Vitalik Buterin, a co-founder of Ethereum, has presented a novel research proposal that has the potential to significantly alter the development of algorithmic stablecoins and synthetic assets in decentralised finance. Buterin proposes that index-tracking assets be built on options contracts rather than collateralised debt positions (CDPs) and liquidation mechanisms. The objective is straightforward: reduce dependence on vulnerable real-time oracle systems and substitute gradual exposure adjustments for abrupt liquidations.

The proposal, which was posted to Ethereum Research on June 1, presents a framework that uses ETH as the only trustless collateral asset to track price indexes, including USD/ETH, CPI/ETH, commodities, rent indexes, and other real-world metrics.

• Why Vitalik Wants to Move Away From Debt-Based DeFi?
• How the P and N Token Model Works?
• Slow Oracles Replace Real-Time Liquidation Triggers
• The Trade-Off: Rebalancing & Slippage Costs

Why Vitalik Wants to Move Away From Debt-Based DeFi?

Today, the majority of DeFi synthetic assets are created with debt. Users maintain a collateral ratio, mint a synthetic asset, and lock collateral. Liquidation systems automatically liquidate collateral to maintain system solvency when prices move dramatically against a position.

Buterin claims that one of DeFi's main flaws is brought about by this structure. Because liquidations necessitate extremely precise, real-time price feeds, protocols rely on quick oracle systems, which are susceptible to manipulation, flash loan attacks, or pricing errors. Liquidations may also cause cascading sell-offs that worsen market stress at times of excessive volatility.

The idea poses a different question; what if options, rather than debt, became DeFi's fundamental primitive?

When collateral becomes insufficient, exposure would progressively migrate away from the target index during market movements instead of compelling customers to exit investments. The system doesn't need forced liquidations to stay solvent.