One of the leading industries that have been affected by blockchain technology is the finance industry. This led to many decentralised finance platforms mushrooming as the demand for lending and borrowing assets grew by the day. Unlike the traditional finance systems, decentralised finance systems are based on the blockchain, and hence, they don’t need any third parties or intermediaries to do transactions.

As a result, that makes the platform not fully decentralised, which comes with its own disadvantages. Lenders remain with an unmet need as they cannot earn enough yield from their tokens and cannot take leveraged long positions. As the borrowers face the risk of volatility and are forced to take leveraged short positions, this led to the rise of Euler. Euler was created to bridge the gap by providing a permissionless protocol without compromising on the volatility risks.

Euler Intro

Euler is a permissionless lending protocol custom-made with new features to fulfil lending and borrowing efficiently. Just like the other platforms. Euler is based on the Ethereum blockchain; hence, it is decentralised and uses smart contracts to govern players on the platform. This helps users to lend and borrow tokens more than they have ever done before.

As a platform, Euler is completely non-custodial. This means that the users are the ones who are responsible for managing their funds. The platform is governed by the Euler governance token, which is used for transactions on the platform. Unlike other platforms, in Euler, it is the users who call the shots, and thus, they are the ones who determine which assets will be listed. The Uniswap v3 enables this as a core dependency. Any asset based on Uniswap v3 can automatically be added to the Euler lending market by anyone.

The permissionless listing has its advantages, but it also comes with disadvantages, especially on decentralised lending protocols. The main risk is that it can easily spill over from one pool to another. For instance, if a collateral asset suddenly drops in price, and its subsequent liquidations are unable to pay the debts, then other pools will be consequently affected with bad debts.

Euler understands this challenge, and that is why it uses risk-based asset tiers to protect both the protocol and the users. Euler uses the three kinds of risk-based asset tiers. The isolation tier assets are the ones that are only available for regular lending and borrowing but cannot be used as collateral for borrowing other assets. They can also be only borrowed in isolation. 

The collateral-tier assets are available for lending and borrowing, cross-borrowing, and they can also be used as collateral. Token holders can vote and decide if an asset should move from the isolation tier, cross-tier, or collateral tier. Through governance mechanisms, users can promote the assets up the tiers to increase the capital efficiency on the platform so that lenders and borrowers can have more money. 

The Euler Lending and Borrowing System

Whenever a lender deposits into a liquidity pool on Euler, they automatically receive interest-bearing ERC 20 etokens, which can be used to redeem the shares of the underlying assets on the condition that there are unborrowed tokens in the pool. That means that borrowers take liquidity from a pool and return with interest. This will make the assets in the different pools grow with time, giving lenders the chance to earn interest from their lending. Lenders usually redeem their tokens for profits from their underlying assets over time. 

In addition to the regular borrowing and lending, the platform also tokenises debts on the protocol from an interface known as dTokens. This creates a dToken interface that is used in creating derivative products, which include debt obligations. Unlike other platforms that have different non-standard mechanisms to make debt transfers, Euler uses the regular transfer/approve ERC20 methods.

It thrives on reversed permissioning logic such that the dTokens can be taken by anyone, but they have to be approved to be accepted. This helps to prevent token holders from burning their tokens. All borrowers are required to pay that interest on loans, depending on the terms of their underlying assets. The interest is algorithmically determined depending on the terms. Part of the interest is held in reserves to cover for the bad debts in the protocol.

Unlike other systems, in Euler, collateral can be deposited but not be available for lending. That means the collateral is protected by the system and cannot earn any interest for the holder. The system protects it from borrowers defaulting and using it for governance decisions or taking short positions. The collateral is, however, readily available for withdrawal. 

Before any transaction, an account is typically checked to confirm it has enough collateral to avoid violations on the platform. Euler users have the option of deferring their liquidity checks so that the review is done later after a transaction.

Even though Euler does not support the concept of flash loans, it supports liquidity checks. Meaning that users can take a collateralised loan and do whatever transaction they feel like, then repay the loan bit later. This helps in rebalancing positions and building up leveraged positions to take advantage of any arbitrage opportunities that may arise.

Euler charges fees as a platform, depending on the time value of money, which makes flash loans free since it does not take any time for a blockchain transaction. Contrary to expectation, the platform’s benefits from free flash loans are more than it can get from flash loan fees.

Just like many lending protocols, in Euler, the collateral should always be more than the liabilities. High collateralisation is encouraged for more liquidity on the platform.

Other systems use collaterals to determine the borrowing capacity, which is unfair to borrowers as their assets can increase with time. Euler tries to balance it out by using the market value of a borrower’s liability to get a risk-adjusted liability value. This helps to ensure capital efficiency as it takes into account both the upside and downside price movements. 

Euler monitors a user’s assets to know if the loan has been over-collateralised or not. It uses Uniswap v3’s decentralised, time-weighted average price (TWAP) oracles to determine the solvency of users. It then uses Wrapped Ether (WETH) to normalise the price of Euler. TWAP helps to avoid price manipulation and price shocks, thus protecting users. 

It is against Euler’s rules to have more risk-adjusted liabilities as compared to the risk-adjusted capital. Even though the borrower may have enough collateral to pay the loan, they will be treated like they want to default on their payments. This may cause the borrower to be liquidated to shield the defaulting risk.

Other lending platforms typically use external sources for liquidity. They source money from third parties such as exchanges, deposits, etc. Even though the style works, it comes with disadvantages as other factors are the ones that will determine the price, and it will expose the funds to the volatility of the market. It will also lead to delays in posting updated prices. This explains why Euler is using a different approach. Euler ensures liquidation by providing stability pools with liquidity. Each lending market has its own liquidity pool, and liquidity providers can earn interest as they wait for processing liquidations. Once the processing is done, the borrower’s debt is cancelled, returning the discounted collateral into the pool. Stability pool providers can swap their etokens for a discounted index of collateral assets. 

When a lender has more liabilities than collateral, they will be deemed insolvent, which will cause them to be liquidated until their collateral runs out. When the collateral is finished, the leftover liabilities will be classified as bad debt. If lenders detect bad debt, it may prompt them to withdraw their funds to avoid dealing with the bad debt.

How does Euler differ from other platforms?

Permissionless listing: As mentioned earlier, Euler enables permissionless listing such that it is the users who decide which assets should be listed. A user can add any asset that has a WETH pair on Uniswap v3.

Asset tiers: The asset tiers used by the system are meant for maximising capital efficiency on the protocol while lowering the systemic risk.

Reactive interest rates: Unlike other platforms that rely on the market to determine the interest rates, Euler uses control theory to create reactive interest rate models to minimise governance and target a cost of borrowing that maximises capital efficiency.

MEV-resistant liquidations: Euler uses a unique model of a Dutch auction combined with a liquidity providers discount booster to help limit the loss of value from liquidations.

Multi-collateral stability pools: Euler offers a variety of stability pools to enable multi-collateral ability. Lenders can passively swap their tokens for a discounted basket of collateral assets during liquidations.

How does Euler governance work?

Euler uses a similar model as Compound’s governance model. The protocol is governed by its native governance token, the Euler Governance Token (EUL). All the EUL tokens will act as voting shares. EUL token holders will use their tokens for voting on the platform. Users can also delegate their vote shares to third parties if need be. The votes are used for making any decisions on the platform, such as deciding the tier of an asset, collateral and borrow factors, price oracle parameters, reactive interest rate model parameters, reserve factors, and governance mechanisms themselves.

Overview of the EUL token

The Euler token (EUL) is an ERC20 token. It will be implemented as an ERC20 smart contract with an address. The token has a total supply of 21 000 000 EUL. 


There is no doubt that the crypto lending and borrowing ecosystem is getting better by the day. As technology advances, so do the features and functionalities of the different platforms. Euler is a game-changer as it is made for the people by the people. Join in for great rewards.

Hopefully, you have enjoyed today’s article. Thanks for reading! Have a fantastic day! Live from the Platinum Crypto Trading Floor.

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