What is Euler Finance? Next-generation money market

What is Euler Finance Next-generation money market

Even though we have seen an explosion in the interest for decentralized money markets, the most popular ones are still restrictive and don’t allow the permissionless creation of new lending markets. 

This is because the creation of lending markets for very volatile tokens could potentially increase the bad debt of those protocols, exposing them to insolvency risk. In order to avoid that, popular money markets like AAVE use a methodology for deciding if an asset should be listed or not. 

Euler comes up with a solution, allowing everyone to list any asset they want.

What is Euler Finance?

Euler Finance is a non-custodial lending protocol built on top of Ethereum. It was launched in December 2021 and aims to solve the biggest problems encountered by its competitors. Its TVL sits at over $200M at the time of the writing.

Among its unique features are permissionless lending markets, reactive interest rates, liquidations in a Dutch auction style, and much more.

Permissionless listing

Any asset that has a WETH pair on Uniswap V3 can be listed on Euler thanks to the protocol asset tiers. 

To minimize the impact of the risks associated with the permissionless listing, the money market divides the assets into 3 asset tiers: 

1. Isolation-tier

Assets are available for lending and borrowing, but can’t be used as collateral or borrowed alongside other assets.

2. Cross Tier

Assets are available for lending, borrowing (can also be borrowed alongside other assets), but can’t be used as collateral.

3. Collateral-tier

Assets are available for lending, borrowing (including cross-borrowing), and can be used as collateral.

All new listed assets are part of the isolation tier. $EUL holders are able to promote them to cross-tier or collateral-tier.

Dutch auction mechanism for liquidations 

Another significant problem that slows down the adoption of decentralized money markets is the big liquidation penalty. AAVE and other similar protocols have set large liquidation penalties (10% in some cases) to ensure that liquidators will be interested in participating in the liquidation process.

Rather than having a fixed liquidation penalty, Euler liquidators have to engage in a Dutch-style auction for the liquidated collateral. 

The discount received for a position with a collateral ratio under the minimum threshold slowly increases until someone decides to liquidate that position.

This typically results in lower liquidation penalties for borrowers.

Even though Euler Finance is still a relatively unknown decentralized money market compared to its biggest competitors, its unique features may very well help it to rapidly increase in popularity.

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Armando Sebi
Armando Sebi
Armando is a DeFi analyst that started his crypto journey in 2021. He is passionate about cryptocurrencies and the future of decentralized finance.