Ethereum co-founder Vitalik Buterin is exploring a new way to build crypto investment products that could reduce one of the biggest risks of decentralized finance: sudden liquidations.
In a research post published Monday, Buterin proposed creating index-tracking assets using options contracts instead of the debt-based structures that underlie much of DeFi today. The idea is to allow users to gain exposure to a basket of crypto assets, similar to an index fund, without relying on collateralized debt positions (CDPs), which can be wiped out when markets move sharply.
“What if we use options as the basis for DeFi, instead of CDPs and liquidations?” Buterin wrote in a post shared on X.
Under the current DeFi model, users typically borrow against crypto collateral to create synthetic assets or stablecoins. If the value of that collateral falls too quickly, positions can be automatically liquidated, often triggering cascades of forced selling during periods of market stress.
Buterin argued that an options-based system could replace the abrupt “you’re being liquidated” dynamic with a smoother process. Rather than immediately losing a position when prices move against a trader, exposure would gradually deviate from a target allocation, potentially making the system more resilient during periods of volatility.
A key advantage, according to Buterin, is that the design could function using slower-moving price oracles, the data feeds that tell DeFi protocols what assets are worth. Most DeFi applications today rely on near real-time oracle updates, which can become targets for manipulation during periods of market turbulence.
Buterin, on the other hand, said an options-based framework could work with “slow oracles,” similar to those used by prediction markets. That could reduce the risk of protocols acting on incorrect price data and reduce the need for automated split-second liquidations.
The proposal is particularly relevant for algorithmic stablecoins, which have historically relied on oracle systems and collateral mechanisms that can fail under stress. Buterin said he would feel “much safer” with algorithmic stablecoins built on an options-based structure than one that relies on real-time oracle feeds that can potentially be manipulated.
The idea comes with tradeoffs. Buterin acknowledged that such a system would require regular portfolio rebalancing and that it remains unclear whether these adjustments can be made cheaply and efficiently enough to avoid excessive trading costs or slippage.
The concept remains theoretical and has not been implemented on Ethereum. Still, it reflects a broader effort by Buterin to rethink the fundamentals of DeFi and develop systems that prioritize robustness over leverage.
Read more: Buterin says Ethereum Foundation will shrink, sell less ETH and focus on ‘CROPS’