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Ethereum co-founder Vitalik Buterin on Monday proposed rebuilding decentralized finance on options contracts instead of collateralized debt, a shift that would eliminate forced liquidations and let synthetic assets run on slow, prediction-market-style oracles rather than the real-time price feeds driving most of DeFi today.
The proposal, Building index-tracking assets on top of options instead of debt, published on the Ethereum Research forum, defines two assets P and N with strike price S and maturity date M. A (P, N) pair is minted from one ETH and can be redeemed for one ETH at any time. At maturity, an oracle resolves the index to x; P receives `min(1, S/x)` ETH and N receives `max(0, 1 - S/x)` ETH. Because the two payoffs always sum to 1, "there is no possibility of liquidation," Buterin wrote. The post credits feedback from Lighter founder Vladimir Novakovski and developers of the Curve decentralized exchange.
Liquidation cascades have been DeFi's dominant failure mode for half a decade. On March 12, 2020, ether fell roughly 43% in hours, MakerDAO keeper bots failed to bid, and a single bot walked off with $8.32 million of ETH for zero DAI. Maker took on a $6.65 million Dai shortfall and later paid $1.16 million to settle a class action from vault owners. Every CDP-based protocol since has been tuned to the assumption that bidders show up; Buterin's design removes the auction entirely.
