On April 18, 2025, the market maker Wintermute announced that its investment arm Wintermute Ventures has invested in the DeFi lending protocol Euler Finance.
Wintermute Ventures published an investment thesis on Euler on the same day, compiled by Golden Finance AIMan. The following is the full text:
In this investment paper, Wintermute Ventures believes that Euler Finance v2 has cracked the code, becoming a complete DeFi liquidity layer, which is also the reason why Wintermute Ventures announced its investment in Euler.
Current Situation
The current state of the on-chain currency market can be classified into three major architectural design frameworks: monolithic, isolated, and modular.
Monolithic lending protocols restrict lending by limiting asset selection, enforcing strict loan-to-value ( LTV ) requirements, and imposing high liquidation penalties. Monolithic lending protocols enhance capital efficiency by pooling collateral used for different purposes and allowing for re-collateralization. However, they only permit the addition of new types of collateral under constrained economic conditions and typically require governance measures to achieve this.
Isolated lending markets provide greater flexibility, but they also disperse liquidity and hinder re-collateralization, reducing capital efficiency. Additionally, traders often have to navigate multiple protocols, governance systems, and interfaces, incurring additional fees. Isolated lending protocols like Compound Finance v3 or Morpho Blue allow for more flexibility in the use of collateral, but at the same time disperse collateral and hinder re-collateralization, reducing capital efficiency. These inefficiencies have prompted traders to turn to centralized financial (CeFi) and perpetual contracts rather than decentralized spot markets, reducing yields for DeFi borrowers and reducing the overall liquidity and efficiency of DeFi.
Euler v2 is a modular lending platform designed to address these issues and become a major liquidity layer in Decentralized Finance.
Core Concepts of Euler
In short, Euler v2 is a highly modular DeFi money market infrastructure. It streamlines the DeFi lending market to its core components and modularizes them, allowing for the creation of almost any type of DeFi money market that caters to various risk preferences, from conservative lenders seeking high-quality collateral to high-yield investors willing to engage in high-risk markets. We believe that it is precisely this modular framework that makes Euler v2 a highly attractive foundation for money markets, as this enhanced flexibility allows it to attract borrowers and asset managers with different risk appetites. Unlike traditional monolithic lending protocols that impose strict collateral requirements, Euler v2 introduces a highly flexible ERC-4626 vault-based system that significantly improves capital efficiency and liquidity utilization. Euler v2 is based on two core concepts: Ethereum Vault Connector (EVC) and Euler Vault Kit (EVK). EVK supports permissionless vault deployments that can be interconnected through EVC, allowing existing vault deposits to be recognized 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 manage risk independently.
Source: Euler
Flywheel Effect
The Euler vault can recognize deposits in other vaults as collateral, thereby solving the incentive problem and enhancing liquidity. In this context, we are particularly excited that when a new vault accepts deposits from existing vaults as collateral, the existing vaults gain additional utility, while the new vault can leverage the existing TVL, accelerating adoption. This creates a flywheel effect: more use cases increase utility, attracting more deposits. In turn, the increase in deposits leads to wider adoption of vaults as collateral, further enhancing TVL growth and improving capital efficiency across the ecosystem. Since its launch, Euler has demonstrated that this theoretical approach can translate well into actual data: the average utilization rate across all vaults is currently about 47%, and Euler’s capital efficiency far exceeds that of other market participants.
Source: Euler
Settlement Mechanism
Another notable feature of Euler v2 is its liquidation mechanism, which is one of the most efficient liquidation mechanisms in DeFi (if not the most efficient), allowing treasury creators to customize the liquidation process. By default, it employs the reverse Dutch auction mechanism from Euler v1, which minimizes liquidation costs and protects borrowers and lenders. The reverse Dutch auction mechanism allows liquidations to typically occur close to the execution marginal cost. Therefore, small positions often incur relatively high liquidation fees, while large positions can enjoy significantly reduced fees proportional to their size. This is because there are typically fixed costs associated with liquidation, which decrease as the size of the position increases. This mechanism ensures that liquidators are fairly compensated without incurring unnecessary MEV or penalizing borrowers with excessively high fees, which fixed liquidation fees typically lead to. Additionally, Euler does not charge the extra liquidation fees that many other lending protocols set up for additional revenue.
At the front end, Euler offers a comprehensive set of product features tailored for passive users and advanced traders. In addition to the standard lending protocol functionalities, its standout features also include:
- Leverage Function: Facilitates leveraged trading and yield farming. Users can create leveraged positions by providing collateral, borrowing, swapping, and re-supplying.
- Transaction Batch Processing: Perform multiple operations in a single transaction via EVC. The built-in delayed state check allows for flexible operation ordering, while the simulation mode provides a preview of results before execution to reduce risk.
- Portfolio Management: Helps users monitor and manage their positions. The health score indicates the degree of imminent liquidation, while quick actions allow users to top up collateral or repay debts. Advanced analytics provide insights for optimizing positions and maximizing returns.
- Euler Vault Explorer: Euler simulates the complexities of real-world credit markets while providing a transparent way to view risks. You can analyze vault risks through Euler’s Vault Explorer or other third-party dashboards.
Growth Momentum
Since its launch, Euler v2 has garnered significant attention, with its TVL skyrocketing over 250 times, making it the fastest-growing lending protocol in the current DeFi space. Monthly active users have grown from less than 1,000 to 10,000 by April 2025, steadily reaching new historical highs. Furthermore, year-to-date, active loan amounts have increased from $88 million to $510 million, marking an approximate growth of 480%. Notably, this growth has been achieved with only about $2 million in protocol incentives deployed. For us, these metrics are highly significant. While liquidity mining activities often attract short-term profit-driven capital, leading to an insignificant focus on data, Euler has proven that with minimal financial incentives, true organic growth can be realized, boasting real users—provided that the product experience is truly exceptional, as with Euler.
Since its launch, Euler’s market capitalization has remained relatively stable, while daily fees and TVL have rapidly increased.
Source: Decentralized Finance Llama
Source: Decentralized Finance Llama
Multi-Chain Expansion
There are many factors driving the recent TVL growth of Euler: Euler focuses on multi-chain expansion and has rapidly deployed on emerging EVM chains in the past six months, attracting a large amount of TVL and establishing its dominant position as a leading money market on these emerging networks. In 2025, Euler v2 will expand to fast-growing blockchains such as Base, Sonic, Berachain, Bob, and BNBCHAIN, gaining substantial attention and steadily announcing new chain expansions such as Optimism.
So far, Euler’s blockchain expansion has been successful, with smaller blockchains currently accounting for about 27% of the total TVL.
Source: Decentralized FinanceLlama
EulerSwap
Finally, it is crucial for us at Wintermute Ventures to emphasize the vision of the upcoming EulerSwap product from Euler, which is an automated market maker (AMM) directly integrated with its money market, aimed at addressing the issue of fragmented liquidity and enhancing yield. This swap product is not only uniquely and efficiently designed, but by integrating the Swap market, Euler also positions itself as a one-stop service platform for DeFi liquidity, thereby making the protocol a complete ecosystem. We are excited about this vision and look forward to using our expertise to support it.
Summary
Wintermute Ventures is very pleased to invest in what we believe is one of the most promising protocols in the DeFi space. Since the release of version 2, Euler has become the fastest-growing lending protocol, with its fully diluted valuation remaining relatively stable. Its modular architecture serves as the foundational infrastructure for DeFi money markets, catering to a variety of risk appetites ranging from conservative institutional strategies to experimental retail products. This marks the beginning of infinite possibilities for Euler and signifies an exciting journey for Wintermute Ventures as a partner and investor in Euler.
