Unit of Account
In the world of decentralized finance, where countless ERC-20 tokens exist, there's a fundamental need for a standardized way to express and compare asset values. This is where the concept of a unit of account comes into play. It serves as a common reference currency that allows the Euler protocol to make sense of the complex web of asset relationships, enabling everything from price comparisons to collateral valuations.
The Role of Unit of Account
When you interact with Euler's lending and borrowing features, you're dealing with different types of assets - perhaps depositing ETH as collateral to borrow DAI, or using WBTC to secure a loan in USDC. To make these interactions work smoothly, the protocol needs a way to compare these assets' values consistently. This is where the unit of account steps in, providing a standardized measure that makes these comparisons possible.
Understanding Asset Valuation
Imagine you're depositing ETH as collateral to borrow DAI. The protocol needs to know if your ETH collateral is sufficient to cover your DAI loan. Without a common unit of account, comparing these different assets would be like trying to compare apples and oranges. The unit of account provides a common denominator, allowing the protocol to accurately assess whether your position is properly collateralized and when it might become eligible for liquidation.
Flexibility in Pricing
What makes Euler's approach to unit of account particularly interesting is its flexibility. While most lending protocols lock themselves into a single unit of account, typically USD or ETH, Euler's modular design allows any asset to serve as the unit of account. This means different markets can choose the most appropriate reference currency for their specific needs.
For example, a stablecoin-based lending market might use USDC as its unit of account, while a BTC-backed borrowing market might prefer to use WBTC. Traditional DeFi markets can continue using ETH as their reference point. This flexibility allows Euler to adapt to various financial ecosystems and their unique requirements.
Practical Applications
The unit of account plays a crucial role in several key aspects of the protocol:
Risk Management
When assessing the health of a borrowing position, the unit of account provides the standard measure against which both collateral and debt are evaluated. This ensures that risk assessments are consistent and accurate across different asset pairs.
Liquidation Triggers
The unit of account is essential for determining when a position becomes undercollateralized and eligible for liquidation. By providing a consistent measure of value, it ensures that liquidation decisions are fair and transparent.
Market Efficiency
By allowing different markets to choose their own unit of account, Euler enables more efficient pricing and risk management. Markets can select the reference currency that best matches their specific use case, whether that's a stablecoin for stablecoin markets or a volatile asset for more traditional DeFi applications.