It introduces advanced features like self-collateralized loans, dramatically boosting capital efficiency for advanced DeFi strategies.
Euler is a lending protocol engineered to overcome the systemic weaknesses of traditional pooled credit models. The protocol uses a modular architecture on Ethereum, allowing for the creation of isolated and permissionless markets supporting a diverse range of ERC-20 assets.
This design fundamentally balances unprecedented customization with strong, built-in risk isolation.
Euler constitutes a non-custodial lending protocol built on the robust security of the Ethereum blockchain. Its creation arose from a clear necessity: overcoming the structural rigidity of first-generation DeFi lending platforms. These older systems, for example, operated on a monolithic model, forcing all assets into a single, shared pool. Consequently, that centralized approach required lengthy, restrictive governance procedures to list new assets, which severely limited market access to only a few blue-chip cryptocurrencies.
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In contrast, Euler Finance entirely rejects this restrictive framework. Its central philosophy centers on permissionless innovation and radical inclusivity for digital assets. The protocol’s ultimate goal is to facilitate a vibrant, global credit market on-chain, enabling users to lend and borrow virtually any ERC-20 token.
This revolutionary Layer 1 lending solution introduces modularity as its primary design paradigm. Rather than one large pool, Euler uses isolated, customizable markets known as Vaults.
First, it enables permissionless listing, meaning anyone can launch a market for a new token immediately. Second, it completely walls off risk. An exploit or failure in one Vault cannot, therefore, trigger a cascade across the entire protocol, protecting all other pools.
Thus, Euler’s platform ensures that the entire DeFi ecosystem can leverage unparalleled capital efficiency while managing risk intelligently.
Euler achieves its revolutionary flexibility and capital efficiency through two interconnected architectural innovations: the Euler Vault Kit (EVK) and the Ethereum Vault Connector (EVC).
In detail, these components function together to create a cohesive, yet segmented, on-chain credit system. This approach moves the protocol beyond the rigid structure of legacy lending platforms. It finally provides users and builders with the freedom to customize and connect various lending products, generating complex financial strategies.
The Euler Vault Kit represents the foundational infrastructure for creating decentralized lending markets. It essentially serves as a blueprint, allowing developers to deploy fully functional, isolated lending vaults for any ERC-20 token instantly.
The EVK supports different classes of vaults, providing builders with tools to meet various risk/reward appetites:
The freedom to permissionlessly list assets immediately expands the total addressable market for DeFi lending. It allows Euler to support “long-tail” assets, such as niche or newly launched tokens, which legacy protocols would never approve due to their strict risk-averse requirements.
While the EVK provides isolation, the Ethereum Vault Connector establishes interoperability, preventing liquidity fragmentation. To function as a powerful, immutable primitive, securely connecting the individual vaults, the connector ensures that the Euler ecosystem operates as a single, cohesive marketplace.
The EVC’s core function is enabling cross-vault collateralization. A user can deposit Asset A into Vault 1 and then use those deposited assets as collateral to borrow Asset B from Vault 2. This feature is entirely unique to Euler and serves as a powerful bootstrapping mechanism. Deposits in highly liquid, older vaults suddenly gain new utility as collateral for borrowing from newly created markets.
The EVC also offers advanced capabilities for high-frequency traders and developers:
To manage the resulting positions from these complex strategies, Euler uses an accounting system involving two custom token types: eTokens and dTokens. These tokens represent a user’s position within the protocol.
Beyond its core accounting, Euler innovated heavily on the liquidation process, a crucial component of any lending protocol. Traditional protocols often impose a fixed, high penalty on the borrower when their health factor drops below one. Euler introduces Soft Liquidation, a far more nuanced and equitable approach.
The penalty imposed on the liquidated collateral is not fixed. Instead, it starts at 0% and increases gradually. Specifically, the penalty rises by 1% for every 0.1 decrease in the borrower’s health score below 1. This mechanism caps the maximum penalty at 20%. Liquidators acquire the debt at a discount equal to this penalty percentage, providing them with a profit incentive.
In addition to a fairer liquidation model, Euler provides a powerful recursive borrowing functionality, known as Minting or self-collateralized loans. This unique feature dramatically increases capital efficiency for users. It allows a user to deposit an asset, like DAI, and then borrow the same asset against that deposit. The system uses the eToken (the representation of the deposited DAI) as collateral.
In Euler’s previous V1, users could leverage their initial deposit up to a maximum Loan-to-Value (LTV) ratio of 95% for same-asset loans. This high Self-Collateral Factor (SCF) enables rapid, gas-efficient leverage.
To support all these innovative features, Euler’s performance and security rely on a meticulously engineered, modular architecture.
The design philosophy emphasizes distinct, replaceable components. This means the protocol consists of several key, interchangeable layers:
This modularity allows builders to tailor every element of their lending market. They achieve a precise balance of features, risk parameters, and collateral requirements.
Furthermore, this architectural commitment extends to multi-tiered risk management. Euler’s previous V1 architecture categorized assets into three tiers to manage systemic risk, a system still philosophically relevant in V2’s modular context:
To facilitate this system and serve as the central hub, EVC is not merely a linker. It is also a secure entry point for user interaction and a router handling the complexity of cross-vault operations for the end user.
Euler’s vision extends beyond pure lending. The team developed EulerSwap, a DEX that merges lending and trading yields. This integration further enhances capital efficiency within the Euler ecosystem. EulerSwap allows users to perform trading activities directly within the lending environment.
This eliminates the necessity of moving assets between separate protocols, reducing gas fees and execution risk. Euler is thus evolving into a holistic hub for decentralized credit and trading.
Euler tackles several chronic, painful friction points plaguing the current decentralized finance ecosystem. It delivers a modern, robust platform capable of supporting institutional-grade financial operations.
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EUL serves as the native governance and utility token, meticulously designed to align incentives and secure the long-term future of the Euler protocol.
The initial EUL token allocation distribution ensured a diverse, balanced ownership structure across key stakeholders.
Euler started in 2020 by a highly skilled group of technical experts. The co-founders drove the protocol from its inception to its status as a market-leading, modular platform.
Michael Bentley serves as the co-founder and CEO of Euler Labs, the entity leading the development. He has championed the core philosophy of permissionless lending and intelligent risk stratification. Bentley, along with co-founders Doug Hoyte and Jack Prior, built the highly complex, non-custodial set of smart contracts that define the protocol.
Euler has secured substantial financial backing, totaling $40 million across two primary funding rounds.
How to Buy Euler Tokens (EUL)?
EUL is now available for trading on major exchanges such as Binance, Coinbase, Upbit, Gate and MEXC.
How Does Euler Minimize Risk Contagion Across Assets?
Euler minimizes risk contagion by employing a modular design. It utilizes the Euler Vault Kit to create isolated lending vaults for each asset. Consequently, an issue or exploit in one vault cannot affect the liquidity or security of funds in any other vault.
What Is Soft Liquidation?
Soft Liquidation is Euler’s unique mechanism that gradually increases the liquidation penalty, starting at 0%. This avoids the fixed, harsh penalties of legacy protocols. It protects the borrower by only liquidating the necessary amount of collateral.
How Does Euler Address Liquidity Fragmentation?
The Ethereum Vault Connector addresses liquidity fragmentation by enabling cross-vault collateralization. Users deposit collateral in one vault and use it to borrow from any other connected vault. This links all isolated markets into one deeply connected liquidity layer.
What Is The Primary Risk For Lenders On The Euler Protocol?
Lenders primarily face bad debt risk if the collateral price of a borrowed asset drops too quickly. While soft liquidation helps, extreme market volatility can occasionally cause the value of the collateral to fall below the outstanding debt.
What New Risk Does Permissionless Vault Creation Introduce?
Permissionless vaults, while promoting innovation, introduce the risk of unverified or manipulated markets. Users must exercise extreme caution and verify that any vault they interact with uses a legitimate price oracle and has been vetted by the community or curators.
How Does The Fee Flow Auction Benefit The EUL Token?
