Why is Euler the best lending product in DeFi right now?

Euler addresses some of the most pressing issues in DeFi lending, such as MEV, high gas fees, and the risks of traditional liquidation mechanisms.

Written by: Tommy.eth

Compiled by: Alex Liu, Foresight News

Euler Finance has been making remarkable progress since October 2024, being hailed as one of the most stunning comebacks in DeFi history. Despite facing significant setbacks – a hacker attack in 2023 led to a temporary halt of the protocol – the Euler team has tirelessly worked to rebuild and regain user trust.

Data speaks for everything:

• Total deposits reached $1 billion (increased by 1000% within 4 months)
• 430 million USD loan
• The TVL on Sonic exceeds 100 million USD
• Deploy on 8 chains

Euler Finance total deposits, source: DeFiLlama

The significant increase in deposits proves Euler's growing appeal in the Decentralized Finance space.

But why should users consider using Euler for lending now? To understand why Euler stands out, we first need to explore some of the problems that exist 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 the decentralized world, this process relies on third parties—liquidators—who act as arbitrageurs. These users create bots that automatically liquidate positions when collateral is insufficient. In return, they receive discounts on collateral, and the competition to liquidate these positions is very fierce.

This competition leads to an increase in Gas fees, especially on networks like Ethereum, where the first acting liquidator will receive a reward. As a result, the Gas war may escalate, making it difficult for ordinary users to interact with the blockchain when Gas prices surge. This phenomenon is referred to as MEV, and it is a significant issue facing the Decentralized Finance ecosystem.

How other protocols handle liquidation

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

These protocols facilitate liquidation by incentivizing arbitrageurs, but intense competition for liquidation often results in unfair outcomes and high trading costs for ordinary users.

Euler's innovative liquidation method

Euler Finance adopts a completely different liquidation approach aimed at directly addressing these issues.

Dutch Auction Settlement

Unlike Compound or Aave, which use a fixed discount rate during the liquidation process, Euler employs a Dutch auction mechanism. This means that as the degree of collateral deficiency for the borrower's position deepens, the liquidation discount gradually increases over time. Liquidators can choose the optimal intervention timing based on their own risk and return expectations.

The liquidation discount increases over time

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

Soft Settlement

A major highlight of Euler is the soft liquidation mechanism, which aims to protect borrowers from the concern of complete liquidation. Under the soft liquidation mechanism, when the value of a borrower's collateral decreases or their debt increases, only a portion of the collateral will be liquidated. However, if the price of the collateral rebounds, the borrower can reclaim the liquidated portion.

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

Euler's innovative liquidation mechanism has had a direct and positive impact on its metrics:

Lending activities are active

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 leverage funds at lower risk.

Attractive Fees and Returns

Weekly fees generated by Euler, source: token terminal

Euler's user-centric philosophy has brought highly competitive fees for borrowers (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 90%, significantly higher than most other Decentralized Finance platforms. This is due to its soft liquidation mechanism, which provides borrowers with greater security and flexibility when managing their positions. Borrowers can use higher leverage while ensuring a lower likelihood of losing all collateral in the event of a liquidation.

Conclusion

Euler's innovative features (such as Dutch auction liquidation and soft liquidation) address some of the most pressing issues in DeFi lending, such as MEV, high Gas fees, and the risks of 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 choices in today's DeFi space. Whether borrowers seeking favorable terms or lenders looking for stable returns, Euler provides compelling solutions that make it stand out in the field.