Vitalik Buterin proposed a liquidation-free synthetic asset design using options-based structures instead of debt.
Ethereum News
Ethereum co-founder Vitalik Buterin has proposed a way to build synthetic assets that track prices. His design drops the forced liquidations that most algorithmic stablecoins rely on.
In a post on June 1, Buterin credited Vladimir Novakovski, Curve developers, and others for their feedback. He built the idea around a ticker, T, that tracks a price index priced in Ethereum (ETH), such as the USD/ETH rate or consumer price data.
The goal is to let users gain exposure to T without a centralized issuer. In a system where $ETH is the only trustless asset, the lone trust dependency would be an oracle, which Buterin said can be made far harder to manipulate than an issuer.
Every such system faces the same limit. It can hold only ETH, so its long and short positions in T must cancel out, and a sharp price move can push one side of the trade toward bankruptcy.
Algorithmic stablecoins fix this through forced liquidation. Buterin gave an example with ETH at $2,500 and a user holding 1 ETH against a $2,000 position. If ETH falls toward that level, the system lets others buy the collateral and keep its books balanced.
How Synthetic Options Work
The weakness, Buterin said, is that liquidations need real-time oracles, which are hard to secure. His design removes liquidations by making options, not debt, the base unit of the system.
Two assets, P and N, are created by splitting one ETH and can be merged back into one ETH at any time. At a set maturity date, an oracle reads the value of T and splits the $ETH between P and N. The two shares always add up to one, so no position can be liquidated.
Buterin said the structure works like a scalar prediction market, which would let it share an oracle with existing prediction market systems for added security. Rebalancing could run through an automated on-chain decentralized autonomous organization (DAO) or through a user's own software, an option he said lowers decentralized finance (DeFi) users' exposure to front-running.
He acknowledged one trade-off. The method causes a slow price drift instead of sudden liquidations, which he estimated at a standard deviation of about 1% to 4% a year. Buterin argued that level suits users who want steady purchasing power rather than a token that behaves exactly like fiat money.
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