Overview
Euler Finance originally launched in late 2022 as a permissionless lending protocol on Ethereum, differentiating itself from Aave and Compound by allowing any ERC-20 token to be listed without governance approval. The protocol introduced innovative features including reactive interest rates, protected collateral, and sub-accounts for advanced position management.
In March 2023, Euler V1 suffered one of the largest DeFi exploits in history — a $197M flash loan attack that exploited a vulnerability in the donation and liquidation logic. In a remarkable turn of events, the hacker returned the stolen funds over subsequent weeks after on-chain negotiations, making it one of the few major DeFi exploits with full fund recovery.
The team spent over a year rebuilding from scratch, launching Euler V2 in 2024 with a completely redesigned architecture. V2 adopts a modular vault-based approach (similar in philosophy to Morpho Blue) where anyone can deploy customizable lending vaults with their own risk parameters. The protocol aims to combine V1's permissionless ethos with dramatically improved security.
Smart Contracts
Architecture
Euler V2 introduces the Ethereum Vault Connector (EVC), a novel primitive that enables vault-to-vault interactions and multi-collateral positions. Each lending market is an independent ERC-4626 vault with custom parameters for collateral factors, interest rate models, and oracles. This modular design contrasts sharply with V1's monolithic pool architecture.
Code Quality
V2 is a complete rewrite — no V1 code was reused. The team invested heavily in formal verification, extensive test suites, and multiple audit rounds. The EVC and core vault contracts are open source. Code quality reflects lessons learned from the V1 exploit, with particular attention to flash loan interactions and donation attack vectors.
Upgradeability
Individual Euler V2 vaults can be configured as immutable or governed, depending on the vault creator's choice. The EVC layer itself is immutable. This flexibility allows both trustless vaults and governed vaults to coexist, giving users options along the trust spectrum.
Security
Audit History
Euler V2 has been audited by Spearbit, Trail of Bits, Certora (formal verification), and others. The audit program is extensive, reflecting the team's acute awareness of security after the V1 incident. A substantial bug bounty program (one of the largest in DeFi) incentivizes responsible disclosure.
The V1 Exploit
The March 2023 exploit was a flash loan attack targeting a vulnerability in Euler V1's donateToReserves function combined with liquidation logic. The attacker drained $197M across multiple tokens. The funds were ultimately returned after a combination of on-chain messages, law enforcement involvement, and negotiation. While recovery was complete, the incident permanently damaged the protocol's security reputation.
Track Record
V2 has operated without exploits since its 2024 launch, but its track record is short. The protocol carries the weight of V1's catastrophic failure, and the market rightfully applies heightened scrutiny. The complete rewrite mitigates direct V1 vulnerability carryover, but trust must be rebuilt over years.
Risk Management
Asset Listing
Euler V2's vault model allows permissionless market creation. Vault deployers set their own risk parameters, similar to Morpho Blue. Curated vaults managed by professional risk teams offer a safer experience, while permissionless vaults carry creator-defined risk.
Risk Parameters
Each vault specifies collateral factors, liquidation LTV, oracle sources, interest rate curves, and supply/borrow caps. The EVC enables cross-vault collateral positions, adding capital efficiency but also systemic interconnection. Risk isolation is maintained at the vault level.
Monitoring
The team has invested in real-time monitoring and alerting systems post-exploit. Simulation tools and invariant checks are part of the deployment process. The protocol benefits from lessons learned — few teams in DeFi have as visceral an understanding of exploit mechanics.
Adoption
TVL & Usage
Euler V2 has rebuilt to approximately $500M-$1B in TVL as of early 2026, a fraction of its V1 peak but showing steady growth. Adoption has been cautious, with institutional and sophisticated DeFi users leading the return. The protocol must overcome reputational headwinds.
Multichain Presence
Euler V2 is primarily deployed on Ethereum mainnet with expansion to select L2s. The multichain footprint is more conservative than Aave's, reflecting the protocol's focus on security over rapid expansion.
Integrations
Growing integrations with DeFi aggregators and yield optimizers. The EVC primitive has attracted developer interest as a building block for composable vault strategies. However, integrations lag behind established protocols due to lingering risk perception.
Tokenomics
Token Overview
EUL is the governance token. The token suffered dramatically during the exploit, losing most of its value. Recovery has been gradual, tied to V2's relaunch and growth. Distribution includes team, investors, treasury, and community allocations.
Revenue Model
Euler V2 earns revenue through protocol fees on vault interest. The fee structure is configurable per vault, with a portion flowing to the DAO treasury. Revenue is rebuilding alongside TVL but remains modest compared to top lending protocols.
Governance
The Euler DAO governs protocol-level decisions including treasury management, incentive programs, and ecosystem development. Governance activity has been rebuilding post-exploit, with the community playing a meaningful role in the V2 relaunch direction.
Risk Factors
- Exploit History: The $200M V1 exploit is the defining event of Euler's history. While funds were recovered and V2 is a complete rewrite, the reputational damage is lasting and warranted caution is permanent.
- Short V2 Track Record: V2 launched in 2024, giving it limited battle-testing. The modular vault architecture, while well-audited, introduces new interaction patterns (EVC) that need time to prove safe.
- Trust Deficit: Many users and protocols remain hesitant to integrate with Euler due to V1. Rebuilding trust is a multi-year process, and a second incident would likely be fatal to the project.
- Competitive Landscape: Morpho Blue occupies a similar design space (modular, permissionless vaults). Euler must differentiate on features while overcoming its reputational handicap.
- EVC Complexity: The Ethereum Vault Connector enables powerful composability but introduces cross-vault dependency risks that could create unexpected attack vectors.
Conclusion
Euler Finance represents one of DeFi's most compelling comeback stories. The V1 exploit was catastrophic, but the full recovery of funds and the team's commitment to a complete rewrite with rigorous security demonstrate resilience. V2's modular vault architecture with the EVC is technically innovative and addresses real DeFi needs.
However, the security scar is permanent. Euler must earn trust through years of incident-free operation, and its scores — particularly in security — reflect this reality. The protocol is not scored on its ambition or technical design alone, but on the totality of its history. Users should approach Euler V2 with cautious optimism: the design is sound, the team is battle-hardened, but the proof is in sustained, exploit-free operation.