Euler Finance is a permissionless lending protocol known for its sophisticated risk management framework and its remarkable recovery from a $197M hack in 2023. Euler v1 was exploited via a donation attack in March 2023, but the hacker returned all funds within weeks — one of the largest fund recoveries in DeFi history. Euler v2, launched in 2024, rebuilt the protocol with significantly enhanced security architecture.
Euler v2 Architecture
Euler v2 consists of two components: the Ethereum Vault Connector (EVC) and Euler Vaults. The EVC is a generalized infrastructure layer that allows any vault to be connected to any other vault, enabling complex nested borrowing and collateral configurations. Euler Vaults are modular lending markets, similar in concept to Morpho Blue markets, where risk parameters can be configured by vault deployers.
The system allows "sub-accounts" — users can create multiple isolated positions under a single wallet address — enabling sophisticated portfolio management without multiple wallets.
Risk Tiers
Euler v1 introduced asset tiers (Isolated, Cross, Collateral) that determined how assets could be used. Isolated assets could only be borrowed, not used as collateral. Cross assets could be used as collateral only for other cross assets. Collateral assets had full collateral functionality. This tiered approach prevented dangerous collateral combinations from being listed simultaneously.
The $197M Hack and Recovery
In March 2023, an attacker exploited a donation vulnerability in Euler v1's reserve logic, allowing them to drain approximately $197M in ETH, stETH, USDC, and DAI across multiple transactions. Remarkably, after negotiations and on-chain messages, the attacker returned virtually all funds within three weeks. Euler subsequently launched a recovery effort, allowing affected users to claim approximately 95 cents on the dollar.
EUL Token
EUL governance token controls vault whitelisting, fee parameters, and protocol upgrades. Euler v2's launch included an airdrop to v1 affected users as part of the recovery effort, converting what could have been a catastrophic loss into a notable demonstration of DeFi resilience.