Frontier Markets: Risk-isolated looping vaults

Euler DAO Markets
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Euler Frontier Markets: Risk-isolated looping vaults

Summary

Objective Labs is seeking community feedback on a proposal to pilot Frontier Markets (FMs), a new vault product designed to provide lending and borrowing infrastructure in a risk-isolated and governance-minimized setup, aiming to foster synergetic growth with emerging ecosystems.

FMs take advantage of Euler’s modular architecture to facilitate various correlated trades concentrated around a single ecosystem in a single rehypothecated market. Compared to a monolithic market, FMs target a fairer interest rate, while also isolating risk to a single issuer.

Motivation

Lending markets are critical for the growth of emerging assets. Market infrastructure paired with borrowable liquidity allows market participants to organically expand circulating supply by executing correlated looping strategies to farm points or yield on leverage.

Euler’s current market strategy is not optimized to support this asset class. While Euler Yield successfully lists many in-demand stablecoins, there is a practical upper limit to size. This is because risk exposure and management complexity scales non-linearly with the number of assets in a market. Furthermore a monolith creates competition between borrowers for liquidity, resulting in the market’s aggregate exposure naturally drifting up the risk curve as higher-yield collateral outcompetes the rest.

The introduction of Frontier Markets aims to improve Euler’s competitiveness for emerging assets. They reduce the time to market for new asset listings, minimize the need for governance and active risk management, while supporting novel correlated trades only possible on Euler.

Specification

We propose general guidelines for the structure of FMs without over-specifying the design space. Each ecosystem has unique assets, derivatives, and microstructures of interest.

  1. FMs shall contain only vaults for correlated assets.

    • One blue-chip vault (USDC) serving as a focal point for lending and borrowing.
    • Frontier vaults for ecosystem assets and their derivatives (staked version, Pendle PTs, LP tokens, etc.).

  2. FM vaults shall configure either 90/91% and 94/95% LTVs.

    • The lower LTV is used when borrowing the blue-chip asset, e.g. sUSDxyz / USDC.
    • The higher LTV is used when borrowing within the ecosystem, e.g. PT-USDxyz / USDxyz.
    • FMs shall aim to create internal microstructures to facilitate trades only possible on Euler.

  3. FM vaults shall have no supply or borrow caps.

  4. FM vaults shall follow this guideline for oracles.

    • Use a hardcoded (1:1) oracle for the blue-chip vault
    • Use a hardcoded or fundamental oracle for ecosystem assets and their derivatives
    • Use a TWAP oracle for Pendle PTs

  5. FM vaults shall configure IRMs with constrained parameters. We expect that an adaptive interest rate model is best used in the long run, but for the purposes of the pilot we propose the use of standard linear kink IRMs with the following parameters:

    • Base rate = 0%
    • Kink = 90%
    • Rate at kink = targeting a 10-50% interest rate spread (relative), adjustable by risk managers
    • Max rate = 40%
    • Interest fee = 10%

  6. FMs shall be governed by Euler DAO and risk managed by its service providers. Outside of emergency actions, ongoing management shall be constrained to listing new derivative assets and adjusting interest rates. We hope that the latter is soon automated by an adaptive interest rate model.

Author

Objective Labs is a service provider for Euler Labs tasked with product development, risk management, and incentive optimization. Objective Labs is Euler-aligned.

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Contingent on this proposal’s acceptance, we recommend deploying the following initial set of Frontier Markets.

Note that these descriptions assume the guidelines are fulfilled, namely:

  • LTVs are 90/91% or 94/95% with one percentage point of spread rather than the default of two
  • IRMs are linear kink with 0% base rate, 90% kink, 40% max rate
  • Vaults have the default 10% interest fee
  • PT tokens for all current and future Pendle maturities are listed

Frontier Renzo

Structure

Vault Rate at kink Oracle
WETH 2.7% None (unit of account)
ezETH - Fundamental

LLTVs

↓ Collateral / Debt → WETH ezETH
WETH — —
ezETH 95% —

Frontier mEDGE

Structure

Vault Rate at kink Oracle
USDC 8% Fixed 1:1
mEDGE 2% Fundamental
PT-mEDGE — Pendle TWAP / Linear Discount

LLTVs

↓ Collateral / Debt → USDC mEDGE
USDC — —
mEDGE 91% —
PT-mEDGE 91% 95%

Frontier mMEV

Structure

Vault Rate at kink Oracle
USDC 8% Fixed 1:1
mMEV 2% Fundamental
PT-mMEV — Pendle TWAP / Linear Discount

LLTVs

↓ Collateral / Debt → USDC mEDGE
USDC — —
mMEV 91% —
PT-mMEV 91% 95%

Frontier Level

Structure

Vault Rate at kink Oracle
USDC 7.5% Fixed 1:1
lvlUSD 7.5% Fixed 1:1
slvlUSD 1% Fundamental
PT-lvlUSD — Pendle TWAP / Linear Discount
PT-slvlUSD — Pendle TWAP / Linear Discount

LLTVs

↓ Collateral / Debt → USDC lvlUSD slvlUSD
USDC — 95% —
lvlUSD 95% — —
slvlUSD 91% 95% —
PT-lvlUSD 91% 95% —
PT-slvlUSD 91% 95% 95%
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Design update: Adaptive IRMs

As the number of Frontier Markets grows, we anticipate that managing the interest rate models could become inefficient and operationally tedious. To iterate on the original proposal we propose the use of a constrained adaptive interest rate model instead of the static linear kink model. With this refinement the management surface for FMs will only be the addition of new collateral.

Euler’s IRMAdaptiveCurve adapts Morpho’s interest model to be compatible with the EVK. While Morpho’s canonical implementation has a static configuration, Euler’s adaptation allows its parameters to be set as construction-time immutable variables.

Parameters

The adaptive IRM has the following parameters:

Parameter Description
TARGET_UTILIZATION The utilization rate targeted by the IRM (0-100%).
INITIAL_RATE_AT_TARGET The initial interest rate at target utilization.
MIN_RATE_AT_TARGET The lowest interest rate at target utilization that the model can adjust to.
MAX_RATE_AT_TARGET The highest interest rate at target utilization that the model can adjust to.
CURVE_STEEPNESS Steepness of the interest rate curve. The interest rate at 0% utilization is 1/c*rate_at_target and the interest rate at 100% utilization is c*rate_at_target.
ADJUSTMENT_SPEED The speed at which the model adjusts the interest rate at target utilization, expressed as a duration. Interest rates doubles/halves if the vault stays at 100%/0% utilization for the full duration.

This model preserves Morpho’s naming convention verbatim. It uses different terms for the concepts of the linear kink model. “Target utilization” is equivalent to “kink position” and “rate at target” is equivalent to “kink rate” in the latter.

Adaptive IRMs for Stablecoin FMs

We propose IRMAdaptiveCurve parameterizations for types of stablecoin FM vaults:

  • The USD class IRM to be used for borrowable blue chip stablecoins (e.g. USDC)
  • The ybUSD class IRM to be used for borrowable yield-bearing stabelcoins (e.g. mEDGE, slvlUSD)

These IRM classes are intended to cover most market scenarios within their rate domain, while limiting the impact of rate decay due to inactivity.

Parameter USD ybUSD
TARGET_UTILIZATION 90% 90%
INITIAL_RATE_AT_TARGET 7% 2%
MIN_RATE_AT_TARGET 5% 1%
MAX_RATE_AT_TARGET 15% 10%
CURVE_STEEPNESS 4 4
ADJUSTMENT_SPEED 7 days 7 days
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[Gauntlet] - Frontier Markets Review and Recommendations

Summary

Gauntlet recognizes the motivation behind the Frontier Markets (FMs) proposal, which is aimed at supporting emerging ecosystems on Euler. The design rests on several key assumptions that require careful examination. Gauntlet encourages the community to fully understand these underlying assumptions and the associated risks before moving forward.

Assumptions

  1. Correlated assets are considered low-risk when grouped
    The proposal assumes that assets within a single ecosystem are sufficiently correlated to justify grouping them in a risk-isolated market. This correlation is used to support aggressive loan-to-value ratios (up to 95%). It also implicitly treats any yield-bearing stablecoins as having risk profiles comparable to USDC, potentially underestimating their complexity and risk.

  2. Minimal governance is assumed to be sufficient
    It is assumed that once FM vaults are deployed, they will require minimal ongoing governance or intervention. The belief is that high asset correlation and risk isolation within each FM will limit the need for active oversight.

  3. Hardcoded oracles are assumed to be robust
    The design relies on fixed or simplified price feeds—such as hardcoded 1:1 oracles for all yield-bearing stablecoins and fundamental oracles for ecosystem assets—being accurate and resilient to manipulation or market stress.

  4. Sustained demand for leverage strategies is presumed
    The model presumes that there is organic and ongoing user demand to engage in leveraged looping strategies across correlated asset pairs, which will drive FM adoption and utility.

  5. Risk isolation will prevent systemic contagion
    It is assumed that the isolation of each FM is strong enough that failures within one will not spill over into other markets or the broader Euler ecosystem, thus containing risk effectively.

Specification Recommendations

Gauntlet has reviewed Objective Labs’ proposed guidelines for the structure of Frontier Markets (FMs) and agrees with the following elements:

  • Limiting FMs to vaults containing only correlated assets
  • LTVs are 90/91% or 94/95%
  • IRMs are linear kink with 0% base rate, 90% kink, 40% max rate
  • The outlined approach to oracle configurations
  • Vaults have the default 10% interest fee
  • PT tokens for all current and future Pendle maturities are listed

However, we propose an alternative approach to the use of supply caps to more effectively mitigate risk in the pilot phase:

  • Blue-chip Vault: No supply or borrow caps will be enforced, preserving its role as a flexible liquidity anchor for the ecosystem.
  • Ecosystem Asset Vaults: To manage concentration risk and reduce exposure to unproven or low-liquidity assets in emerging ecosystems—such as yield-bearing tokens and LP tokens—initial supply caps per vault will default to 50% of the asset’s total circulating supply. For PT token vaults, the supply cap will default to that of the corresponding underlying asset vault. Borrow caps will not be enforced.

To streamline the configuration of interest rate models (IRMs) across an expanding set of Frontier Markets (FMs), Gauntlet recommends anchoring the kink rate—also referred to as the “rate at target utilization” in the adaptive model—to the prevailing rate observed in either the Euler Yield or Euler Prime markets. These rates provide a dynamic and market-reflective benchmark. Vaults may optionally apply a modest premium above these reference rates to account for market-specific factors such as risk, volatility, or strategic positioning.

For yield-bearing tokens, Gauntlet suggests setting the rate at kink at 2%.

Cap Recommendations

Frontier Renzo

Vault Supply Cap
WETH -
ezETH 150K

ezETH total circulation: ~300K

Frontier mEDGE

Vault Supply Cap
USDC -
mEDGE 16M

mEDGE total circlation: ~32M

Frontier mMEV

Vault Supply Cap
USDC -
mMEV 20K
PT-mMEV 20K

mMEV total circulation: ~40K

Frontier Level

Vault Supply Cap
USDC -
lvlUSD 90M
slvlUSD 38M
PT-lvlUSD 90M
PT-slvlUSD 38M

lvlUSD total circulation: ~180M
slvlUSD total circulation: ~76M

Rate at kink Recommendations

With the kink rate in Yield markets presently configured at 7.5%, we propose setting the rate at kink for USDC vaults at 8%, reflecting a 50 basis point risk premium to account for associated risk factors.

Below are our recommended configurations for each proposed Frontier Market:

Frontier Renzo

Vault Rate at Kink
WETH 2.7%
ezETH 2%

Frontier mEDGE

Vault Rate at Kink
USDC 8%
mEDGE 2%

Frontier mMEV

Vault Rate at Kink
USDC 8%
mMEV 2%
PT-mMEV —

Frontier Level

Vault Rate at Kink
USDC 8%
lvlUSD 8%
slvlUSD 2%
PT-lvlUSD —
PT-slvlUSD —

LLTVs Recommendations

Gauntlet has reviewed Objective Labs’ LLTV recommendations and concurs with the proposed values.

Frontier Renzo

↓ Collateral / Debt → WETH ezETH
WETH — —
ezETH 95% —

Frontier mEDGE

↓ Collateral / Debt → USDC mEDGE
USDC — —
mEDGE 91% —
PT-mEDGE 91% 95%

Frontier mMEV

↓ Collateral / Debt → USDC mMEV
USDC — —
mMEV 91% —
PT-mMEV 91% 95%

Frontier Level

↓ Collateral / Debt → USDC lvlUSD slvlUSD
USDC — 95% —
lvlUSD 95% — —
slvlUSD 91% 95% —
PT-lvlUSD 91% 95% —
PT-slvlUSD 91% 95% 95%
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While we understand the need for aggressive parameters to give this market the best chance of out-of-the-gate growth, these initial supply caps appear nonspecific. An asset such as mMEV is essentially an onchain hedge fund. Restaked assets run similar risks. To set supply caps at 50% of an asset’s total supply could introduce profitable liquidation risk, even with superior liquidation technology.

Could you expand further on how you approached the supply cap specifically?

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Thank you @Gauntlet for your thoughtful review of our proposal for Frontier Markets.

TLDR:

  • We agree with the amendment to adaptive IRMs (8% for USDC and 2% for ecosystem assets). The initial rate is largely inconsequential as the model is designed to adapt and reach equilibrium regardless.
  • We challenge the 50% rule for supply caps.

We would like to make some of our design goals more explicit:

Frontier Markets are not actively risk managed. They are constructed based on a template, require minimal due diligence to be deployed, and reduce ongoing maintenance requirements only to expanding the collateral set.

By virtue of their design, FMs shift the risk responsibility entirely to its participants. We encourage the Euler Labs team to make this abundantly clear on the frontend, as it sets different expectations compared to Prime and Yield. We expect that in the long term the majority of blue-chip inflows will come from curated vaults like Veda, SummerFi, Superform, IPOR, and Euler’s own Earn vault, instead of direct lending.

Importantly, FMs are still subject to intervention by governance in emergency situations. Examples of such situations are: a sustained depeg, the failure or deprecation of an oracle, or a contract migration. We believe this governance model is superior to full immutability. Morpho’s tense USD0++ situation (which curators narrowly escaped) and Aave’s excellent reaction to the FDUSD depeg are recent examples that speak to the value of emergency governance in money markets (if done proactively and prudently).

FMs should not have supply caps. We recognize the 50% rule for supply caps as Gauntlet’s goodwill effort to make FMs for emerging ecosystem assets safer. Yet after careful thought we strongly believe that leaving FM vaults uncapped is the correct decision:

  1. The 50% rule likely doesn’t curb much tail risk. We echo @tributary0x’s point that this way of imposing risk controls is arbitrary and likely does not have the projected impact on safety for the riskiest FMs. On the other hand, the 50% rule might stifle growth for low-risk FMs and cede ground to competing protocols. Risk controls should either be configured prudently to optimize risk-adjusted growth (as they are in Euler Yield), or be entirely left out of the risk management domain.
  2. Supply caps set the expectation that FMs are actively risk managed. Imagine a new FM for a rapidly growing stablecoin that begets successive increases of caps in accordance with the 50% rule. Should lenders experience socialized losses, they may rightly hold Euler DAO and its service providers liable (socially, not legally) for the event. We strongly prefer to set the right expectations in users. Isolated uncapped markets are a proven scalable model of lending architecture (Morpho) provided that risk prudence is exercised at the level of lending abstraction. We expect that the primarily mode of lending into FMs will not be direct and we once again encourage the Euler Labs team to set the right expectations on the frontend.
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[Gauntlet] – Response to Frontier Markets Update

Summary

  • We note and agree: Objective Labs proposed removing supply caps and shiftingFM risk to users.
  • We understand and agree: Risk is clearly stated in the frontend, empowering users to DYOR.
  • Actionable recommendation: Increase the USDC kink rate in the Frontier mMEV vault from 8% → 8.25% to reflect the higher risk profile relative to other vaults.

1. Concurrence with Objective Labs’ Adjustments

  1. Adaptive IRM adopted
    Objective Labs’ decision to anchor FM kink rates at 8% for USDC (and 2% for ecosystem assets) aligns with our recommendation and reflects a market-driven design instinct.

  2. Supply caps removed
    By dropping the 50% supply-cap rule, Objective Labs clearly signals that FMs are permissionless, shifting ongoing risk responsibility onto participants.

2. Emphasizing Front-End Risk Disclosure

“Frontier Markets shift risk responsibility entirely to participants. This must be prominently displayed on the dApp.”

Objective Labs has made it clear that FMs are not actively risk-managed; they are:

  • Template-based, requiring minimal due diligence to deploy.
  • Hands-off, with emergency governance only in extreme events (e.g., sustained depegs, oracle failures).

We support UI callouts such as:

:magnifying_glass_tilted_left: “These vaults carry higher risk. Please DYOR before supplying collateral.”

3. IRM Sensitivity

  • IRM as a lever: With the DYOR framing and user-led risk assumption, the utility and adoption of Frontier Market vaults will be sensitive to the underlying interest rate model (IRM).The long-term success and profitability of these markets will depend heavily on selecting an IRM that appropriately embeds a risk premium reflective of their unmanaged, higher-risk nature.

4. Recommendation: Frontier mMEV USDC Rate Adjustment

While we concur with the broad IRM structure, we propose a 25 bps premium for USDC vault in Frontier mMEV:

Vault Current Kink Rate Proposed Kink Rate
Frontier mMEV – USDC 8.00% 8.25%
  • Rationale:
    • Risk premium needed: This vault carries materially greater risk than Frontier Level and Frontier Renzo markets, so the IRM should include an appropriate premium to ensure Liquidity Providers are fairly compensated.

Conclusion

By raising the USDC kink rate in Frontier mMEV to 8.25%, Objective Labs can better align growth incentives with risk compensation—while keeping the DYOR message front and center in the UI.