What is token economics model: EUL tokenomics allocation, inflation design and governance explained

EUL Token Distribution: 25% Community, 25.85% Shareholders, 20.65% Team, and 28.48% Treasury Reserve

The EUL token allocation structure reflects a carefully balanced approach to distributing governance rights across multiple stakeholder groups. The 25% allocation to the community empowers users and participants to have a direct voice in protocol decisions, while the 25.85% reserved for shareholders aligns financial incentives with long-term protocol success. The 20.65% designated for the team ensures core developers and contributors retain meaningful governance participation, while the substantial 28.48% treasury reserve provides flexibility for future ecosystem development and strategic initiatives.

This tokenomics design demonstrates how EUL distribution balances immediate stakeholder needs with long-term sustainability. The treasury reserve's significant portion allows Euler to adapt its governance strategy as market conditions evolve, fund community programs, or respond to emerging opportunities without requiring additional token issuance. By distributing allocation across these four pillars—community, shareholders, team, and treasury—the EUL token economics framework creates a robust system where governance participation extends beyond early adopters to encompass diverse ecosystem participants. This multi-faceted approach to token allocation reflects sophisticated tokenomics planning that supports decentralized governance while maintaining protocol stability and development continuity.

Deflationary Design with Fixed 27.18 Million Supply and Optional 2.718% Annual Inflation After Year Four

EUL maintains a carefully designed deflationary architecture centered on its fixed supply of 27.18 million tokens, creating inherent scarcity that contrasts sharply with traditional inflationary token models. This supply cap represents the absolute ceiling for all EUL tokens that will ever exist, establishing predictable long-term economics for protocol participants and holders. The deflationary nature of this fixed supply structure ensures that token value is not subject to unlimited dilution, a critical consideration in governance token design where dilution directly impacts voting power distribution and stakeholder incentives.

After the fourth year of protocol operation, EUL introduces an optional inflation mechanism allowing for up to 2.718% annual supply growth, though this remains subject to community governance approval. This optional feature provides flexibility for the protocol to adjust incentive structures and reward mechanisms if necessary, while maintaining discipline through the requirement for explicit governance decisions. The 2.718% figure—mathematically referencing Euler's number—reflects the protocol's emphasis on precise tokenomics. During the initial four-year period, this inflationary element remains dormant, allowing the deflationary supply pressure to build network effects and establish protocol sustainability. Governance token holders retain complete control over whether inflation activates, making EUL's economic trajectory dependent on community consensus rather than predetermined algorithmic distribution. This dual-phase approach balances the deflationary incentives that attract early adopters with flexibility for long-term protocol evolution, positioning EUL's tokenomics as both disciplined and adaptive.

Soft Liquidation Mechanism: Dutch Auction-Based Burn with Dynamic Discounts Up to 20% for Collateral Recovery

Euler's soft liquidation mechanism represents an innovative approach to collateral recovery through a reverse Dutch auction model. Unlike traditional liquidation systems that instantly execute at market prices, this mechanism progressively lowers the offered price to encourage timely participation. The auction structure ensures that positions only slightly below health thresholds aren't immediately liquidated at steep discounts, creating fairer outcomes for borrowers.

The mechanism operates by offering dynamic discounts starting from the collateral's current market value and gradually increasing them to a maximum threshold. These discounts can reach up to 20%, providing meaningful incentives for liquidators while still allowing borrowers opportunities to recover positions. Early participants receive smaller discounts, rewarding speed and capital availability, while longer waits result in steeper discounts that attract broader liquidator participation.

This Dutch auction-based burn system fundamentally improves the liquidation experience within Euler's lending protocol. By creating a progressive incentive structure, the soft liquidation mechanism encourages efficient capital deployment and prevents sudden, harsh liquidations that characterize traditional systems. The dynamic discount model ensures collateral recovery remains accessible while maintaining protocol health and protecting the integrity of the EUL ecosystem's governance and economic design.

Governance Power: Community-Driven Protocol Decisions Through On-Chain Voting and Risk Parameter Adjustments

EUL governance power represents the fundamental mechanism through which token holders exercise direct control over protocol evolution and operational parameters. When community members hold EUL tokens, they gain the ability to participate in on-chain voting processes that determine critical protocol decisions, from feature implementations to treasury allocations. This voting mechanism ensures that stakeholders with genuine economic interest maintain proportional influence over the platform's direction. Beyond conventional governance, EUL holders can adjust risk parameters—such as collateral ratios, liquidation thresholds, and reserve factors—that directly impact how the Euler protocol functions. These risk parameter adjustments are particularly crucial in lending protocols, as they affect asset safety and user experience. By distributing governance power among token holders rather than centralizing it with developers or a single entity, the protocol achieves genuine decentralization. The on-chain voting infrastructure creates transparent, immutable records of all decisions, enabling community members to hold the protocol accountable. This governance model transforms EUL from a simple utility token into a governance instrument that shapes the platform's future while aligning incentives between the protocol and its users.

FAQ

What is EUL token and what is its role in the Euler ecosystem?

EUL is Euler's native governance token enabling holders to vote on protocol changes and treasury decisions through Euler DAO. It also participates in fee stream auctions and incentivizes ecosystem participation.

What is the initial allocation plan for EUL tokens and what are the proportions of each part?

EUL's initial allocation consists of multiple components including rewards pool, development team, community incentives, and early supporters. The exact proportions vary by allocation category, with specific details available in the official tokenomics documentation.

What is the total supply of EUL tokens? How is the inflation rate designed?

EUL has a maximum supply of 27.18 million tokens. The inflation rate is capped at 2.718% annually after the first four years, subject to token holder voting approval through DAO governance.

How do EUL token holders participate in governance? How are voting rights allocated?

EUL holders participate in governance by voting on protocol proposals and risk parameters. Voting power is distributed proportionally based on token holdings. More tokens equals greater voting influence in decision-making.

What is EUL's mining/incentive mechanism? How do users obtain token rewards?

EUL is earned through lending or staking assets on Euler. Users receive EUL rewards by participating in incentive programs, lending supported assets, or staking eTokens. Rewards are distributed to borrowers and stakers based on their time-weighted activity.

What is the difference between EUL token economics model and other lending protocols like Compound and Aave?

EUL features decentralized collateral mechanism with higher capital efficiency, while Compound uses isolated markets and Aave uses unified collateral pools. EUL prioritizes liquidity optimization with flexible liquidation parameters, offering distinct risk management compared to traditional lending protocols.

What is the unlock schedule for EUL tokens? Is there a vesting period?

EUL tokens unlock on February 15, 2026 at 5:40 PM with no vesting period. Approximately 98,000 tokens worth nearly $400,000 will be released at this time.

What is the value capture mechanism of EUL tokens? What economic returns can holders gain?

EUL captures value through governance influence and liquidity incentives. Holders earn rewards by soft-locking tokens in gauges to direct protocol incentives. Direct rewards typically require active participation rather than passive holding alone.