TL;DR:
- Buterin proposed replacing forced liquidations in synthetic assets with options as a base primitive, eliminating reliance on real-time oracles.
- The system splits one ETH into two positions tied to a strike price and expiry date, always summing to exactly one unit to prevent insolvencies.
- The proposal allows the use of “slow oracles” with extended dispute windows, reducing manipulation risk compared to current instant price feeds.
Vitalik Buterin published a proposal on the Ethereum research forum to redesign synthetic assets and algorithmic stablecoins from the ground up. The core of the initiative is to replace debt-based positions and forced liquidations with options as the system’s central primitive.
According to the document, the structural vulnerability of current algorithmic designs lies in their reliance on real-time oracles: price feeds that must deliver instant and binding valuations to trigger liquidations when collateral proves insufficient. That dependency, Buterin argued, constitutes a critical single point of failure that is technically difficult to secure and impossible to protect against manipulation within any useful response window.
Buterin: ETH Without Liquidations or Insolvencies
The proposed solution eliminates liquidations entirely. The scheme splits one unit of ETH into two assets —a protected position and a leveraged position— tied to a strike price and an expiry date. At expiry, an oracle resolves the index value and distributes the ETH between both holders according to a fixed formula. Since the two positions always sum to exactly one ETH, the design eliminates the insolvency risk associated with undercollateralized debt positions.
The practical consequence is that, instead of abrupt and binary liquidation events, exposure to the underlying index decays quadratically as prices approach the strike price. The user must actively rebalance their positions before expiry to maintain the desired exposure.
Replacing Fiat-Pegged Stablecoins
Buterin acknowledged the tradeoff, but argued that tolerating a standard deviation of approximately one to four percent per year is underestimated, given that fiat currencies themselves move within similar ranges relative to one another.
A core structural advantage of the design is its compatibility with slow oracles: the kind used by prediction markets, which allow for extended dispute windows and human review in the face of potential manipulation. The proposal is tied to a thesis Buterin has been developing since February, when he suggested replacing fiat-pegged stablecoins with customized price index baskets powered by artificial intelligence. The new document introduces the onchain mechanisms that could underpin that architecture.
