Introduction to Euler

The ability to take assets is the most important characteristic of any financial system. Nowadays it is difficult to imagine this process without the involvement of a third independent party. Let’s consider this system on the example of banks. They connect people with an excess of money with those who need this money in the short term. Fortunately, we no longer need all these “Third Parties”, banks have been replaced by lending protocols without trust and permission.

Compound and Aave are first-generation DeFi lending protocols that provide users with access to lending only the most liquid tokens. It sounds good, but these protocols are not designed to manage the risks associated with lending and borrowing illiquid or unstable assets.

Speaking of lending, users want to deposit more tokens to earn more income and open long-term positions with a credit account. The amount of leverage will depend on the risk rate of the asset. When borrowing, users expect to reduce their exposure to changes in asset prices and open short positions with leverage. Here we present to your attention a resource on crypto-lending Euler. With this protocol, you can borrow and borrow more types of tokens. Since we use the Ethereum blockchain, access to smart contracts is open to everyone who has an Internet connection. Euler has its own Euler Governance Token (EUL) at its disposal. In the long term, the Euler protocol will be managed by a decentralized community of custodians. The custodians are holders of their own protocol management token, which is called Euler (EUL). Tokens can be used to offer protocol updates or vote for suggestions from others. EUL tokens are voting shares. Keepers can vote for proposals directly or delegate their votes to a third party.

If a collateral asset suddenly drops in value, and subsequent liquidation cannot sufficiently repay the debts of borrowers, then pools of several different types of assets may be left with bad debts. To eliminate these problems, Euler uses 3 asset levels to protect the channel and users. Let’s analyze each of them in detail:

1. Isolation level assets are available for ordinary lending and borrowing, but they cannot be used as collateral for borrowing other assets, and they can only be borrowed in isolation.
2. Tiered assets are available for general lending and borrowing and cannot be used as collateral for borrowing other assets, but they can be borrowed together with other assets.
3. Collateral assets are available for ordinary lending and borrowing, cross-borrowing and can be used as collateral.

On Compound and Aave, the deposit entered into the protocol is always available for lending. If desired, Euler allows you to make a deposit, but does not make it available for lending. Such a pledge is “protected”. It does not bring any interest to the user, but it is free from the risk of default of the borrower, can always be instantly withdrawn and helps protect borrowers from using tokens to influence management decisions or opening short positions.

Euler has a very convenient feature that allows users to postpone their liquidity checks. There can be many operations, and the liquidity is checked only once at the very end. For example, without postponing the liquidity check, the user must first deposit a deposit before issuing a loan. Unlike Aave, Euler does not have its own concept of express loans. Instead, users can postpone the liquidity check, take out an unsecured loan, perform any operation at their discretion, and then repay the loan.

Compound uses collateral ratios to adjust the value of the borrower’s collateral assets when deciding how much they can borrow. This leads to a “risk-adjusted collateral cost”, which helps to create a buffer that liquidators can use if the value of the borrower’s assets and liabilities changes over time. One of the problems with this approach is that it takes into account only the risks associated with a decrease in the value of the borrower’s collateral assets. However, there may be some risk of an increase in the value of the borrower’s obligations. This risk is not taken into account as concomitant factors.

At Euler, we use a two-pronged approach in which we adjust the market value of the borrower’s liabilities to obtain a “risk-adjusted liability value”. This approach increases the efficiency of the use of capital in the protocol, as it allows Euler to take into account the risks associated with specific assets, both downward and upward in prices.

In order to be able to calculate whether a loan is over-secured or not, Euler needs to track the value of users’ assets. Compound, Maker and Leave use various systems to obtain prices from off-network sources and place them on the network so that they can be accessed using the appropriate smart contracts. Euler, in turn, took a different path and relies on the decentralized oracles of the time-weighted average price (TWAP) Uniswap v3 to assess the solvency of users. The reference asset used to normalize prices on Euler is Wrapped Ether (WETH), which is the most common base pair on Uniswap.

The decentralized exchange Uniswap TWAP is calculated using the geometric average price of an asset for a certain time interval. TWAP as a whole is both a smoothed and a lagging indicator of the transaction price: TWAP on a short interval is a less smooth function, but more relevant, and TWAP on a long interval is a smoother function, but less ascending.

One of the problems when using TWAP is determining the correct interval during which it should be calculated for a given asset. Sometimes it may be necessary to take into account the trade-offs associated with shorter (longer) intervals and modify them for specific assets. Thus, Euler allows management to update the default time interval if the EUL holders deem it necessary.

The borrower is considered to have violated the Eulerian rules when the value of his risk-adjusted obligations exceeds the value of the risk-adjusted collateral. A borrower who has just become a violator still has enough collateral to repay his loan, but it is considered that he risks not fulfilling his loan obligations. Consequently, they can be liquidated to limit the possibility of their depreciation.

In other lending protocols, liquidation is usually carried out using an external source of liquidity. That is, the liquidator usually receives the repayment amount of borrowed assets from a third-party exchange, repays the loan and receives collateral and any bonus for himself. One of the disadvantages of this approach is that the initial price used to determine the borrower’s liquidation price will not always accurately reflect the exchange rate on foreign markets, which means that liquidators will not always be able to liquidate at this price. To solve this problem, Euler allows lenders to support liquidation by providing liquidity to the stability pool associated with each lending market. Liquidity providers in the stabilization pool place electronic tokens and receive interest while they wait for liquidations to be processed. The no-bet period does not allow them to move assets in and out of the pool to try to beat the system.

Comparison of using an internal stability pool for liquidations rather than using an external source of liquidity.

Let’s discuss interest rates. Both Compound and Aave use static linear (or piecewise linear) interest rate models to manage the cost of borrowing in their protocols. Generally speaking, as the demand for borrowing from the pool increases or the supply decreases, interest rates rise, and when the supply increases or the demand for borrowing decreases, interest rates decrease.

To avoid the problem of choosing the right parameters for each credit market, Euler uses control theory to help autonomously direct the cost of borrowing to a level that maximizes the efficiency of using capital in the protocol. In particular, we use a PID controller to enhance the rate of change in interest rates when usage is above or below the target usage level. This results in very fast interest rates that adapt to market conditions for the underlying asset in real time without the need for constant intervention. Compound interest is accrued on Euler every second. This differs from other lending protocols, where interest is usually charged for each block.

And also, I want to inform you that Euler has joined the Paradigm family. Paradigms will provide valuable experience, recommendations and resources that will help take Euler to a new level. The new funding will help bring the product to market and expand the team. We express our special gratitude Shaishav Todi, Luke Youngblood, Charlie Noyes, samczsun, Hasu, Dave White, Rick Pardoe, Ayana Aspembitova and the team Delphi Labs, Mariano Conti, Lev Livnev and Chainguys.

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