You are currently viewing The new era of lending and borrowing in DeFi |  by Dylan Nicholas Tan |  Coinmonks |  Oct, 2022

The new era of lending and borrowing in DeFi | by Dylan Nicholas Tan | Coinmonks | Oct, 2022

Euler Finance is a permissionless lending protocol custom-built to help users lend and borrow more Ethereum-based tokens than ever before.

Launched in Dec of 2021, a shaky timing to be launching a protocol in the money market. But have since proved themselves worthy as they have collected $280m in TVL.

DeFi Llama

That kind of sounds like Aave and Compound… So how does Euler differ?

These protocols provide users with access to lending and borrowing capabilities for a handful of the most liquid ERC20 tokens. However, protocols like Aave and Compound were not designed to handle the risks associated with lending and borrowing illiquid or volatile assets and have therefore relied on a permitted listing system to protect their users from the risks associated with such assets. But Euler allows users to create their own markets for any Ethereum ERC20 token and features innovative reactive interest rate models backed by control theory that reduce the need for governance intervention in rapidly moving markets.

Why cant Aave and Compound list every token under the sun?

They use Chainlink oracles.

What’s a blockchain oracle?

Blockchain oracles are entities that connect blockchains to external systems, thus sparking smart contracts to execute based upon inputs and outputs from the real world. Price oracles provide exchange rates between various Ethereum-based tokens.

Chainlink oracle

So what makes Euler Finance different?

The risk framework.

Instead of using Chainlink oracles, users are able to create their own lending and borrowing markets on the protocol on the UniswapV3.

List any asset — powered by Uniswap’s decentralized time-weighted average price oracles, Euler is allowing users to create their own lending/borrowing markets for almost any Ethereum ERC20 token.

Uniswap’s oracles are now far easier and cheaper to integrate. V3 oracles are capable of providing time-weighted average prices (TWAPs) on demand for any period within the last ~9 days. This removes the need for integrators to historical checkpoint values.

Risk-minimised — Euler secures the protocol by tailoring the borrowing capacity of users to the risk profiles associated with the assets they want to borrow and use as collateral.

To enable the function of permitionless listing, Euler lets its users determine which assets are listed, categorized into 3 tiers.

  • Isolation-tier — Assets are available for ordinary lending and borrowing, but they cannot be used as collateral to borrow other assets, and they can only be borrowed in isolation. What this means is that they cannot be borrowed alongside other assets using the same pool of collateral. For example, if a user has USDC and DAI as collateral, and they want to borrow isolation-tier asset ABC, then they can only borrow ABC. If they later want to borrow another token, XYZ, then they can only do so using a separate account on Euler.
  • Cross-tier — Assets are available for ordinary lending and borrowing, and cannot be used as collateral to borrow other assets, but they can be borrowed alongside other assets. For example, if a user has USDC and DAI as collateral, and they want to borrow cross-tier assets ABC and XYZ, then they can do so from a single account on Euler.
  • Collateral-tier — Assets are available for ordinary lending and borrowing, cross-borrowing, and they can be used as collateral. For example, a user can deposit collateral assets DAI and USDC, and use them to borrow collateral assets UNI and LINK, all from a single account.

Reactive interest rates — Interest rate models backed by control theory ensure that money markets on Euler adapt to volatile market conditions in real-time without the need for governance intervention.

Aave/Compound interest rates

Introducing Euler

Euler interest rates

Introducing Euler

In a nutshell, Euler has similar fundamental limitations of Compound and AAVE. But it’s not about what you can borrow or lend, its what you can borrow against that matters most.

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