If you have been through more than one cycle in this industry, you have probably seen the same scene play out again and again:
In extreme market conditions, prices suddenly crash, oracle price feeds become distorted, liquidation bots rush in, and a wave of positions is liquidated within minutes. The added sell pressure pushes prices even lower, eventually turning into a liquidity run across the broader ecosystem.
From the “March 12” crash in 2020 to later market shocks such as “May 19” and “October 11,” forced liquidation has remained one of the most criticized triggers behind these cascading events.
To address this long-standing problem, Vitalik Buterin published a research idea earlier this month titled Building index-tracking assets on top of options instead of debt. In it, he raised a potentially transformative question: can DeFi use options-based mechanisms to replace the traditional CDP, or collateralized debt position, and forced liquidation model?
According to Vitalik’s idea, the core advantage of this design is that it could use “slow oracles” instead of real-time oracles, significantly reducing the risk of oracle manipulation. A user’s exposure to an index would decay smoothly or degrade in a near-quadratic curve, instead of suddenly facing instant forced liquidation.
1. The Achilles’ Heel of Traditional DeFi
Before discussing Vitalik’s new idea, it is worth looking back at why the “CDP + forced liquidation” model became one of DeFi’s core mechanisms, and why it also became one of its biggest weaknesses.
As many users know, classic lending protocols such as MakerDAO/Sky, Aave, and Compound helped define one of early DeFi’s most important innovations: allowing users to deposit on-chain assets as collateral and borrow another asset against them.
Put simply, a user deposits assets such as ETH into a protocol and receives a borrowing limit. As long as the collateral value remains high enough, the position is safe. But once the collateral price falls below a certain threshold, the protocol triggers liquidation, sells the collateral, and uses it to repay the debt in order to protect the system’s solvency.
This may seem ordinary today, but it was crucial to early DeFi. It turned on-chain assets such as ETH from “passive holdings” into financial base assets that could be reused across lending, leverage, stablecoins, yield strategies, and other more complex systems.
In this sense, CDPs and lending protocols laid the earliest and most important foundation for DeFi composability.
But the problems are also clear.
Forced liquidation depends on real-time oracles that must be reliable. Protocols need external oracles to provide second-by-second price feeds. If an oracle suffers delays, manipulation, or extreme network congestion, or if the asset itself lacks sufficient liquidity, the protocol may execute liquidations based on short-term distorted prices.
Forced liquidation amplifies stress during extreme market moves. When collateral prices fall quickly, liquidators and MEV bots compete for liquidation opportunities. Collateral is sold in concentrated bursts, adding more pressure to the market and potentially triggering a liquidity squeeze across the wider ecosystem.
There is also a liquidity illusion. Traditional lending protocols assume that “there will always be enough liquidity in the market to absorb liquidation sell pressure.” But in truly extreme market conditions, liquidity can disappear almost instantly. As prices fall, fewer participants are willing to take on risk, making liquidations harder to complete smoothly. If a protocol cannot deal with undercollateralized positions in time, it may be left with bad debt.
Objectively speaking, the “CDP + forced liquidation” model is not a flawed design in itself. It was an extremely important and effective foundational module in early DeFi. But as DeFi moves into a stage with larger capital scale and more complex structures, the trade-offs of this model are becoming increasingly visible.
It concentrates risk around a single liquidation threshold. Before the threshold is reached, everything appears normal. Once it is touched, users often have no choice but to passively accept the outcome.
2. Vitalik’s New Idea: Reshaping Lending with an Options Mindset
Vitalik’s new idea is essentially about changing the underlying way DeFi handles risk.
It can be summarized in one sentence: instead of using “debt” as DeFi’s foundational building block, can we use “options” instead?
The traditional CDP model is built on debt. When a user borrows an asset, there must be a mechanism to ensure that the debt remains sufficiently collateralized at all times. Once the collateral is no longer enough, the protocol can only rely on forced liquidation to prevent system-level bad debt.
An options-based design works differently. Instead of asking users to create a debt position that must be protected in real time, it splits the underlying asset into a set of contracts with complementary payoffs. In simple terms, 1 ETH can be split into two types of assets: one closer to a stable or index-tracking exposure, and another that takes on the risk and return in the opposite direction. No matter how the price changes, the combined payoff of these two assets always corresponds to the underlying 1 ETH.
This means the system no longer needs to suddenly liquidate a user at a specific price point. In the traditional liquidation model, a user may be forced out as soon as the price hits the liquidation line. In an options-based model, the user’s exposure gradually deviates from the target, and the user needs to rebalance at the right time.
A more intuitive analogy may help explain this.
In the traditional CDP model, imagine depositing $10,000 worth of ETH into a lending protocol and borrowing $5,000. The protocol tracks the price through an oracle. Once ETH falls to a critical level, it sells your ETH immediately and charges you a hefty liquidation penalty, leaving you with zero window to react or adjust.
In the new options-based model, you deposit ETH and still receive $5,000, but this is no longer “borrowing” in the traditional sense. It is closer to a time-limited “right.” Before the agreed time, no matter how much ETH falls, your position will not be liquidated midway. You retain control. If the price recovers at maturity, you can redeem the collateral. If the price falls, you can choose not to exercise the option and let the protocol keep the collateral, while you still keep the $5,000. You are no longer liquidated by a sudden downward price spike while asleep.
Of course, this is only a simplified analogy to help users understand the idea. In Vitalik’s original wording, the safer approach is to “hold deep ‘in-the-money’ options, and then rotate them into options with a lower strike price” when the price gets close to the strike.
Overall, the former is more like “the system pressing the liquidation button for the user,” while the latter is more like “the user seeing the risk curve in advance and deciding when to adjust the position.”
This shift in mechanism would also bring several deeper changes to DeFi.
There would be no more “hard liquidation.” Because lending positions are transformed into options with a defined term, protocols no longer need to set a liquidation line that “explodes immediately once touched.” Users would no longer need to anxiously watch candlestick charts every day, and they would not be forcibly liquidated during sleep because of a malicious price spike.
Reliance on oracles would be greatly reduced. The new mechanism significantly reduces the need for high-frequency, real-time oracle feeds. Protocols only need to settle positions at maturity or at specific checkpoints. This directly reduces the attack surface for “flash loan + oracle manipulation” exploits.
It would be naturally more MEV-resistant. Without instant forced liquidation, there would no longer be gas bidding wars caused by cascading liquidations on-chain. MEV bots would lose one of the most profitable liquidation arbitrage scenarios. The value created by the protocol would be more likely to flow back to users and LPs, rather than being extracted by arbitrageurs, sequencers, or builders.
The significance of this change goes far beyond “better security.”
The future of DeFi is not only about serving high-risk traders. It also needs to serve more retail users and real-world payment scenarios. For these users, the most important thing is often not maximizing capital efficiency, but whether they can retain choice during extreme market conditions and avoid being forcibly pushed out of a position because of a short-term price move.
3. Do Users Still Need Ethereum DeFi?
This question has become more urgent today.
With the rise of emerging ecosystems such as Hyperliquid, users are seeing another form of DeFi product: faster matching, an experience closer to centralized exchanges, more concentrated liquidity, and a more direct way to meet trading demand.
This creates real pressure for Ethereum.
If we only compare trading speed, fees, and front-end experience, Ethereum mainnet and some traditional DeFi protocols may not always have the advantage. Users will not automatically believe that a protocol is better simply because it is deployed on Ethereum. Nor will they ignore cheaper and smoother alternatives just because a product is more “orthodox.”
So Ethereum DeFi needs to answer the question again: why do users still need Ethereum DeFi?
The answer cannot simply be “because Ethereum is the most secure.” Nor can it only be “because Ethereum has the largest TVL.” A truly convincing answer should come from deeper financial design capabilities.
In my view, if Ethereum DeFi wants to remain the main arena for on-chain finance, it cannot stop at copying traditional financial products and simply improving leverage efficiency. It needs to build advantages in harder areas: clearer risk boundaries, more robust oracle mechanisms, fewer forced system actions, stronger user autonomy, and protocol structures that can better withstand extreme conditions.
In other words, the next stage of competition for Ethereum DeFi may no longer be about who can help users earn more. It may be about who can help users avoid being passively forced out in complex financial environments, while truly understanding the risks they are taking.
For ordinary users, Vitalik’s options-based DeFi design may still feel distant, and it may not become a mature product quickly. But the direction it points to is clear: DeFi should not only pursue higher yields. It should also pursue risk structures that are clearer, more explainable, and easier to manage.
Closing Thoughts
To be realistic, after repeated security incidents, a common view has emerged: if DeFi carries so many risks, does that mean on-chain finance itself is not viable?
That conclusion may be too simplistic.
The problem with DeFi is not “decentralization” itself. The real issue is that many products have not yet completed the evolution from high-risk experiments into robust financial infrastructure. For too long, the industry has been used to proving value through growth and TVL, while underestimating risk design and resilience under extreme conditions.
Vitalik’s new idea is a reminder to the industry that the evolution of DeFi is not just about moving old financial products on-chain. It is about using the programmability and composability of blockchains to design new risk structures that traditional finance may not be able to implement easily.
If Ethereum only competes on speed and speculative efficiency, it will be hard to win. Ethereum must return to its core narrative: security, decentralization, and foundational innovation in financial paradigms.
That may be where the real opportunity for Ethereum DeFi lies.