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Interacting with Earn Vaults

Euler Earn vaults are designed to be simple for users and integrators, following the ERC-4626 standard for deposits, withdrawals, and redemptions. This means you can use standard ERC-4626 methods to interact with Earn vaults, making integration with wallets and DeFi protocols straightforward.

Step-by-Step: Depositing and Withdrawing

1. Deposit:

  • Call the deposit or mint method on the Earn vault contract, specifying the amount and the receiver address.
  • You will receive ERC-4626 shares representing your claim on the vault's assets and future yield.

2. Withdraw or Redeem:

  • Call the withdraw or redeem method to receive your underlying asset back.
  • Withdrawals are first satisfied from the vault's cash reserve for instant liquidity. If the cash reserve is insufficient, the vault will withdraw from underlying strategies in a prioritized order (the withdrawal queue).

How the Withdrawal Queue Works

The withdrawal queue is an ordered list of strategies. When you withdraw, the vault pulls funds from the cash reserve first, then from strategies in the queue. This design minimizes gas costs, but if most assets are deployed in external strategies, large withdrawals may incur higher gas fees.

Yield Accrual, Performance Fees, and the Smearing Mechanism

How Interest Smearing Works​

When strategies generate positive yield and it's harvested, Euler Earn doesn't immediately distribute all the yield to depositors. Instead, it uses an "interest smearing" mechanism that gradually releases the harvested yield over a configurable time period (set by the vault creator during deployment).

Here's the process:

  1. Harvest: Yield is collected from underlying strategies
  2. Gulp: The net positive yield is "gulped" into a smearing buffer
  3. Smear: This yield is gradually released to depositors over the smearing period
  4. Exchange Rate: The vault's exchange rate increases smoothly rather than in sudden jumps

Why Smearing Was Chosen​

The smearing mechanism serves several purposes:

Smoothed Returns: Instead of sudden exchange rate jumps when large yields are harvested, depositors see gradual, predictable increases in their share value. This creates a more stable and predictable user experience for passive yield seekers.

MEV Protection Alternative: While there are other approaches to prevent MEV attacks on yield distribution, smearing provides protection without requiring complex on-chain computations on every vault interaction. Alternative MEV-resistant mechanisms would require more expensive gas costs because they would need to process all strategies on every deposit/withdrawal.

Capital Efficiency: By avoiding the need for complex per-transaction accounting across all strategies, the vault can operate more efficiently in terms of gas costs for regular users which might be important especially on Ethereum mainnet.

Understanding the Trade-offs​

The Smearing "Withdrawal Experience": When you withdraw during the smearing period, you may receive less accrued interest than the total yield that has been harvested but not yet fully distributed. This isn't a fee — it's deferred yield that continues to benefit remaining depositors. Some users may initially perceive this as unfair, especially if they're used to immediate yield distribution.

Time Sensitivity: Your effective yield depends partly on timing. If you withdraw before the smearing completes, you'll receive less yield than someone who stays for the full smearing period.

Predictability vs. Timing: While smearing creates more predictable returns overall, it introduces timing considerations that don't exist in immediate distribution systems.

Performance Fees and Loss Handling​

  • Performance Fees: If enabled, a portion of net positive yield (up to 50%) is minted as new vault shares to the fee recipient. This slightly dilutes all depositors but rewards the manager for their service.
  • Loss Deduction: If a strategy incurs a loss, it is first deducted from unaccrued interest (the smearing buffer). If that's not enough, the remaining loss is socialized across all depositors by reducing the vault's exchange rate.

A Design Choice, Not a Universal Solution​

The smearing mechanism represents one approach to balancing user experience, gas efficiency, and MEV protection. It's not presented as the ultimate solution—other valid approaches exist with different trade-offs. Vault creators should consider their target users and use cases when configuring smearing periods.

Role-Based Permissions

Certain operations, such as adding or removing strategies, rebalancing allocations, or triggering emergency modes, require specific roles (e.g., Strategy Operator, Guardian, Rebalancer). Regular users do not need to worry about these roles for basic deposit and withdrawal operations, but integrators and risk curators should be aware of the access control model.