Euler is Back: Following $240M Hack, Euler v2 Arrives as a Modular Credit Layer of On-Chain Finance

After a $240 million exploit in March 2023 and “one of the most comprehensive security audits in DeFi history,” Ethereum-based protocol Euler reemerged with its second version.

According to the press release, Euler v1 was made for a particular use case, but Euler v2 supports many.

Euler v2 is a meta-lending protocol that supports unlimited use cases for on-chain credit.

Therefore, it acts as the credit layer of on-chain finance in several manners.

First, it introduces this framework that allows limitless use cases in on-chain credit for DeFi users and institutional players.

Next, it enables builders to create vaults that collateralize “almost any kind of digital asset.” This, in turn, opens up “new avenues for innovation in DeFi,” the team argued.

Finally, the team claims that Euler v2 eliminates fragmentation and capital inefficiency, which have notoriously been massive issues in isolated lending markets.

In March 2023, Euler Finance suffered a flash loan attack , which resulted in the theft of over $200 million worth of digital assets.

The exploiter returned some $102 million to the protocol.

Four Types of Customizable Vaults

Euler’s latest move enables builders and institutions to create a credit product from the ground up.

They can create highly customizable borrowing and lending vaults, according to the press release.

Then, they can connect and optimize vaults for “any strategy or need.” From passive yield aggregators to complex lending and borrowing systems, “the possibilities are endless,” the announcement said.

Vaults can be permissioned or permissionless. They are agnostic about governance, risk management mechanics, asset pricing, etc.

Furthermore, vault creators specify all the risk/reward parameters. They also decide whether their vault keeps governance for active risk management or revokes it. In the latter case, lenders manage their own risk.

At launch, the types of supported vaults include:

• ungoverned escrowed collateral vaults: hold deposits that can be used as collateral for taking out loans from other vaults, but do not earn their depositors interest because they do not allow borrowing;
• governed vaults: suited for passive lenders, they hold deposits that can be both collateral and borrowed, earning depositors additional yield;
• ungoverned vaults: come in two types, 0x for zero exposure to governance through collaterals and nzx that may accept collateral with governance exposure;
• yield aggregator vaults (a special class of governed vaults): aggregates passive lender assets that can flow into any underlying ERC4626 vault, including ungoverned or governed Euler vaults, as well as external vaults like sDAI.

Additionally, vaults can hold crypto-native fungible tokens, non-fungible assets, tokenized real-world assets (RWAs) with permission transfer restrictions, and natively minted synthetic assets.

‘Unique Feature’: Recognizing Deposits in Any Ecosystem Vault

Vault creators can deploy vaults permissionlessly via the Euler Vault Kit (EVK) and “chain” them to one another.

This will allow the new vault to recognize deposits in any other existing vault in the Euler ecosystem as collateral via the Ethereum Vault Connector (EVC).

This feature is unique to Euler, said the team. They argued that it can be utilized as “a powerful bootstrapping mechanism” for growing liquidity in old and new vaults.

Deposits in old vaults, said the announcements, gain new utility when newer vaults recognize them as collateral.

At the same time, new vaults get “a ready-made user base” for borrowing when they accept deposits from liquid and widely used existing vaults.

Finally, Euler’s overall switch to v2 represents a shift for the end user as well, they said. It means new risk/reward opportunities for lending and borrowing the assets they prefer, as well as new asset classes.

Lenders can choose vaults governed by active risk managers, or a governance-free one.

They also choose “from risk-isolated lending and borrowing pairs for lending to long-tail or higher risk markets, to more capital-efficient cross-collateralized clusters of vaults that support lending of short-tail crypto majors or price-correlated assets such as stablecoins or ETH staking/restaking tokens,” the announcement concluded.