Euler Finance

Simple Summary

Proposal includes changing the stETH oracle on Euler from Uniswap V3 to Chainlink and amending the interest rate model to take into account borrowing activity.

Motivation

The goal of the proposal is to pave the way for stETH as collateral on Euler by giving stETH a reliable pricing feed (1) and letting lenders earn both staking rewards and APYs paid by borrowers (2).

At the moment, the wrapped version of stETH (wstETH) is collateral and can be effectively used to go levered long and short on Lido’s staked version of ETH.

In fact, Euler is the only place on-chain where users can short wstETH, which so far has led to additional 2% yield for lenders. This is possible because wstETH has a robust oracle on Uniswap V3.

However, the more popular unwrapped version of stETH does not have a strong oracle on Uniswap V3 because Uniswap does not support rebasing tokens. This is why Chainlink is necessary and finally possible after implementing eIP14.

Similarly, the interest rate model needs changing due to the nature of rebasing tokens. In the case of wstETH, the wstETH/WETH exchange rate increases in time, meaning that wstETH borrowers’ debt to lenders automatically increases as the exchange rate goes up. This means that lenders don’t miss out on staking rewards as the borrower’s debt takes them into account.

That, however, is not the case with stETH. At the moment, should a user borrow stETH on Euler, the borrower will be entitled to the rewards of the borrowed tokens. Any unborrowed tokens in the pool will accrue to lenders.

The new interest rate model seeks to correct that by amending the base interest rate (IR% at 0% utilisation) to the staking reward APY. This way, the borrowers will be paying the lenders whatever they owe in terms of staking rewards.

Risk Assessment

The Chainlink oracle change has undergone auditing by Omniscia: https://omniscia.io/reports/euler-finance-chainlink-support/

It has also been reviewed by Sherlock: https://www.hacknote.co/17c261f7d8fWbdml/1821f966f40pJG_t

Conclusion

These changes will enable lenders to maintain their rewards while earning additional APYs from borrowers, while relying on a tried and tested Chainlink oracle. They will also pave the way for listing stETH as collateral and hopefully let Euler attract more liquidity and activity.

Relevant Links

IR model github links: https://github.com/euler-xyz/euler-contracts/pull/154

eIP 14 (Chainlink): https://forum.euler.finance/t/eip-14-contract-upgrades/305#governance-5