Euler

Euler is a decentralized financial organization, offering a permissionless lending protocol intended to democratize assets users can lend and borrow. The protocol offers reactive interest rates backed by control theory and allows interest rates to adapt to market conditions in real time with asset-specific collaterals to allow users to earn interest on different cryptocurrency assets. Euler also offers a series of features, such as permissionless lending markets, the above-mentioned reactive interest rates, protected collateral, MEV-resistant liquidations, and multi-collateral stability pools.

In March of 2023, Euler was hit with a flash loan attack, which resulted in approximately $195 million in losses and caused a contagion to spread through multiple DeFi protocols, which suffered losses due to the attack. In the wake of the attack, Euler announced it would repay all sub-account liabilities, based on on-chain price oracles and the value of assets and liabilities based on the day the protocol was disabled. Further, twenty-three days after the exploit, all the recoverable funds from the attack were returned to Euler. Due to the exploiter returning the funds, Euler also stopped searching for information about the exploiter and would no longer accept information about the exploiter, which had previously been attached to a $1 million reward.

Euler's platform is a permissionless lending protocol intended to allow users to lend and borrow digital assets. Euler is comprised of a set of smart contracts deployed on the Ethereum blockchain that can be accessed by anyone and is managed by holders of the protocol's native governance token, Euler Governance Token (EUL), and is non-custodial, leaving users to manage their own funds.

Euler lets users determine which assets are listed, and any asset that has a WETH pair on Uniswap v3 is capable of being added as a lending market on Euler. Permissionless listing tends to be riskier on decentralized lending protocols rather than on other DeFi protocols because of the potential risk of spillover from one pool into another. To counter this risk, Euler uses a risk-based asset tier to protect the protocol and its users.

These include isolation-tier assets, which are available for ordinary lending and borrowing but cannot be used as collateral for other assets and can only be borrowed in isolation; cross-tier assets, which are available for ordinary lending and borrowing, cannot be used to borrow other assets, but can be borrowed alongside other assets; and collateral-tier assets, which are available for ordinary lending and borrowing and cross-borrowing and can be used as collateral.

When lenders deposit on Euler, they receive an interest-bearing ERC-20 eToken, which can be redeemed for their share of the underlying assets in the pool at any time. This is intended to allow lenders to earn interest on assets they supply, as eTokens can be redeemed for an increasing amount of underlying asset over time, thus allowing the total assets of a liquidity pool to grow in time.

One unique feature of Euler's platform is its reactive interest rates. These are developed to avoid the problem of having to choose the right parameters for every lending market and use control theory to autonomously guide the cost of borrowing toward a level that maximizes capital efficiency on the protocol. This uses a PID controller to amplify or dampen the rate of change in interest rates when utilization is above or below a utilization target and allows the interest rate to adapt to market conditions for the underlying asset in real time without the need for ongoing governance intervention.

Another unique feature of Euler's platform is MEV resistance. MEV stands for miner extractable value (MEV), which occurs when a liquidation bonus is exposed and a fixed discount acts as a punitive measure for large liquidations, which can discourage large borrowers and being insufficient to cover costs and incentivize smaller liquidations. To remedy the issue, rather than using a fixed discount percentage, Euler allows the discount to rise as a function of how under-water a position is, and turns a one-shot opportunity where liquidators have no option but to engage into a type of a Dutch auction. This type of auction allows a would-be liquidator to decide whether or not to bid for a liquidiation at a current discount on offer, allowing them to choose their profitability. This Dutch auction is aided by the TWAP oracle intended to keep the price moving smoothly over time and offering a continuum of opportunities to liquidate.

Euler, unlike other lending protocols, allows collateral to be deposited but not made available for lending, or protecting the collateral. This protected collateral earns the user no interest, but is free from the risks of borrowers defaulting. Further, protected collateral is available to be withdrawn instantly and is used to protect against borrowers taking short positions or influence governance decisions.