Euler Finance is an innovative lending protocol on ETH.
In this episode of Bankless Alpha Leak, host David welcomes on Euler cofounder Michael Bentley to explain what sets Euler apart from the competitive lending market landscape.
Read our notes below to learn more.
What is Euler?
Pronounced “oiler”.
Launched early December, survived hostile market conditions.
Permissionless lending protocol on ETH with multiple innovative features.
Users can deposit collateral, borrow against it.
Euler uses a different risk framework than competitors such as Compound or Aave.
How Euler Works
Chainlink oracle price feeds on lending protocols can be expensive and limit the number of assets that can be provided.
Euler uses decentralized price feeds that are read from Uniswap v3.
Anyone can create their own lending and borrowing markets on Euler, with anything that’s available on Uniswap.
3 different tiers of assets on Euler:
Collateral tier: individual assets can be lent and borrowed, used as collateral. Only 7 blue chip assets are in this tier.
Cross tier: users can deposit collateral tier assets for multiple cross-margin assets in a portfolio. All assets in the portfolio are at risk together.
Isolated tier: New lending market assets by default cannot be used as collateral, which helps isolate risk. Governance can dictate what assets get moved to collateral tier.
Many new possible use cases are enabled by this lending and borrowing system, including convenient borrowing and shorting of assets.
Downsides of Uniswap Price Reads
This new feature creates more problems and attack vectors, which is why Euler has a much more complex risk framework.
Low-cap tokens can be extremely volatile and could drain the collateral if borrowing is enabled.
This could create a liquidation loop, driving prices lower.
To avoid this, Euler is extremely conservative with what assets can be used as collateral.
Euler Liquidation System
Most protocols incentivize liquidators to pay back loans on users behalf, but this has several flaws:
Protocol suffers as more debt is repaid than necessary.
Borrower suffers as more collateral moves from system than necessary.
Liquidators suffer as more of their rewards go to MEV bots.
Euler system uses a variable bonus for liquidators based on size of loan.
Euler uses a MEV resistant liquidaton process.
Other protocols will likely adopt Euler liquidaton system if it proves useful.
Euler Interest Rates
Usually, protocols rates are based on utilization rate of pool.
Setting the slope at which rates increase too shallow or too steep will negatively impact borrowing market.
Unpredictable markets and governance make it difficult to create an ideal slope for rates.
Euler uses “thermostat” method to incentivize lending if pool utilization rate is too high by raising lending rates, and vice versa.
This can reduce role of governance over interest rates, create a more balanced interest rate system.
This system works best if there are interest rate arbitragers.
System will be proposed to DAO EUL token holders.
Future of Euler
Long term there could be a main Euler protocol with “baby” Eulers beneath it.
Liquidity would flow through main protocol into smaller ones.
This enables borrowing against many assets without posing additional risks to main protocol.
This is more capital efficient.
Euler also planning sub-accounts, which would allow funding multiple separate positions from the same ETH account.
Euler aims to eliminate obstacles to lending, if people want to lend and borrow something risky then they should be able to.
Important Links