Euler

Euler

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

Here, we present Euler: a permissionless lending protocol custom-built to help users lend and borrow more Ethereum-based tokens than ever before.

Introduction

The ability to lend and borrow assets efficiently is a crucial feature of any financial system. In the world of traditional finance, this process is typically facilitated by trusted and permissioned third-parties such as banks, who connect people with a surplus of money to those who need access to it in the short term. In the world of decentralised finance (DeFi), trusted and permissioned third-parties are no longer needed; banks have been replaced by trustless and permissionless lending protocols running on the blockchain.

Among the first-generation of DeFi lending protocols are Compound and Aave. These protocols provide users with access to lending and borrowing capabilities for a handful of the most liquid ERC20 tokens. However, these protocols were not designed to handle the risks associated with lending and borrowing illiquid or volatile assets and have therefore relied on a permissioned listing system to protect their users from the risks associated with such assets.

Consequently, there remains significant unmet demand for lending and borrowing the long tail of crypto assets. On the lending side, users want to deposit tokens to earn yield and take leveraged long positions. On the borrowing side, users want to reduce their exposure to volatility and take leveraged short positions. Here, we present Euler: a permissionless lending protocol custom-built with an array of new features to help users lend and borrow more types of tokens than ever before.

Getting Started

Euler comprises 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 Euler Governance Token (EUL). Euler is entirely non-custodial; users are responsible for managing their own funds.

As creators of the protocol, the Euler development team have produced a convenient and user-friendly front-end to the Euler smart contracts, which is hosted at https://app.euler.finance. However, users are free to access the protocol in whatever format they wish, and we encourage developers to create their own front-end access points to the protocol to help decentralise access and increase censorship resistance.

Permissionless Listing

Euler lets its users determine which assets are listed. To enable this functionality, Euler uses Uniswap v3 as a core dependency. Any asset that has a WETH pair on Uniswap v3 can be added as a lending market on Euler by anyone straight away.

Asset Tiers

Permissionless listing is much riskier on decentralised lending protocols than on other DeFi protocols, like decentralised exchanges, because of the potential for risk to spill over from one pool to another in quick succession. For example, if a collateral asset suddenly decreases in price, and subsequent liquidations fail to repay borrowers' debts sufficiently, then the pools of multiple different types of assets can be left with bad debts.

To counter these challenges, Euler uses risk-based asset tiers to protect the protocol and its users:

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.

EUL holders can vote to liberate assets from the isolation-tier and promote them to the cross-tier or collateral-tier through governance mechanisms. Promoting assets up the tiers increases capital efficiency on Euler because it allows lenders and borrowers to use capital more freely, but it may also expose protocol users to increased risk. It is therefore in EUL holders' interests to balance these concerns.

Lending and Borrowing

When lenders deposit into a liquidity pool on 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 Compound's cTokens). Borrowers take liquidity out of a pool and return it with interest. Thus, the total assets in the pool grows through time. In this way, lenders earn interest on the assets they supply, because their eTokens can be redeemed for an increasing amount of the underlying asset over time.

Tokenised Debts

Similarly to Aave's debt tokens, Euler also tokenises debts on the protocol with ERC20-compliant interfaces known as dTokens. The dToken interface allows the construction of positions without needing to interact with underlying assets, and can be used to create derivative products that include debt obligations.

Rather than providing non-standard methods to transfer debts, Euler uses the regular transfer/approve ERC20 methods. However, the permissioning logic is reversed: rather than being able to send tokens to anyone, but requiring approval to take them, dTokens can be taken by anyone, but require approval to accept them. This also prevents users from "burning" their dTokens. For example, the zero address has no way of approving an in-bound transfer of dTokens.

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

Protected Collateral

On Compound and Aave, collateral deposited to the protocol is always made available for lending. Optionally, Euler allows collateral to be deposited, but not made available for lending. Such collateral is 'protected'. It earns a user no interest, but 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 issue (6)) or take short positions.

Defer Liquidity

Normally, an account's liquidity is checked immediately after performing an operation that could fail due to insufficient collateral. For example, taking out a borrow, withdrawing collateral, or exiting a market could cause a transaction to be reverted due to a collateral violation.

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

Feeless Flash Loans

Unlike Aave, Euler doesn't have a native concept of flash loans. Instead, users can defer their liquidity check, make an uncollateralised borrow, perform whatever operation they like, and then repay the borrow. This can be used to rebalance positions, build-up leveraged positions, take advantage of external arbitrage opportunities, and more.

Because Euler only charges fees according to the time value of money, and from the blockchain's perspective flash loans are held for a duration of 0 seconds, they are entirely free on Euler (ignoring gas costs). We believe that flash loan fees are ultimately in a race to the bottom that will be accelerated by advances like flash minting. The ecosystem benefits gained from simple and free flash loans outweigh the relatively modest benefit from flash loan fees.

Risk-adjusted Borrowing Capacity

Like other lending protocols, Euler requires users to ensure that the value of their collateral remains higher than the value of their liabilities (except during the intermediate period when liquidity checks have been deferred). Over-collateralisation is encouraged by limiting how much borrowers can take out as a loan in the first place.

Compound achieves this in a one-sided way by using collateral factors to adjust down the value of a borrower's collateral assets when deciding how much they can borrow. This gives rise to a 'risk-adjusted collateral value' that helps to create a buffer that can be drawn upon by liquidators in the event that the value of a borrower's assets and liabilities changes over time. One of the problems with this approach is that it only adjusts for the risks associated with a borrower's collateral assets decreasing in value. There may be an asymmetric risk, however, of the borrower's liabilities increasing in value. This risk is not factored into the collateral factors.

On Euler, we therefore use a two-sided approach where we also adjust up the market value of a borrower's liabilities to arrive at a 'risk-adjusted liability value'. This approach improves capital efficiency on the protocol because it allows Euler to factor in the asset-specific risks of both downside and upside price movements. These risks are encapsulated in asset-specific collateral factors (as on Compound) and borrow factors (new to Euler). Ultimately, this approach means that the liquidation threshold of every borrower is tailored to the specific risk profiles associated with the assets they are borrowing and using as collateral.

To give an example, suppose a user has $1,000 worth of USDC, and wants to borrow UNI. How much can they borrow? If USDC has a collateral factor of 0.9, and UNI has a borrow factor of 0.7, then a user can borrow up to $1,000 0.9 0.7 = $630 worth of UNI. At this level of borrowing, the risk-adjusted value of their collateral is $1,000 * 0.9 = $900, and the risk-adjusted value of their liabilities is $630 / 0.7 = $900. If UNI increases in price, then the risk-adjusted value of their liabilities will also increase to >$900, and then they will be eligible for liquidation. The buffer allowing for liquidation is $1,000 - $630 = $370.

Decentralised Price Oracles

To be able to calculate whether a loan is over-collateralised or not, Euler needs to monitor the value of users' assets. On Compound, Maker, and Aave, various systems are used to get prices from off-chain sources and put them on-chain so that they can be accessed by the relevant smart contracts.

This approach is unsuitable for Euler's purposes because it requires centralised intervention whenever a new lending market needs to be created. Euler therefore relies on Uniswap v3's decentralised time-weighted average price (TWAP) oracles to assess the solvency of users (4). The reference asset used to normalise prices on Euler is Wrapped Ether (WETH), which is the most common base pair on Uniswap (5).

TWAP

Uniswap TWAP is calculated using the geometric mean price of an asset over some interval of time. TWAP in general is both a smoothed and lagging indicator of the trade price: a TWAP over a short interval is a less smooth function, but more up-to-date, whilst a TWAP over a long interval is a smoother function, but less up-to-date. TWAP is ideal for Euler's purposes for several reasons.

First, TWAP is resistant to price manipulation attacks. It cannot be manipulated within a transaction or block (for example, with flash loans or flash bots) because it is calculated using historic data. It is also expensive to manipulate using large market orders because the manipulated price must be maintained for some period of time relative to the TWAP time interval. During this time, other users can take advantage of the manipulated price with arbitrage, which will cause it to revert back to the broader market price. Arbitrage is especially practical on the blockchain because arbitrageurs have access to large amounts of capital (including from flash loans) and the atomic nature of transactions means that arbitrage transactions have a low execution risk. For these reasons, manipulating the price on a single decentralised exchange usually requires more widespread manipulation of all on-chain exchanges simultaneously, although even this can't prevent the (less practical but still possible) arbitrage between on and off-chain exchanges.

Second, the smooth nature of TWAP helps to remove the impact of price shocks on borrowers. In the event of a large trade, the current price on Uniswap can be moved significantly. Usually, arbitrage bots will quickly converge this to the broader market value, so the maximum deviation of the TWAP will only be a fraction of the temporary price movement. This prevents some unnecessary liquidations and loans that may quickly become undercollateralised.

Third, instead of instantly jumping between two price levels, TWAPs change continuously, second-by-second. This property is used by Euler's liquidation process to implement Dutch auctions that reduce the value captured by miners and front-running bots.

Time Interval

One of the challenges in using TWAP is determining the right interval over which it should be calculated for a given asset. The trade-offs involved with shorter (longer) intervals may sometimes need to be taken into consideration and altered for specific assets. Euler therefore allows the default time interval to be updated by governance if EUL holders deem it necessary.

Liquidations

A borrower is considered to be in violation on Euler when the value of their risk-adjusted liabilities exceeds the value of their risk-adjusted collateral. A borrower that has just become in violation still has enough collateral to repay their loan, but is adjudged to be at risk of defaulting on their loan. Consequently, they may be liquidated in order to limit the potential for them to default.

MEV-resistance

On Compound and Aave, liquidations are incentivised by offering up a borrower's collateral to liquidators at a fixed percentage discount, which typically ranges between 5-10%. One of the issues with this strategy is that would-be liquidators often have no choice but to engage in priority gas auctions (PGA) for profitable liquidations, which exposes the liquidation bonus as so-called miner extractable value (MEV) (7). Another issue with this approach is that a fixed discount can be punitive for large liquidations, and therefore discourage large borrowers, whilst being insufficient to cover costs and incentivise smaller liquidations.

To remedy these issues, Euler uses a different approach. Rather than a fixed discount percentage, we allow the discount to rise as a function of how under-water a position is. This turns a one-shot opportunity, where liquidators have no option but to engage in a PGA, into a type of Dutch auction. As the discount slowly increases, each would-be liquidator must decide whether or not to bid for a liquidation at the current discount on offer. Liquidator A might be profitable at 4%, but liquidator B might run a more efficient operation and be able to jump in sooner at 3.5%. The Dutch auction is aided by the TWAP oracles used on Euler because a shock to the price does not bring with it a singular point at which every liquidator becomes profitable all at once. Instead, the price moves more smoothly over time leading to a continuum of opportunities to liquidate, which further helps to limit PGAs. Overall, this process should help to drive the discount price towards the marginal operating cost of liquidating a borrower.

However, by itself, this process does not prevent MEV because miners and front-runners can still steal a liquidator's transaction. To limit this form of MEV, we allow liquidity providers on Euler to make themselves eligible for a "discount booster", which allows them to become profitable in the Dutch auction before miners and front-runners (who do not have the booster).

Активность

Читателей:
26 747
VERY HIGH
Твиты:
760
VERY HIGH
Рост за 30 дней:
836
Сообщество:
2 950
MEDIUM
Рост за 30 дней:
-149

Euler Команда

Проверено 0%

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Dr Michael Bentley
Co-founder + CEO
непроверенно
Doug Hoyte
Co-founder + blockchain dev
непроверенно
Jack Prior
Co-founder + full-stack dev
непроверенно
Dr Tari Ajienka
Blockchain dev
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Darek Glowinski
Full-stack dev
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Vishal Vasu
Full-stack dev
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Советники

Проверено 0%

Внимание. Существует риск того, что непроверенные члены на самом деле не являются членами команды

Mick De Graaf
Advisor + blockchain dev
непроверенно

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