Key Highlights
- Vitalik Buterin suggests DeFi should move away from loans and liquidation systems and instead use options-based tools to build index-tracking assets.
- The new design removes forced liquidations and uses “slow oracles,” so price updates are less real-time and harder to manipulate.
- Users must rebalance their positions over time, which adds effort and trading costs, but the system aims to be more stable and less crash-prone.
Ethereum co-founder Vitalik Buterin has outlined a new idea for how decentralized finance (DeFi) could work in the future.
In a post on Ethereum Research on Monday, he suggested that DeFi should move away from systems based on debt and loans and instead use options as the main building block. He said the goal is to create financial products that track indexes like USD, CPI, or other prices without depending on heavy borrowing or sudden liquidations.
Why liquidations are a problem
In the proposal, Buterin questioned the need for systems that depend on real-time liquidation triggers. Today, most DeFi works with loans: people lock crypto as collateral, borrow money, and try to keep their position safe. If the market moves too fast and the value drops, the system automatically closes its position.
This is called liquidation. It helps protect the system, but it can also lead to panic in the market because many users get closed out at the same time. These systems depend on real-time price feeds called oracles, which must always give fast and correct prices. Vitalik said this is risky because fast oracles can be manipulated and do not allow time for correction or dispute.
Instead, he proposed a different approach: what if DeFi does not use debt at all? “What if we use options as the base of DeFi, instead of CDPs and liquidations?” He wrote. Instead of borrowing and being forced to sell, users would use option-like tools that spread risk more smoothly.
Under this model, a user does not take a loan. Instead, they hold a contract linked to a price index, which he called “T”, such as USD/ETH or CPI-based measures. These instruments are split into two parts, labeled P and N, which together always equal the original value of ETH deposited. At the end of a set maturity period, an oracle determines the final outcome, and payouts are distributed based on the final price level of the index.
Slow oracles and safer data
According to Buterin, this structure removes liquidation completely. No one gets forced out of their position. Instead, the value of what users hold changes slowly as the price moves. If the price moves far away from the chosen level, the value changes step by step instead of suddenly going to zero, like in current DeFi systems. The structure is also similar to prediction markets, meaning it could use shared oracle systems already present in those environments.
Vitalik also stated that the system allows reliance on “slow oracles” rather than instant ones. These are price systems that do not need to react instantly. They can take time and even use prediction markets to agree on the correct result. This makes the system harder to attack because bad actors cannot take advantage of fast price jumps before the system responds.
In addition, this also reduces pressure on real-time data feeds, which are often considered a weak point in current DeFi infrastructure.
Vitalik outlines issues with the idea
Buterin acknowledged several limitations. Users need to adjust their positions over time to maintain the right exposure to the index. If they don’t, they can lose that exposure. This causes additional work, but also introduces the possibility for additional trading costs, known as slippage, which can eat into their profits.
He also noted that this system is not meant to perfectly copy the US dollar. Instead, it is better for people who want general price stability over time. He notes that small changes, like 1–4% yearly drift, may be fine if the system is safer and more stable overall. Buterin added that real-world currencies already move more than people expect, so perfect stability is not always realistic.
In this setup, every positive position always has a matching negative one, so the system stays balanced. But instead of fixing the imbalance through liquidation, it is handled through pricing and market movement. This makes the system less harsh during big market swings.
Buterin concluded that the concept remains experimental but merits further exploration.
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