total supply of the EUL token is fixed at 27,182,818 tokens. This number is Euler’s number (e) multiplied by 107, reflecting the project’s mathematical and elegant design philosophy.

Euler’s Security and Recovery Process

Although Euler Finance was launched with a sophisticated smart contract architecture and security audits, the DeFi ecosystem is unfortunately not completely immune to attacks.

In March 2023, Euler Finance suffered a significant flash loan attack, resulting in the theft of approximately $200 million worth of assets. This event was widely publicised and marked a watershed moment in DeFi history.

The Recovery:

The aftermath of the attack demonstrated the extraordinary resilience of the Euler community and team, embodying the spirit of decentralised collaboration inherent in DeFi. Through communication with the hacker, the protocol’s team was remarkably able to recover almost all of the stolen funds. The return of the funds was a combination of community pressure, potential legal proceedings, and perhaps a change of heart by the attacker.

This recovery proved that Euler Finance possessed not only innovative technology but also a robust community and governance structure capable of rapidly adapting and restoring value to its users during a crisis. The retrieval of the funds was vital for compensating users for their losses on the protocol and rebuilding trust.

Why Is Euler Finance Important?

Euler Finance is considered not just a player but an innovator and standard-setter in the DeFi lending space.

Increasing Liquidity and Accessibility: The permissionless listing allows even smaller, newer crypto assets to enter the DeFi lending market. This boosts liquidity and capital efficiency for the entire ecosystem.
Flexible Risk Management: Mechanisms like asset tiers and sub-accounts enable users to devise customisable lending and borrowing strategies tailored to their specific risk appetite.
Modular Architecture: Euler’s design, featuring components like the Euler Vault Kit (EVK), provides a modular structure, allowing new financial products and services to be easily built on top of the platform. This positions Euler as a foundational layer for future DeFi innovations.

By combining the power of the Ethereum blockchain with advanced financial engineering and a modular design, Euler is shaping the future of decentralised lending. It serves to unlock the idle potential of cryptocurrencies, facilitating the more efficient and free flow of capital globally.

A Powerful Player in DeFi

Euler Finance (EUL) presents a bold, innovative, and technically sophisticated solution within the realm of decentralised lending protocols. Its permissionless nature, broad asset support, and flexible risk management tools have elevated one of DeFi’s most essential services—borrowing and lending—to an entirely new level.

The EUL token plays a pivotal role in the governance of this dynamic protocol, ensuring that users are not merely investors but active participants who determine the protocol’s direction. Despite facing security challenges, the swift and successful recovery process has attested to Euler’s resilience, both technologically and communally.

As the DeFi ecosystem continues to grow and mature, Euler Finance will remain a critical infrastructure provider for both borrowers and lenders. For anyone seeking decentralised ways to earn yield on their crypto assets or to borrow flexibly, Euler is an essential protocol to explore.