The Status Quo

The status quo of current on-chain money markets can be categorised by three broad architectural design frameworks: Monolithic, Isolated, and Modular. Monolithic lending protocols limit borrowing by offering a restricted asset selection, rigid loan-to-value (LTV) requirements, and high liquidation penalties. Monolithic lending protocols help foster greater capital efficiency by pooling collateral used for different purposes and enabling rehypothecation. However, they only allow new collateral types to be added under restrictive economic conditions and typically only via governance actions. Isolated lending markets provide more flexibility but fragment liquidity and prevent rehypothecation, reducing capital efficiency. Additionally, traders must often navigate multiple protocols, governance systems, and interfaces, incurring extra fees. Isolated lending protocols allow greater flexibility in collateral use but fragment collateral, which can make it harder to rehypothecate assets, leading to lower capital efficiency*. These inefficiencies push traders toward CeFi and perpetual futures instead of decentralized spot markets, lowering yields for DeFi lenders and reducing overall liquidity and efficiency in DeFi.

Euler v2 is a modular lending platform that aims to fix these problems and become the primary liquidity layer for DeFi.

Euler’s Core Concepts

On the highest level, Euler v2 is a highly modular DeFi money-market infrastructure. It strips down DeFi lending markets to their core components, modularizes them, and consequently allows the creation of almost any sort of DeFi money market, catering to the entire range of risk appetite from conservative lenders seeking blue-chip collateral exposure to high-yield seekers willing to engage with riskier markets*.* We believe that exactly this type of modular framework makes Euler v2 a highly attractive foundation for money markets, given that its precisely this increased flexibility, which allows it to appeal to a wide range of borrowers and curators with varying risk appetites. **Unlike traditional monolithic lending protocols that impose rigid collateral requirements, Euler v2 introduces a highly flexible ERC-4626 vault-based system, significantly improving capital efficiency and liquidity utilization. Euler v2 is based on two core concepts, the Ethereum Vault Connector (EVC) and Euler Vault Kit (EVK). The EVK enables permissionless deployment of vaults, which can be interconnected through the EVC to recognize existing vault deposits as collateral. Creators define all risk/reward parameters and choose whether to maintain governance for active management or permanently revoke governance control, enabling lenders to self-manage risks.

Source: Euler

The Flywheel Effect

Euler vaults can recognise deposits in other vaults as collateral, which solves the bootstrapping challenge and enhances liquidity. In that context, what we are particularly excited about is that existing vaults gain additional utility when newer vaults accept their deposits as collateral, while new vaults tap into pre-existing TVL, accelerating adoption. This creates a flywheel effect: more use cases increase utility, attracting more deposits. Increased deposits, in turn, lead to broader adoption of vaults as collateral, further reinforcing TVL growth and enhancing capital efficiency across the ecosystem. Since its launch, Euler has shown that this theoretical approach translates well into hard numbers: with a current average utilisation ratio of ca. 47% across all of its vaults, Euler’s capital efficiency stands head and shoulders above the rest of the market.

Source: Euler

Liquidation Mechanism

Another interesting feature that stands out in Euler v2 is their liquidation mechanism, which is one of the most efficient - if not the most efficient - liquidation mechanisms in DeFi, and allows vault creators to customize liquidation flows. By default, it employs Euler v1’s reverse Dutch auction mechanism, which minimizes liquidation costs and protects both borrowers and lenders. The reverse Dutch auction mechanism allows liquidations to typically occur close to the marginal cost of execution. As a result, small positions tend to have relatively higher liquidation fees, while larger positions benefit from drastically lower fees in proportion to their size. This is because there is usually a fixed cost to liquidate, which becomes proportionally smaller as the position size increases. The mechanism ensures fair compensation for liquidators without creating unnecessary MEV or penalizing borrowers with oversized fees, which is often the case with fixed liquidation fees. Additionally, Euler has no additional liquidation fees that many other lending protocols implement for extra revenue.

On the front end, Euler provides a comprehensive suite of product features tailored to both passive users and advanced traders. Beyond standard lending protocol capabilities, its standout functionalities include:

• Multiply Feature: Facilitates leveraged trading and yield looping. Users create leveraged positions by supplying collateral, borrowing, swapping, and re-supplying.
• Transaction Batching: Executes multiple actions in a single transaction via the EVC. Built-in deferred status checks allow flexible operation sequencing, while simulation mode previews outcomes pre-execution to reduce risk.
• Portfolio Management: Helps users monitor and manage their positions. A health score indicates proximity to liquidation, while quick actions allow users to top up collateral or repay debt. Advanced analytics provide insights for optimizing positions and maximizing returns.
• Euler Vault Explorer: Euler mimics the complexity of real-world credit markets, but provides a transparent way to view the risks. The vault risks can be analysed via Euler’s Vault Explorer or other third-party dashboards.

Euler v2’s design enables the creation of various strategies, such as:

• Delta-neutral liquidity provision (simplified example)
  • Borrow a volatile asset (e.g., ETH on Euler)
  • Deposit that volatile asset into an LP pool (e.g., USDC/ETH)
  • This creates a delta-neutral LP position, where, with an ideal strategy, the hedged position generates additional yield.
• Margin Trading RWAs
  • Create a USDC vault accepting RWAs as collateral.
  • RWA depositors borrow USDC, swap for more RWA, and loop to go long, leveraging yield spreads.

Traction

Since its launch, Euler v2 has gained significant traction, with its TVL surging over 250x, making it the currently fastest-growing lending protocol in DeFi. Monthly active users have increased from under 1k to breaching 10k in April 2025, steadily hitting new all-time highs. Additionally, active loans have grown from $88m to $510m year to date - a growth of approximately 480%. Noticeably, this growth has been achieved with a proportionately small amount of ca. $2m in protocol incentives deployed. For us, these metrics hold significant relevance. At a time when traction data has become less meaningful due to yield farming campaigns that often attract only short-term, mercenary capital, Euler has proven that true organic growth, with real users, is still achievable with minimal financial incentivisation - provided the product experience is genuinely superior like in Euler’s case.

Euler’s market cap has remained relatively stable since launch, while the daily fees and TVL have increased rapidly

Source: DefiLlama

Source: DefiLlama

Chain Expansion

A handful of factors drives Euler’s recent TVL growth: Euler's focus on multi-chain expansion has seen rapid deployment across emerging EVM chains over the past six months, attracting significant TVL and establishing dominance as a leading money market on newer networks. In 2025, Euler v2 expanded to rapidly growing chains like Base, Sonic, Berachain, BOB, and BNB gaining substantial traction and new chain expansions, such as Optimism, being announced steadily.

Euler's chain expansion has been a success so far, with smaller chains now ~27% of total TVL

EulerSwap

Lastly, but of significant importance to us at Wintermute Ventures, is Euler’s vision for its upcoming product release of EulerSwap - an AMM directly integrated with its money markets - to address fragmented liquidity and enhance yield generation. Not only is the swap design unique and efficient, but by integrating a swap market, Euler establishes itself as a one-stop shop for DeFi liquidity, which allows the protocol to become a complete ecosystem. We are truly excited about this vision, and we look forward to supporting it with our in-house expertise.

Conclusion

Wintermute Ventures is extremely excited to invest in what we believe to be one of the most promising protocols in all of DeFi. Euler has established itself as the fastest-growing lending protocol since the launch of v2, while its fully diluted valuation has remained largely stable. Its modular architecture acts as a DeFi money market infrastructure that caters to the full spectrum of risk appetites, from conservative institutional strategies to experimental retail products. This marks just the beginning of a long list of endless possibilities for Euler - and the start of an exciting journey for Wintermute Ventures as both a partner and investor in Euler.

* In an earlier version of this post, we stated: "Isolated lending protocols like Compound v3 or Morpho Blue allow greater flexibility in collateral use but fragment collateral and prevent rehypothecation, leading to lower capital efficiency." This is incorrect, and we apologize for this oversight.