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.

How the P and N Token Model Works?

P and N are two artificial assets that are introduced in the design.

One ETH can be divided into a paired set of one P token and one N token by the user. Before they mature, these two tokens can always be combined again and exchanged for one ETH. This indicates that P and N always add up to one ETH.

The system also defines:

• A target index T
• A strike price S
• A maturity date M

An oracle calculates the tracked index's value at the maturity date. The underlying ETH is split amongst P and N holders in accordance with predetermined payout criteria based on that outcome. There is never a situation when a position needs to be liquidated in order to preserve solvency because the total value is always limited to 1 ETH, and both parties jointly hold the full collateral pool.

Buterin points out that this structure can perhaps share oracle infrastructure with prediction market systems because it is similar to a scalar prediction market. This resemblance may lessen reliance on costly real-time data sources while enhancing security.

Slow Oracles Replace Real-Time Liquidation Triggers

One of the proposal's most important features is its application of "slow oracles."

Because liquidations must happen right away when collateral ratios become hazardous, current DeFi lending systems require quick price updates. The system as a whole may experience losses if the oracle is altered or delayed.

Buterin's options-based architecture eliminates the need for immediate liquidations. Consequently, the protocol can function with slower oracle systems, which are comparable to those already employed in prediction markets. Because they don't have to update prices every few seconds, these oracles are typically simpler to secure.

Buterin made it clear that, in contrast to stablecoins that mostly rely on real-time oracle updates, he would feel more at ease owning algorithmic stablecoins based on this options-based design.

Building index-tracking assets on top of options instead of debthttps://t.co/isSkr3901W

What if the use options as the base of defi, instead of CDPs and liquidations? So instead of extreme price movements creating a sharp and global "you get liquidated" effect, instead your…— vitalik.eth (@VitalikButerin) June 1, 2026

The Trade-Off: Rebalancing & Slippage Costs

The design has trade-offs, even though it eliminates liquidations.

Periodically rebalancing holdings is necessary for users or automated systems to maintain proper index exposure. Adjustments may be necessary if the synthetic asset's exposure gradually deviates from its target due to market fluctuations. These rebalancing procedures add slippage risk and result in transaction expenses.

However, Buterin recognised that the question of whether recurrent rebalancing can continue to be effective enough to withstand severe slippage remains unanswered. The idea is still in its early stages and is not yet suitable for manufacturing.

Supporters of the DeFi community have hailed the idea as a new primitive for decentralised finance despite this drawback. Beyond stablecoins, researchers and developers are already debating uses such as inflation indexes, commodities baskets, synthetic exposure to real-world assets, and even new use cases like compute-related indices.

Buterin's plan seeks to create a framework where risk is progressively absorbed through exposure drift, as opposed to a system where market crashes cause waves of forced liquidations. The model provides a completely new picture of how synthetic assets can operate across DeFi in the future by substituting options for debt and slower, more secure oracle systems for quick oracles.

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