Buterin proposes options model to avoid crypto liquidations

Vitalik Buterin published a proposal Monday on the Ethereum Research Forum that outlines an options-based framework for building synthetic assets and algorithmic stablecoins. The proposal removes forced liquidations and allows protocols to rely on slower, dispute-ready oracles.

The design splits one unit of ether into two linked positions: a protected position and a leveraged position. Each position is tied to a strike price and a maturity date. At maturity, an oracle resolves an index value and distributes the ether between the two holders according to a fixed formula. Because the two positions always add to one ether, the design eliminates the insolvency risk created by undercollateralized debt.

Under the proposal, exposure to the underlying index changes gradually instead of through sudden liquidation events. As prices move toward the strike, a holder’s exposure drifts quadratically. Holders must rebalance their positions before maturity to maintain a desired exposure.

Buterin argued that current algorithmic stablecoins depend on real-time oracles that must provide instantaneous, binding prices to trigger liquidations. He wrote: “I would feel significantly safer holding algorithmic stablecoins within this architecture than in anything that depends on an oracle that must provide real-time answers.”

A structural advantage of the design is compatibility with slow oracles, which include extended dispute windows and allow human intervention when manipulation is suspected. The proposal describes slow oracles as providing time to raise disputes and seek remedies rather than requiring instant price feeds for liquidation triggers.

Buterin identified rebalancing and slippage as open questions. He proposed treating rebalancing as one-sided market making instead of expecting instant, two-sided execution, arguing that many users do not need precise timing and can accept gradual fills. The proposal says research is needed to determine whether rebalancing can be made sufficiently resistant to slippage to compete with existing protocols.

The paper connects to a broader idea Buterin has promoted of shifting prediction markets toward AI-assisted hedging tools and personalized price-index baskets. The post presents on-chain mechanics intended to support synthetic assets that could reduce reliance on fiat-pegged stablecoins.