Ethereum co-founder Vitalik Buterin published a research paper proposing the use of option contracts instead of debt-collateralized structures to design on-chain products that track the US dollar or a basket of crypto assets. His vision is that such products would not trigger forced liquidations as quickly as existing DeFi mechanisms during market crashes.
The goal is to reduce chain reactions of forced liquidation.
Many current DeFi protocols rely on over-collateralization and lending structures to generate synthetic assets or stablecoins. The problem is that if the price of the collateral falls rapidly, the position may be automatically liquidated, triggering a continuous sell-off during periods of increased volatility.
Vitalik argues that by using an options structure, users' asset exposure wouldn't be directly "liquidated" during short-term price fluctuations. Instead of immediately triggering a forced liquidation process, the position's performance would gradually deviate from the target allocation as the market moves away. The key to this approach is transforming a drastic, abrupt liquidation into a smoother adjustment process.
Dependence on oracles is expected to decrease
He also pointed out that this design may be less reliant on real-time price oracles. Existing DeFi applications typically require near-real-time price updates, and such data sources are more susceptible to manipulation during periods of high market volatility, forcing protocols to execute automatic liquidations in a very short time.
According to him, the options framework has the potential to use "slow oracles" with a lower update frequency, similar to the data methods used in market prediction. This may not eliminate risk, but it could reduce the likelihood of the protocol making drastic moves due to erroneous price data.
Algorithmic stablecoins or their application direction
This research is particularly relevant to algorithmic stablecoins. Historically, such products have often relied on collateral mechanisms and oracle systems, which are prone to failure under stress. Vitalik stated that he would prefer to hold algorithmic stablecoins built on an option structure compared to solutions that depend on real-time oracles.
However, this approach still has significant limitations. The article mentions that the portfolio needs periodic rebalancing, and it's unclear whether these adjustments can be made at a sufficiently low cost. If transaction costs and slippage are too high, product usability will be affected.
Currently, this concept remains in the research stage and has not yet been implemented on Ethereum. Overall, Vitalik's focus this time is not on improving leverage efficiency, but rather on trying to make DeFi more robust in extreme market conditions.
