Euler

01 · Concept — what problem does it solve?

Compound and Aave gate listings through governance — slow, political, and capped at a few dozen blue chips. Euler made lending permissionless: any asset with a Uniswap v3 oracle could get a money market. The insight that makes this survivable is risk tiering: untrusted assets can be borrowed but never used as collateral, quarantining long-tail risk away from the core pool.

02 · Mechanics

• Asset tiers: isolation (borrow alone, no collateral), cross (borrow alongside others), collateral (full privileges) — promotion via governance.
• Reactive rates: a PID controller targets utilization dynamically instead of a fixed kink curve — rates adapt to market conditions per block.
• eTokens / dTokens: tokenized deposits and tokenized debt; dTokens make synthetic leverage and "minting" loops first-class operations.
• Soft liquidations: Dutch-auction discount that starts near zero and grows — minimizing liquidation penalty instead of fixed 5–13% bonuses.

03 · Formulas

// reactive interest rate (PID on utilization)
r(t+1) = r(t) + kp·e(t) + ki·Σe   e = U − U_target

// dutch-auction liquidation discount
discount = f(HF) → grows as health factor falls
   vs fixed 5–13% bonus in Compound/Aave

// synthetic leverage via mint
mint: eToken + dToken in equal measure → loop

04 · Edge cases & risks

• Mar 2023 hack — $197M — donateToReserves let an attacker burn eTokens without a health check, then self-liquidate at a discount via flash loan. Largest DeFi hack of 2023; remarkably, the attacker returned essentially all funds within weeks.
• Permissionless ≠ safe — long-tail listings concentrate oracle-manipulation risk; v3 TWAPs on thin pools are attackable.
• Euler v2 (2024) — rebuilt as the EVK: a kit where anyone deploys customized, isolated vaults connected by the EVC — modularity as the answer to monolithic risk.