Vitalik proposed a synthetic asset scheme based on options, addressing a major issue in DeFi.

Written by: Liam Akiba Wright

Translated by: Chopper, Foresight News

TL;DR:

• Vitalik Buterin proposed building synthetic assets based on options, eliminating the automatic liquidation trigger mechanism from the underlying design of DeFi.
• The practical significance of this design was evidenced in the recent market crash: concentrated forced liquidations amplified short-term declines, evolution into systemic selling pressure across the entire market.
• The unresolved challenges include whether investors can tolerate deviations in asset value and rebalancing costs, while the new model may give rise to new security vulnerabilities.

Vitalik Buterin is working on rewriting the long-standing risk control logic of DeFi: the classic mechanism of automatic liquidation of lending positions when the collateral price falls below the risk control line. On June 1, Vitalik published an article proposing to create synthetic assets anchored to an index based on options, completely removing the collateral lending structure from the product's native design.

This approach does not set rigid liquidation lines; instead, it introduces a buffered risk: the benchmark value of the user's position will gradually deviate from the target anchor price with market trends, unless they actively rebalance their position.

This improved logic has a strong real-world reference: the drawbacks of the old liquidation mechanism have repeatedly exposed themselves in extreme market conditions. On June 2, Bitcoin fell below $68,000, and within an hour, the total market liquidation reached $394 million, with approximately $87 million in Ethereum-related positions being liquidated, as a large number of high-leverage positions were forcibly closed by the system.

This flash crash occurred just a day after Vitalik's article, sending a warning to the industry: crowded leveraged positions encountering a rapid decline can exacerbate short-term crashes through concentrated automatic liquidations.

The proposal currently remains at the theoretical research level, will not be implemented into a protocol anytime soon, nor is it included in the official Ethereum roadmap, and it will not directly replace existing projects like Aave, Maker, or mainstream stablecoins. Vitalik breaks away from conventional ideas of optimizing collateral buffers and upgrading oracle pricing speeds to question from the foundational architecture: in extreme market conditions, must instant forced liquidation become a standard feature of DeFi risk control?

Why Traditional Liquidation Mechanisms Exacerbate Market Stampedes

The underlying logic of most DeFi lending products is similar: users pledge assets to borrow funds, and positions must remain above a designated safety line. Taking Aave's risk control rules as an example, the health factor measures the safety of positions; when the factor falls below 1, liquidation is triggered: the liquidator settles the borrower's debt in exchange for collateral assets plus liquidation rewards.

This design is intended to ensure the platform's solvency but can easily trigger concentrated selling pressure during market crashes. Once collateral assets like ETH drop sharply, users have no choice to sell independently, and the system will passively close positions. Liquidators compete to close eligible positions, and the collateral may be pushed into a market already short on liquidity.

A report from the OECD on decentralized finance (DeFi) liquidation found a positive correlation between liquidation activities and price fluctuations after liquidation in major decentralized trading pools. The report also pointed out that liquidators heavily rely on market liquidity during extreme conditions, making this mechanism supposedly intended to mitigate platform risk equally unfeasible in a liquidity-starved environment.

Past cases validate this risk. In 2025, an anomaly in Chainlink oracle pricing led to Euler Finance experiencing over $500,000 in abnormal liquidations, reigniting discussions in the industry about oracle pricing rules under weak liquidity conditions; that same year, Ethereum underwent a deep correction, with nearly $320 million in Ethereum-based lending positions only 20% away from the liquidation line, leaving a significant number of positions locked at critical price points for MakerDAO and Compound.

The crux of all problems lies in cliff-like liquidations. DeFi indeed needs to handle insolvent positions, but the current model generally enforces a cutoff once the price breaches the threshold, simultaneously pressuring borrowers, liquidators, oracles, and market makers. Savvy speculators can monitor liquidation lines to execute timely short strategies.

From a user perspective, while the platform relies on liquidation to protect the fund pool, ordinary borrowers often end up cutting losses at the least favorable price points. A user may have originally intended to hold Ethereum long-term to hedge cash needs, or wait for volatile price swings to settle down. Once the threshold is exceeded, the system prioritizes solvency over users' holding plans.

New Options Thinking: Turning Cliff Liquidations into Gradual Value Shifts

Vitalik's alternative solution starts from the definition of the underlying asset, abandoning the model of “positions that are insolvent will be liquidated”: it splits 1 ETH into two types of option assets P and N, linked to price indices, exercise prices, and expiration dates. Upon contract expiration, the oracle determines the index price, then divides the corresponding ETH interests between parties P and N.

The core logic is that the equity of P assets and N assets combined always equals 1 ETH. The system merely separates the existing ownership of ETH, without the need to seize user collateral or forcibly close positions to cover losses, removing the occurrence of liquidation at its source.

Compared to collateral-backed stablecoins, the differences are significant: under traditional debt models, users appear to have stable positions, but once collateral breaches a threshold, they are immediately forced into liquidation; in the options framework, there are no sudden liquidations, but the target value of the positions will gradually drift.

To illustrate, a user wishing to lock in USD exposure around an ETH market price of $2500 can purchase an option with a $1500 exercise price; if ETH continues to decline towards the exercise line, the user can swap for options with lower exercise prices. If the user does not actively rebalance, the hedging effect gradually weakens, and the position value slowly deviates from the target. This is the core trade-off of the new model: risks will not be released suddenly, but position values will drift gradually with market conditions.

Traditional liquidation places the decision-making power for closing positions in the hands of platform rules and liquidators; the options scheme shifts the rebalancing options to users, market makers, or automated rebalancing tools.

Vitalik also admits that the solution has limitations in the stablecoin scenario. A slight annual value drift is acceptable for products aimed at hedging future expenditures and pursuing relative price stability, but unsuitable for accounting settlement stablecoins. Such currencies need to be pegged to $1 for payment, accounting, and tax purposes, and cannot tolerate persistent deviations from the anchor price.

Oracle Rules Are Coming to Reform

Optimizing oracles is a key highlight of this proposal. Collateral liquidation heavily relies on real-time price feeds: platforms need instant price determinations to assess position risks and facilitate liquidator executions. Vitalik believes that high-frequency real-time pricing increases the safety challenges of oracles; when prices are abnormal, there is insufficient time to go through a dispute arbitration process.

In contrast, the options structure postpones oracle pricing decisions until the contract expiration date; oracle risks still exist, but are no longer subject to immediate market pressures. The deferred settlement feature of contracts allows projects to adopt pricing schemes with higher fault tolerance, such as prediction market-style pricing, which are not feasible within an instantaneous liquidation system.

Thus, this proposal is not just a minor adjustment for stablecoins, but a restructuring of the overall risk control in DeFi: breaking free from the underlying logic that relies on instantaneous pricing to trigger irreversible liquidations. The current liquidation mechanism easily breeds price manipulation, MEV arbitrage, oracle arbitrage, and other gray areas, with the root cause being clear liquidation points that provide speculators with target trigger lines.

The ultimate effect still depends on specific implementation plans. Automated contracts that rebalance on behalf of users can reduce access barriers but may also give rise to new predictable points that seasoned traders can exploit for arbitrage; purely local automated tools can obscure rebalancing logic but may lead to issues with user experience and transaction slippage; DAO-driven on-chain packaged contracts require stringent rules and sufficient liquidity to avoid becoming targets for pinpoint shorts again.

The advantages of slow oracles are built on complementary designs and remain a challenge for developers. Increased quoting tolerance space exists, but the market needs sufficient depth to support users in rotating options positions, and accompanying rules should prevent rebalancing actions from becoming exploitable arbitrage signals. Previous oracle failures essentially stemmed from incorrect pricing facing instantaneous forced liquidation rules; the options solution avoids instantaneous decision-making, but project teams still need to address index operation, liquidity supply, extreme market loss, and other issues.

Implementation Awaiting Validation: Rebalancing Costs and Liquidity Are Key to Success

Whether this theory can rival traditional collateral lending systems ultimately depends on the accompanying market ecosystem. Vitalik bluntly stated that slippage loss is the number one hidden danger: relying on regular AMMs for rebalancing, repeated rotation of options can incur high trading costs, especially during periods of severe volatility.

He suggested that the rebalancing market needs a new market-making model, leaning towards passive unilateral limit orders and long-term commitments from market makers, rather than instant-gratification spot trading. This is also the assessment criterion for the proposal's implementation: if users evade cliff-like liquidations but are continually consumed by value drift, high slippage, and cumbersome operations, then this design can only remain within theoretical papers and cannot be commercially viable.

Product positioning determines applicable boundaries. As a hedging tool and anchor-type exposure product, this logic has significant advantages; however, if it aims to be a general stablecoin pegged equivalently to the dollar, the shortcomings are evident: tokens with continuous drift and periodic rebalancing greatly differ in user commitments from fully collateralized stablecoins and traditional CDP synthetic currencies used for cash payouts.

For the Ethereum ecosystem, the significance of this matter is that the industry's top designers no longer view forced liquidation as a natural rule that cannot be evaded in DeFi, but rather as a replaceable structural option.

The next step will be to observe whether any protocol teams can convert the options model into tested packaged products, simulation programs, or sufficiently liquid real-time markets to achieve implementation awaiting validation.

Before that, it is best to interpret this proposal as a direct challenge to the collapse mechanisms in DeFi: the industry can continue to attempt to accelerate the liquidation speed and better supply collateral, or explore a completely new foundational design that fully bids farewell to passive concentrated liquidations.