Home /Euler /Risk Architecture

? Euler Risk Architecture

Euler v2 isolates risk at the vault level. Each vault is an independent smart contract with its own collateral, oracle, and risk parameters. The Ethereum Vault Connector (EVC) wires them together for cross-vault composability while keeping failure domains isolated. This page breaks down the tier system, health factor math, and Dutch auction liquidation mechanics.

? Vault Tier System

Euler v2 classifies each vault into one of four tiers based on collateral quality, decentralization, and oracle trust. The tier determines how the vault's collateral can be used across the broader Euler ecosystem.

Tier 1 - Cross
Cross-Collateral
Highest quality assets. Used as collateral across multiple vaults via the EVC.
Examples: ETH, wstETH, cbBTC
Tier 2 - Isolated
Solo Collateral
Collateral only usable within its own vault. Cannot be cross-collateralized.
Examples: Aave ERC-20 tokens, long-tail assets
Tier 3 - Native
Supply Only
Can supply and earn yield but cannot be used as collateral for borrowing.
Examples: Governance tokens, unstable assets
Tier 4 - Terminal
Phased Out
No special privileges. Assets that have been deprecated or proven risky.
No current examples - sunset tier
Tier Cross-Collateral Borrow Against Max LTV Liquidation Penalty
Tier 1 - Cross OK Yes OK Yes Up to 95% 4-8% (Dutch auction)
Tier 2 - Isolated X No OK Yes Up to 70% 6-12% (Dutch auction)
Tier 3 - Native X No X No N/A N/A
Tier 4 - Terminal X No X No 0% Sunset

? Health Factor Calculator

Euler v2 computes health per-vault. Unlike Aave's shared-pool model, your collateral in Vault A cannot shore up your borrowing in Vault B unless both are Tier 1 (Cross) vaults connected through the EVC.

Collateral
Borrow (Debt)
-80% (crash)0%+80% (moon)
Collateral Value
$35,000
Max LTV (Collateral Factor)
95%
Borrowed Value
$5,000
Health Factor
6.65
Cross-tier note: Because your collateral is in a Tier 1 Cross vault, it can secure borrowing across multiple vaults simultaneously via the EVC. This gives you more capital efficiency than isolated tier vaults.

Health Factor Bar - Euler vs Aave

Compare how Euler v2's per-vault isolation differs from Aave's shared pool model as collateral price changes.

DepositBorrow initiatedPrice drops 30%HF = 1.0 ?Now
SAFE (HF > 1.5)
Buffer above liquidation. Position healthy.
? CAUTION (HF 1.0-1.5)
Add collateral or reduce borrow. Liquidation possible if price drops further.
DANGER (HF < 1.0)
Dutch auction liquidation triggered. Liquidators compete to close the position.

Dutch Auction Liquidation Mechanics

Unlike Aave's fixed bonus liquidation model, Euler v2 uses a Dutch auction for liquidations. The penalty starts high and decreases over time, ensuring the liquidated user gets fair market value while liquidators compete on price.

Auction State
Live Auction Price
Current Penalty
20%
Collateral Value
$35,000
Liquidator Cost
$42,000
Liquidator Profit
$0
Why Dutch auction? Fixed bonus liquidations (Aave/Compound) create winner-take-all races where the first bot to execute wins all the bonus. Dutch auctions naturally converge to market price - as the penalty decreases, more liquidators find it profitable to bid, and the auction price approaches the true market price of the collateral.

Sub-Account Architecture

Each Ethereum address on Euler v2 controls up to 256 virtual sub-accounts. Each sub-account is a fully isolated position - different collateral, different debt, different health factor. Sub-accounts cannot cross-liquidate each other. This is one of Euler's most powerful risk management features.

Wallet (EOA or contract)Sub-accounts are virtual - no deployed contracts per sub-accountEach sub-account independently managed
256
Max sub-accounts per address
0 gas
Per sub-account deployment cost
Isolated
Cross-liquidations between sub-accounts
Single Sig
All sub-accounts use same wallet key

Euler vs Aave/Compound Risk Model

Aspect Euler v2 Aave v3 Compound v3
Risk Isolation Per-vault Shared pool Shared pool
Liquidation Type Dutch auction Fixed bonus Fixed bonus
Health Factor Scope Per-vault Account-wide Account-wide
Sub-Accounts 256 per address None None
Oracle Choice Per-vault (flexible) Chainlink mainly Chainlink mainly
Cross-Vault Collateral OK EVC (Tier 1) eMode groups None
Market Creation Permissionless (EVK) Governance only Governance only

Case Study: Euler v1 Exploit (March 2023) & v2 Prevention

In March 2023, Euler v1 was exploited for $197M through a complex flash loan attack. The attacker manipulated the WSTETH/ETH price feed on CoinBaselines (Twap Oracle), artificially inflating the apparent value of WSTETH collateral. This allowed the attacker to borrow far more than their collateral was actually worth.

The attacker eventually returned all funds through a whitehat bug bounty negotiation. But the lesson was clear: a single point of failure in the oracle system compromised the entire protocol.

Euler v2 prevention: Vault deployers choose their own oracle. The EVC doesn't mandate any specific price feed. Each vault is a separate risk domain - a compromised oracle in one vault cannot cascade to others. The Tier 1 Cross tier requires assets to have established decentralized oracle infrastructure before qualifying.

Health Factor Formula

Euler v2's health factor is computed per vault, not per account. For a Tier 1 Cross vault with collateral value C, borrowed value B, and collateral factor CF:

Health Factor = (C CF) B

When HF < 1.0, the position enters Dutch auction liquidation. The auction penalty starts high and decreases linearly, converging to market price. A liquidator calls liquidate() and receives the collateral minus the current auction penalty.

Vault Composability via the EVC

The EVC acts as a middleware that maintains a normalized account balance sheet. When you deposit ETH into a Tier 1 vault, the EVC registers that collateral and makes it available as borrowing power across all connected Tier 1 vaults. Critically, each vault's smart contract still enforces its own liquidation rules - the EVC routes but does not execute. This design means each vault is a self-contained risk unit: a bug or insolvency in Vault X cannot spill over into Vault Y.