Can Euler Finance Carve Out a Moat?

Aave and Compound have paved the path for the basic money market design space in DeFi. Both protocols have dominated the landscape and weathered numerous threats from newer, more agile competitors. In the process, they’ve had to compete with protocols that employed lucrative liquidity mining incentives to attract users. Yet, they have undoubtedly reigned as the top money market protocols in all of DeFi.

While Aave has been continually shipping new features, Compound has made improvements and added token markets at a slower rate. It also suffered a well-publicized hiccup last year. Along with the overall crypto market, both protocols have been in decline. Aave’s TVL is down 70% from all-time-highs and Compound’s is down 80% from its peak.

While Euler’s TVL is incredibly small compared to the likes of Aave and Compound, it has been a standout year for the protocol’s growth.

Euler’s TVL has increased by nearly 1,000% YTD. And while it is much easier for a smaller protocol like to see TVL growth — especially when they have token incentives — it’s still no easy feat to continue attracting capital amidst current market conditions.

In this report, we’ll break down how Euler works and whether it has the ability to become a market leader by usurping one or both of Aave and Compound.

What Makes Euler Different?

Euler is a non-custodial, permissionless lending protocol built from scratch by the team at Euler Labs. It is designed to handle the risks associated with borrowing and lending risky assets. Unlike Aave v2 and Compound v2 where all the assets exist in one interconnected money market, Euler doesn’t allow cross-borrowing for most assets.

In order to ensure safety and allow permissionless listing, Euler has taken a more systematic approach to risk management and made several design choices to decentralize the protocol. For instance, they have applied both borrowing and lending LTVs to every asset, meaning that the LTV of a user’s loan is dependent on collateral used as well as the asset being borrowed. This is unlike other money markets which only take into consideration the LTV of the asset being borrowed, while ignoring the volatility of the borrower’s collateral when calculating a loan’s LTV.

Euler was initially designed to rely solely on Uniswap v3 TWAP for their price oracles, a