Buterin proposes options-based assets to avoid liquidations

On June 1, Ethereum co-founder Vitalik Buterin published a research proposal for synthetic assets built on options rather than collateralized debt. The design removes hard liquidation triggers and replaces sudden forced closures with a slower, predictable drift in exposure.

The model splits a single ETH claim into two option-like tokens, called P and N. Each token is tied to a price index, a strike and a maturity date. At maturity an oracle resolves the index and allocates the ETH claim between the two tokens. P and N together always equal one ETH, so the design does not include a mechanism that seizes collateral to force-close a borrower. Buterin framed the work as research rather than a protocol roadmap or a direct replacement for existing lending platforms or stablecoins.

The proposal responds to recurring problems with liquidation-based lending. When collateral values fall quickly, on-chain rules allow liquidators to close positions immediately and sell collateral into already stressed markets. A Bitcoin drop below $68,000 caused roughly $394 million of liquidations in one hour on June 2, including about $87 million in ETH positions. Research has found a link between liquidation activity and higher post-liquidation price volatility. Past incidents include a 2025 oracle dispute that triggered liquidations on a lending protocol and a 2025 ETH decline that put nearly $320 million of loans close to liquidation.

Buterin described how the options design changes where oracle risk matters. Debt-backed systems require near-real-time price feeds so protocols can decide when a position is unsafe and allow liquidators to act. Options-style contracts need a binding price only at maturity, which allows slower, contestable price-resolution methods such as dispute windows, prediction-market-style mechanisms or expensive fallback oracles that would be impractical for instant liquidations.

The trade-off is exposure drift instead of a liquidation cliff. A holder of an options-based synthetic aimed at dollar-like stability would avoid a sudden close when prices swing, but the hedge can gradually diverge from its target unless rebalanced. That shifts timing and execution decisions from protocol rules and liquidator bots to users, automated rebalancers, market makers or wrappers built on top of the design. Buterin noted the approach is more appropriate for a stability-oriented exposure or a personal hedge than for an accounting-grade, redeemable dollar.

Buterin identified practical challenges for developers. Rebalancing through standard automated market makers could cause significant slippage during volatile periods, so alternative market structures such as patient one-sided market making might be needed. Automated wrappers that rebalance for users could improve usability but might recreate predictable triggers that traders can exploit. An on-chain DAO wrapper would require deterministic rules and deep liquidity to avoid becoming a target.

Next steps include prototype wrappers, simulations and live tests to measure rebalancing costs, liquidity needs and resistance to manipulation. The proposal presents an architectural option for handling undercollateralized positions without immediate forced sales, leaving developers to test whether the design can operate effectively in live markets.