Ethereum co-founder Vitalik Buterin has published a research post outlining a new design for decentralized finance (DeFi) that could eliminate one of its most feared features: sudden liquidations. The proposal suggests building crypto investment products, such as index-tracking assets, on top of options contracts rather than the collateralized debt positions (CDPs) that dominate DeFi today.
In a post shared on X, Buterin asked: "What if we use options as the base of DeFi, instead of CDPs and liquidations?" Under the conventional model, users borrow against crypto collateral to mint synthetic assets or stablecoins. If collateral value drops below a threshold, the position is automatically liquidated, often triggering cascading forced sell-offs during market stress. Buterin's alternative would replace that abrupt outcome with a smoother divergence from the target allocation as prices move, potentially making the system more resilient.
A key technical advantage is the ability to rely on slower-moving price oracles. Current DeFi protocols demand near-real-time oracle updates to trigger liquidations, but these fast feeds are vulnerable to manipulation during volatility. An options-based framework, Buterin argued, could function with "slow oracles" similar to those used in prediction markets. This would reduce the risk of protocols acting on incorrect price data and lessen dependence on split-second automated actions.
Buterin said he would feel "much safer" holding algorithmic stablecoins built on an options-based structure than on real-time oracles that can be manipulated. The proposal is especially relevant to algorithmic stablecoins, which have historically suffered from fragile collateral and oracle systems. However, the concept remains theoretical and has not been implemented on Ethereum. Practical hurdles include the need for regular portfolio rebalancing, and it remains unclear whether such trades can be executed cheaply enough to avoid excessive costs or slippage.
The post is part of a broader push by Buterin to rethink DeFi foundations, prioritizing robustness over leverage. It comes amid other changes, including plans by the Ethereum Foundation to shrink, sell less ETH, and focus on core development.
