Euler Finance has been on a roll since October 2024, making it one of the most stunning comebacks in DeFi history. Despite facing major setbacks - a hack in 2023 led to a temporary protocol suspension - the Euler team has been tirelessly working to rebuild and regain user trust.

Data speaks for itself:

• Total deposits reached 1 billion US dollars (an increase of 1000% in 4 months)
• 4.3 billion US dollar loan
• TVL exceeds $100 million on Sonic
• Deployed on 8 chains

Total deposits of Euler Finance, source: DeFiLlama

The significant increase in deposits proves the growing attractiveness of Euler in the DeFi space.

But why should users consider using Euler for lending now? To understand why Euler stands out, let’s first explore some issues with other lending products on the market, and how Euler addresses these issues.

Clearing and MEV issues

One of the main issues with DeFi lending protocols is the liquidation method. In traditional lending markets, central entities (such as banks) may liquidate bad debts. However, in the decentralized world, this process relies on third parties - liquidators, who act as arbitrageurs. These users create bots to automatically liquidate positions when collateral is insufficient. In return, they receive collateral discounts, and the competition for liquidating these positions is fierce.

This competition leads to an increase in Gas fees, especially on networks like Ethereum, where the first liquidator of an action will be rewarded. As a result, Gas wars may escalate, making it difficult for ordinary users to interact with the blockchain when Gas prices soar. This phenomenon is called MEV, a major problem facing the DeFi ecosystem.

How do other protocols deal with liquidation

Leading DeFi platforms such as Aave, Compound, and Curve all have liquidation systems. When a borrower’s position falls below the collateral threshold, liquidators compete to seize the collateral at a discount. However, this process often leads to a rapid drop in collateral prices, further exacerbating liquidation issues and driving up Gas costs.

These protocols incentivize arbitrageurs to facilitate liquidation, but intense liquidation competition often leads to unfair outcomes and high trading costs for regular users.

Euler’s innovative liquidation method

Euler Finance has adopted a radically different liquidation method aimed at addressing these issues head-on.

Dutch auction settlement

Unlike Compound or Aave, which use a fixed discount rate in the liquidation process, Euler uses a Dutch auction mechanism. This means that as the collateral of the borrower’s position becomes increasingly insufficient, the liquidation discount will gradually increase over time. Liquidators can choose the optimal intervention time based on their own risk and return expectations.

Liquidation discounts increase over time

This mechanism reduces the congestion and competition leading to MEV, thereby helping to stabilize Gas prices. By transforming liquidation into an auction, Euler has created a more beneficial and controllable environment for all parties involved.

Soft Liquidation

One of the highlights of Euler is the soft liquidation mechanism, which aims to protect borrowers from the fear of complete liquidation. Under the soft liquidation mechanism, when the value of the collateral of the borrower falls or the debt increases, only part of the collateral will be liquidated. However, if the price of the collateral rises, the borrower can recover the liquidated part.

This gives borrowers more time to recover from market fluctuations without immediately losing their entire position. Soft liquidation allows users to maintain control of their assets, increasing their ability to withstand temporary price declines and minimize losses.

Euler’s innovative liquidation mechanism has directly and positively impacted its benchmarks:

Lending activities are active

Compared to other protocols like Aave (0.38) and Compound (0.3), Euler has the highest Borrow TVL ratio (0.45). This indicates that borrowers are attracted to Euler because of its unique features such as more favorable liquidation terms and the ability to leverage funds at lower risk.

Attractive fees and returns

Euler-generated weekly fees, sourced from: token terminal

Euler’s user-centric approach brings highly competitive fees to borrowers (up to $557,000 per week) and lucrative returns to depositors. By minimizing the negative impact of liquidation on users to the greatest extent, the protocol helps ensure that both borrowers and lenders benefit from a smoother and more efficient process.

Loan-to-Value Ratio (LTV)

Euler’s average loan-to-value ratio is as high as 90%, much higher than most other Decentralized Finance platforms. This is thanks to its soft liquidation mechanism, which provides borrowers with higher security and flexibility when managing positions. Borrowers can use higher leverage while ensuring a lower possibility of losing all collateral in a liquidation event.

Conclusion

Euler’s innovative features, such as Dutch auction settlement and soft liquidation, address some of the most pressing issues in DeFi lending, such as MEV, high Gas fees, and risks of traditional liquidation mechanisms. The protocol’s strong recovery and growth, along with its attractive metrics, indicate that Euler is not only reliable but also one of the most user-friendly and secure choices in today’s DeFi space. Whether borrowers seeking favorable terms or lenders seeking stable returns, Euler can provide convincing solutions that set it apart in the field.

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