Written by: Tommy.eth
Compiled by: Alex Liu, Foresight News
Euler Finance has surged since October 2024, marking one of the most remarkable comebacks in DeFi history. Despite facing significant setbacks—a hacker attack in 2023 temporarily halted the protocol—the Euler team has tirelessly worked to rebuild and regain user trust.
The data speaks for itself:
Total deposits reach 1 billion USD (1000% growth in 4 months)
430 million USD borrowed
TVL on Sonic exceeds 100 million USD
Deployed on 8 chains
Total deposits of Euler Finance, source: DeFiLlama
The significant increase in deposits demonstrates Euler's growing appeal in the DeFi space.
But why should users consider using Euler for lending now? To understand why Euler stands out, we first explore some problems with other lending products in the market and how Euler addresses these issues.
Liquidation and MEV issues
One of the main issues with DeFi lending protocols is the liquidation process. In traditional lending markets, central institutions (such as banks) may liquidate bad debts. However, in a decentralized world, this process relies on third parties—liquidators—who act as arbitrageurs. These users create bots that automatically liquidate positions when collateral falls short. In return, they receive discounted collateral, and competition to liquidate these positions is fierce.
This competition leads to rising gas fees, especially on networks like Ethereum, where the first liquidator to act will receive rewards. As a result, gas wars can escalate, making it difficult for regular users to interact with the blockchain when gas prices spike. This phenomenon is known as MEV, which is a significant issue facing the DeFi ecosystem.
How other protocols handle liquidation
Leading DeFi platforms like Aave, Compound, and Curve have liquidation systems. When a borrower's position falls below the collateral threshold, liquidators compete to seize collateral at a discount. However, this process often leads to rapid declines in collateral prices, exacerbating liquidation issues and driving up gas costs.
These protocols facilitate liquidation by incentivizing arbitrageurs, but intense competition in liquidation often results in unfair outcomes and high trading costs for regular users.
Euler's innovative liquidation approach
Euler Finance has adopted a radically different approach to liquidation, aimed at directly addressing these issues.
Dutch auction liquidation
Unlike Compound or Aave, which use a fixed discount rate during liquidation, Euler employs a Dutch auction mechanism. This means that as the borrower's collateral becomes increasingly insufficient, the liquidation discount gradually increases over time. Liquidators can choose the best timing to intervene based on their own risk and return expectations.
Liquidation discounts increase over time
This mechanism reduces the congestion and competition that lead to MEV, helping to stabilize gas prices. By transforming liquidation into an auction, Euler creates a more favorable and controllable environment for all parties involved.
Soft liquidation
One of the highlights of Euler is the soft liquidation mechanism designed to protect borrowers from the fear of complete liquidation. Under the soft liquidation mechanism, only a portion of the collateral is liquidated when the borrower's collateral value falls or debt increases. However, if the collateral price rebounds, borrowers can recover the liquidated portion.
This allows borrowers more time to recover from market fluctuations without immediately losing their entire position. Soft liquidation enables users to maintain control over their assets, thereby increasing their ability to withstand temporary price declines and minimize losses.
Euler's innovative liquidation mechanism has had a direct and positive impact on its metrics:
Active lending activity
Compared to other protocols like Aave (0.38) and Compound (0.3), Euler has the highest loan-to-TVL (total value locked) ratio (0.45). This indicates that borrowers are attracted to Euler because of its unique features, such as more favorable liquidation conditions and the ability to utilize funds with lower risk.
Attractive fees and returns
Weekly fees generated by Euler, source: token terminal
Euler's user-centric philosophy offers borrowers highly competitive fees (up to $557,000 per week) and generous returns for depositors. By minimizing the negative impact of liquidation on users, the protocol helps ensure that both borrowers and lenders can benefit from a smoother and more efficient process.
Loan-to-Value Ratio (LTV)
Euler's average loan-to-value ratio reaches up to 90%, significantly higher than most other DeFi platforms. This is thanks to its soft liquidation mechanism, which provides borrowers with greater security and flexibility in managing their positions. Borrowers can use higher leverage while minimizing the risk of losing all their collateral during liquidation events.
Conclusion
Euler's innovative features (such as Dutch auction liquidation and soft liquidation) address some of the most pressing issues in DeFi lending, including MEV, high gas fees, and risks associated with traditional liquidation mechanisms. The protocol's strong recovery and growth, along with its highly attractive metrics, indicate that Euler is not only reliable but also one of the most user-friendly and secure options in today's DeFi space. Whether borrowers are seeking favorable terms or lenders looking for stable returns, Euler offers compelling solutions that make it stand out in the field.