Project Euler Finance Crypto Review: A Capital-Efficient Permission-Less Lending Protocol

Project Euler finance crypto is a capital-efficient permissionless lending protocol that helps users earn interest on their crypto assets or hedge against volatile markets without the need for a trusted third party.

Euler introduces a host of innovations never seen before in DeFi, including permissionless lending markets, reactive interest rates, protected collateral, SEM-resistant liquidations, multi-collateral stability pools, and more. Read on to learn more about the Euler finance crypto project.

What is Project Euler finance crypto?

The Project Euler finance crypto is a non-custodial protocol on Ethereum that allows users to borrow and borrow almost any crypto asset. Euler Finance makes it possible for users to lend and borrow cryptocurrencies. What makes Euler Finance different from other DeFi lending protocols such as Aave or Compound is its use of risk-based asset tiers designed to protect the protocol from risks typically associated with decentralized permissionless lending, especially with regards to illiquid assets. or volatile.

Lenders can deposit assets into a pool at Euler Finance in exchange for ERC-20 “eTokens” and can redeem their shares (plus interest) at any time. Borrowers can draw liquidity from a pool and will need to return it with interest. Notably, Euler also allows users to deposit “protected collateral”, which will not be made available for loans. Euler Finance also offers reactive interest rates, multi-collateral stability pools, risk-adjusted lending, and other DeFi products.

How does Project Euler finance crypto work?

Project Euler finance crypto works as a set of smart contracts deployed on the Ethereum blockchain that can be openly accessed by anyone with an internet connection. Euler is managed by holders of a protocol-native governance token called the Euler Governance Token (EUL). Euler is fully non-custodial; users are responsible for managing their own funds.

As creators of the protocol, the Euler development team has produced a convenient and user-friendly front-end to Euler smart contracts, however, users are free to access the protocol in any format they wish, and encourage developers to create their own own front-end access points to the protocol to help decentralize access and increase censorship resistance.

Euler’s innovations:

  • Permissionless Listing – Euler allows its users to determine which assets are listed; any asset that has a WETH pair in Uniswap v3 can be added.
  • Asset Tiers – Euler uses an asset tiering system to help maximize capital efficiency in the protocol without increasing systemic risk.
  • Reactive Interest Rates – Euler uses interest rate models supported by control theory to minimize governance and target a cost of borrowing that maximizes capital efficiency.
  • SEM-Resistant Liquidations – Euler uses a Dutch auction along with a discount enhancement for liquidity providers to help limit the extraction of value from liquidations.
  • Secured Collateral – Euler allows users to retain their collateral from borrowers, limiting business risk, short selling opportunities and governance manipulation.
  • Multi-collateral Stability Pools – Euler provides Stability Pools where lenders can passively exchange their tokens for a discounted basket of collateral assets during liquidations.

listing without permission

The Euler finance crypto project allows its users to determine which assets are listed. To enable this functionality, Euler uses Uniswap v3 as a main dependency (4). Any asset that has a WETH pair in Uniswap v3 can be added as a loan market in Euler by anyone immediately.

Project Euler finance crypto: Asset levels

Permissionless listing is much riskier on decentralized lending protocols than other DeFi protocols such as decentralized exchanges, due to the potential risk of spillover from one pool to another in quick succession. For example, if the price of a collateral asset suddenly declines and subsequent liquidations do not sufficiently pay off borrowers’ debts, pools of many different types of assets may be left with bad debts. To address these challenges, Euler uses risk-based asset levels to protect the protocol and its users:

  • Insulation Layer Assets are available for common borrowing and lending, but cannot be used as collateral to borrow other assets and can only be borrowed in isolation. What this means is that they cannot be borrowed along with other assets using the same set of collateral. For example, if a user has USDC and DAI as collateral and wants to borrow insulation layer asset ABC, he can only borrow ABC. If they later want to borrow another token, XYZ, they can only do so using a separate Euler account.
  • Cross-tier assets are available for common borrowing and lending and cannot be used as collateral to borrow other assets, but can be borrowed along with other assets. For example, if a user has USDC and DAI as collateral and wants to borrow cross-tier assets ABC and XYZ, he can do so from a single Euler account.
  • Collateral is available for common loans and loans, cross loans and can be used as collateral. For example, a user can deposit DAI and USDC escrows and use them to borrow UNI and LINK escrows, all from a single account. EUL holders can vote to release assets from the isolation tier and promote them to the cross or escrow tier through governance mechanisms. Promoting assets across layers increases capital efficiency in Euler because it allows lenders and borrowers to use capital more freely, but it can also expose users of the protocol to greater risk. Therefore, it is in the interest of EUL holders to balance these concerns.

Lending and Borrowing

When lenders deposit into a liquidity pool at Euler, they receive interest-bearing ERC20 eTokens in return, which can be redeemed for their share of the underlying assets in the pool at any time, as long as there are unborrowed tokens in the pool (similar to Euler cTokens). Compound). Borrowers draw liquidity from a pool and return it with interest. Thus, the total assets in the pool grow over time. In this way, lenders earn interest on the assets they provide because their eTokens can be redeemed for an increasing value of the underlying asset over time.

tokenized debts

Similar to Aave’s debt tokens, the Euler finance cryptor project also tokenizes debt on the protocol with ERC20-compliant interfaces known as dTokens. The dToken interface allows the construction of positions without the need for interaction with the underlying assets, and can be used to create derivative products that include debt obligations.

Rather than providing non-standard methods for transferring debt, Euler uses the regular ERC20 transfer/approval methods. However, the permission logic is reversed: instead of being able to send tokens to anyone but requiring approval to receive them, dTokens can be received by anyone but requiring approval to accept them. This also prevents users from “burning” their dTokens. For example, address zero has no way of approving an incoming transfer of dTokens.

Borrowers pay interest on their loans in terms of the underlying asset. Accrued interest depends on an algorithmically determined interest rate for each asset. A portion of the accrued interest is held in reserves to cover the accumulation of defaults under the protocol.

Protected Warranty

In Compound and Aave, the guarantees deposited in the protocol are always available for loan. Optionally, Euler allows collateral to be deposited but not made available for loan. This warranty is ‘protected’. It does not earn interest to the user, but it is free from the risks of borrowers defaulting, can always be withdrawn instantly, and helps protect against borrowers using tokens to influence governance decisions (see Maker governance question (6)) or take short positions.

postpone liquidity

Normally, the liquidity of an account is checked immediately after carrying out an operation that may fail due to insufficient collateral. For example, taking out a loan, withdrawing collateral, or exiting a market can cause a transaction to be reversed due to a breach of collateral.

However, Euler has a feature that allows users to postpone their liquidity checks. Many operations can be carried out, and liquidity is checked only once at the end. For example, without deferring liquidity checks, a user must first deposit collateral before issuing a loan. However, if done in the same transaction, postponing the liquidity check will allow the user to do this in any order.

Instant loans without feeling

Unlike Aave, the Euler finance crypto project does not have a native concept of instant loans. Instead, users can postpone their liquidity check, take out an unsecured loan, perform whatever transaction they want, and then repay the loan. This can be used to rebalance positions, build leveraged positions, take advantage of external arbitrage opportunities and much more.

Since Euler only charges fees according to the time value of money and, from a blockchain perspective, instant loans are held for 0 seconds, they are completely free on Euler (ignoring gas costs). We believe flash lending rates are ultimately on a run to the bottom that will be accelerated by advances like flash coinage. The ecosystem benefits gained from simple and free quick loans outweigh the relatively modest benefit of quick loan rates.

Decentralized pricing oracles

In order to calculate whether or not a loan is oversecured, Euler needs to monitor the value of users’ assets. In Compound, Maker and Aave, various systems are used to get prices from off-chain sources and place them on-chain so they can be accessed by the relevant smart contracts.

This approach is inadequate for Euler’s purposes because it requires centralized intervention whenever a new loan market needs to be created. Euler therefore relies on Uniswap v3’s decentralized time-weighted average price (TWAP) oracles to assess the solvency of users. The benchmark asset used to normalize prices on Euler is Wrapped Ether (WETH), which is the most common base pair on Uniswap.

EUL Token

EUL, is an ERC-20 governance token compatible with the Ethereum blockchain network. Users who own the EUL can provide input on the future decisions and direction of Euler Finance, as well as the distribution of the EUL. The Euler token (EUL) is also distributed to borrowers in select markets on its platform.

Final Thought

The Euler protocol is an Ethereum-based permissionless lending platform that aims to facilitate the provisioning and lending of tokens for users. It differentiates itself from other popular protocols such as Compound and Aave by its new features and innovations. Overall, Euler is an innovative solution for lending Ethereum-based tokens that aims to provide more convenience and efficiency for users.

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