Evolution of Lending Architectures on Ethereum: A Comparative Analysis of MakerDAO, Yield, Aave, Compound, and Euler

The decentralized finance (DeFi) ecosystem on Ethereum has undergone rapid architectural innovation, particularly in the domain of lending protocols. As multi-billion-dollar assets are now locked in lending platforms, understanding their structural evolution is crucial for developers, architects, and researchers aiming to build secure, efficient, and user-friendly financial applications.

This article analyzes the architectural journeys of five major lending protocols—MakerDAO, Yield, Aave, Compound, and Euler—highlighting key design decisions, innovations, and trade-offs between security, gas efficiency, and composability. By examining their evolution, we uncover patterns that inform the future of DeFi lending.

Core Keywords

• Ethereum lending protocols
• DeFi architecture
• Overcollateralized lending
• Smart contract design
• Gas optimization
• Risk management in DeFi
• Tokenized debt
• Decentralized borrowing

The Foundations of DeFi Lending

Most DeFi lending operates on an overcollateralized model: users must deposit collateral worth more than the value of the loan they wish to take. Unlike traditional finance, loans often lack fixed repayment schedules—borrowers can keep debt open indefinitely.

However, a critical condition applies: the collateral value must always exceed a minimum threshold relative to the debt. If this ratio falls below the required level—often due to price volatility—the position becomes eligible for liquidation. In such cases, third parties repay part or all of the debt and receive discounted collateral in return.

All lending protocols require similar core components:

• Vaults to hold user collateral and borrowed assets
• Accounting systems tracking individual debts and collateral
• Interest rate functions determining borrowing costs
• Collateral validation mechanisms, typically using price oracles
• Liquidation pathways for undercollateralized positions
• Risk management systems monitoring global and per-user limits, collateral ratios, and safety thresholds
• User interfaces enabling deposit, withdrawal, borrowing, and repayment

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While these components are universal, their implementation varies significantly across protocols—reflecting different priorities such as security, composability, or user experience.

A key distinction lies in whether a protocol acts as a lender originator or a peer-to-pool intermediary:

• MakerDAO and Yield issue their own borrowing assets (e.g., DAI), minting them on demand.
• Compound, Aave, and Euler facilitate peer-to-pool lending where users supply assets for others to borrow.

This structural difference shapes everything from interest rate models to upgradeability and risk exposure.

MakerDAO: Security-First Architecture

Launched in 2019, MakerDAO remains one of Ethereum’s most secure and battle-tested protocols, securing over $4.9 billion in collateral. Its architecture prioritizes safety and auditability over gas efficiency or user convenience.

Key design elements include:

• Each approved collateral asset has its own dedicated Join contract
• All accounting and risk logic is centralized in the vat.sol contract
• The vat tracks debt balances, collateralization ratios, and global risk parameters
• Users interact with multiple contracts to borrow—minting DAI via the DAI Join after pledging collateral

Interest rates and price data are fed into the system by external governance-controlled modules rather than computed internally. This separation enhances transparency but reduces automation.

Notably, MakerDAO does not own the DAI it issues—it mints and burns DAI algorithmically based on demand. This makes it a protocol-native stablecoin issuer, distinct from pure lending platforms.

While its modular design may appear complex and gas-intensive, it has enabled years of stable operation without major exploits—a testament to its robustness.

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Yield Protocol: Optimizing Gas and Flexibility

Yield v2, launched in October 2021, evolved from early experiments with fixed-rate lending (YieldSpace) built atop MakerDAO. Learning from its predecessor’s high gas costs and inflexibility, Yield v2 rearchitected its stack for efficiency and extensibility.

Its core innovations include:

• All accounting, risk checks, and collateral validation consolidated into a single contract: The Cauldron
• Asset-specific vaults (Join contracts) handle custody
• Unified oracle interface for both price and interest rate data
• Introduction of Ladle, a mediating contract that abstracts user interactions into single transactions

Unlike MakerDAO—which pushes oracle updates—the Cauldron actively pulls data when needed. This pull-based model is now standard across modern DeFi protocols.

Most importantly, users can perform complex operations—deposit, borrow, repay—in one transaction, dramatically improving UX and reducing gas costs.

Compound: From Simplicity to Composability

Compound v1: Proof of Concept

The initial version of Compound was a minimal viable product focused on proving that algorithmic money markets could work on-chain. Everything—vaults, accounting, risk checks—resided in a single MoneyMarket.sol contract.

Users interacted directly with this contract, though deposits and borrows required separate calls.

Compound v2: Tokenizing Exposure

Launched in 2019, v2 introduced cTokens, which represent users’ supplied assets plus accrued interest. This innovation enabled composability: cTokens could be used as collateral or traded elsewhere in DeFi.

Other features:

• Each asset has its own market contract
• Accounting is decentralized across cToken contracts
• A central Comptroller handles risk logic and collateral checks
• Interest rates are determined internally based on asset utilization
• Price oracles operate separately from rate calculations

Despite its success in enabling liquidity mining and fostering forks, v2 required multi-contract interactions for borrowing.

Compound v3 (Comet): Safety Through Isolation

Released in 2022, v3 marked a return to simplicity—with a focus on security and gas efficiency.

Design highlights:

• One contract per market handling all functions (vault, accounting, risk)
• Isolated liquidity pools reduce systemic risk
• No borrowing against supplied collateral—increasing safety for depositors
• Integrated action batching via a transfer hook system
• Supplying borrowed tokens automatically repays debt

By eliminating recursive borrowing and reducing inter-contract calls, v3 lowers attack surface and gas usage—making it ideal for Layer 2 deployment.

Aave: Pioneering Composable Lending

Aave v1: Shared Liquidity Pools

Replacing the peer-to-peer model of ETHLend, Aave v1 introduced pooled liquidity in 2019. Key components:

• LendingPoolCore: Handles accounting and vault logic
• LendingPool: User entry point with business logic
• LendingPoolDataProvider: Manages health checks using oracle feeds

Interest rates were dynamically set based on utilization.

Aave v2: Full Tokenization

Launched in 2021, v2 refined the architecture:

• aTokens represent supplied assets (with auto-compounding yield)
• vTokens represent variable-rate debt positions
• All core logic unified under LendingPool
• Enhanced risk management with flash loan mitigation

The fully tokenized model improved composability—users can stake aTokens or use them as collateral across DeFi.

Aave v3: Efficiency at Scale

Released in 2023, v3 maintains v2’s core structure while adding:

• Multi-chain support
• Improved gas efficiency
• Advanced risk controls (e.g., supply/borrow caps)

The architectural continuity underscores v2’s long-term viability.

Euler: Minimal Governance, Maximum Flexibility

Launched in 2022, Euler emphasizes permissionless markets and minimal governance. Its unique "diamond" architecture features:

• A single storage contract holding all data
• Modular logic contracts (BaseLogic for vaults, RiskManager for checks)
• eTokens (for collateral) and dTokens (for debt) as read-only views

This design minimizes gas costs by avoiding inter-contract calls. Upgrades are seamless—logic modules can be replaced without touching storage.

Though Euler suffered a major exploit in 2023 due to a flawed upgrade—not architecture—the underlying model remains promising for gas-sensitive environments.

Frequently Asked Questions (FAQ)

Q: What is overcollateralized lending?
A: It requires borrowers to lock up more value in collateral than they borrow. If the collateral value drops below a threshold, the loan is liquidated.

Q: Why do some protocols use tokenized debt or supply?
A: Tokenization (e.g., cTokens, aTokens) enables composability—users can use their positions as assets in other DeFi apps like derivatives or yield strategies.

Q: How do interest rates work in DeFi lending?
A: Rates are typically algorithmic—based on supply/demand (utilization). Some protocols use external rate models (e.g., MakerDAO), while others compute them internally (e.g., Compound).

Q: What role do oracles play in lending protocols?
A: Oracles provide real-time price data to assess collateral health. Without accurate pricing, protocols cannot detect undercollateralized loans.

Q: Why did Compound move away from allowing borrowing against supplied assets in v3?
A: To reduce systemic risk. Recursive borrowing increases exposure to cascading liquidations during volatility.

Q: Which architecture is best for Layer 2 deployment?
A: Gas-efficient designs like Compound v3 or Euler are ideal for L2s where transaction cost is less forgiving than on mainnet.

Conclusion

The evolution of Ethereum lending reflects shifting priorities—from proving feasibility (MakerDAO, Compound v1) to enabling composability (Compound v2, Aave v2) and finally optimizing for security and efficiency (Compound v3, Euler).

Key takeaways for builders:

• Centralizing critical logic can enhance security but may increase gas costs.
• Tokenization unlocks powerful composability but adds complexity.
• Isolated markets reduce systemic risk but limit capital efficiency.
• Gas optimization often comes at the cost of auditability or upgrade safety.

As Layer 2s mature and user expectations rise, future protocols will likely blend the strengths of these models—delivering secure, efficient, and composable lending experiences.

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