Vitalik's Vision for the Next Evolution of On-Chain Finance: How to Reconstruct DeFi with "Options Thinking"?

If you've been in the industry for more than one cycle, you’ve certainly seen this recurring scene play out time and again:

During extreme market conditions, prices flash crash, oracle feeds become distorted, liquidation bots swarm in, and a batch of positions gets cascadingly liquidated within minutes. The selling pressure continues to push prices lower, ultimately escalating into a liquidity crunch across the entire ecosystem. Starting from "312" in 2020, through "519," "1011," and several other stampedes, forced liquidation has always been the most criticized trigger.

Faced with this dilemma, Vitalik Buterin published a research concept earlier this month titled "Building index-tracking assets on top of options instead of debt," posing a rather disruptive question: Can DeFi use an options-based mechanism to completely replace the traditional CDP (Collateralized Debt Position) and forced liquidation model?

According to Vitalik's vision, the core advantage of this design is that it can replace real-time oracles with "slow oracles," thereby significantly reducing the risk of oracle manipulation. A user's exposure to the index would deviate smoothly (in an approximately quadratic manner) from the target over time, rather than facing instantaneous forced liquidation.

1. The Achilles' Heel of Traditional DeFi

Before discussing Vitalik's new idea, it’s necessary to review why the "CDP + forced liquidation" model became DeFi's core mechanism, and why it also became its weakness.

As we know, represented by classic lending protocols like MakerDAO/Sky, Aave, and Compound, one of the most important early financial innovations in DeFi was allowing users to collateralize on-chain assets to borrow another asset.

This mechanism can be simply understood as users depositing assets like ETH into a protocol to obtain a borrowing limit. As long as the collateral value remains sufficiently high, the position is safe. However, once the collateral price falls below a certain threshold, the protocol triggers a liquidation, selling the collateral to repay the debt in order to protect the system's solvency.

While it might seem unremarkable today, this mechanism was crucial for early DeFi. For the first time, it transformed on-chain assets like ETH from "passive holdings" into "reusable" financial base assets, enabling their use in more complex systems such as lending, leverage, stablecoins, and yield strategies.

It can be said that CDPs and lending protocols laid the earliest and most critical foundation for composability in DeFi.

However, its problems are also evident:

• Forced liquidation relies on real-time and reliably accurate oracles: Protocols must rely on external oracles for second-by-second price feeds. If the oracle experiences delays, manipulation, extreme network congestion, or if certain assets are illiquid, the protocol might execute liquidations based on distorted prices over a short period.
• Forced liquidation amplifies pressure during extreme market events: When collateral prices drop rapidly, liquidators and MEV robots compete intensely for liquidation opportunities. The concentrated selling of collateral further intensifies market pressure, potentially triggering a liquidity crisis across the entire ecosystem.
• Liquidity illusion: Traditional lending protocols assume "there will always be enough liquidity in the market to absorb the selling pressure from liquidations." However, in genuinely extreme market environments, liquidity can evaporate instantly. As prices fall further, fewer are willing to take on the risk, making liquidations harder to complete smoothly. If the protocol cannot promptly handle bad positions, it may be left with bad debt.

So, objectively speaking, the CDP + forced liquidation model is not a flawed design; it was an extremely important and effective foundational module for early DeFi. However, as DeFi moves into a phase with larger capital and more complex structures, the costs of this model become increasingly apparent:

It concentrates risk on a single liquidation threshold. Everything seems normal until that threshold is touched; once triggered, users often have no choice but to passively accept the consequences.

2. Vitalik's New Approach: Reimagining Lending with "Options Thinking"

The essence of Vitalik's new idea is to change the underlying way DeFi handles risk.

We can summarize his approach in one sentence: Can DeFi use "options" as its foundational building block instead of "debt"?

Because the traditional CDP model is based on debt. When a user borrows assets, there must be a mechanism ensuring the debt is always sufficiently over-collateralized. If the collateral becomes insufficient, the protocol can only resort to forced liquidation to avoid systemic bad debt.

An options-based design, however, follows a completely different logic. Instead of having users create a debt position that must be constantly protected in real-time, it splits the underlying asset into a set of contracts with complementary payoffs. Simply put, 1 ETH can be split into two types of assets: one is closer to a stable or index-tracking exposure, and the other assumes the opposite risk and return. 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 forcibly liquidate a user at a specific price point. In the traditional liquidation model, a user might be abruptly liquidated when the price hits a line. In the options-based model, the user faces a gradual deviation of their exposure from the target, requiring them to rebalance at an appropriate time. A more relatable analogy can help understand this:

• **Traditional model (CDP):** It's like you pledge $10,000 worth of ETH to a lending protocol to borrow $5,000. The protocol watches the price via an oracle. If ETH drops to a critical point, it sells your ETH without question, charges you a hefty fee, and you have no room for appeal.
• **New options-based model:** You pledge your ETH and also receive $5,000, but it wouldn't be called a loan. Its form is more like a time-bound "right": before the agreed-upon expiry, no matter how much ETH drops, your position won't be forcibly liquidated midway. The initiative always remains with you. At maturity, if the price recovers, you can redeem your collateral. If the price drops, you can choose not to exercise the option, letting the protocol take the collateral, while you have already secured the $5,000 in your pocket, rather than being "cleaned out" by a sudden price wick in your sleep.

Of course, this is just a simplified analogy for understanding. Vitalik's original design is closer to a portfolio strategy involving "holding deep in-the-money options and gradually rolling them to lower strike prices as the spot price approaches."

In summary, the former is more like "the system presses the liquidation button for the user," while the latter is more like "the user sees the risk curve in advance and decides when to adjust their position." This shift in mechanism will undoubtedly bring profound changes to DeFi on several levels:

• No more "hard liquidations": Since borrowing positions are transformed into time-bound options, protocols no longer need a liquidation line that triggers an immediate explosion. Users no longer need to anxiously watch candlestick charts every day, nor will they be forcibly liquidated in their sleep due to a single malicious price wick.
• Significantly reduced reliance on oracles: The new mechanism drastically reduces dependence on high-frequency, real-time oracle price feeds. Protocols only need to settle at expiry or specific time points, directly compressing the attack surface for hackers using "flash loans + oracle manipulation."
• Naturally MEV-resistant: Without instantaneous forced liquidations, there will be no more gas bidding wars on-chain caused by cascading liquidations. MEV bots lose their most profitable liquidation arbitrage scenarios, allowing more value created by the protocol to flow back to users and LPs, rather than being extracted by arbitrageurs and sequencers.

The significance of this change goes far beyond just being "safer."

Because the future of DeFi needs to serve not only high-risk traders but also more average users and real payment scenarios. For these groups, what truly matters is often not maximizing capital efficiency, but whether they can retain the option during extreme market conditions and avoid being forcibly kicked out of the system due to short-term volatility.

3. Do Users Still Need Ethereum DeFi?

This question has become increasingly relevant today.

With the rise of emerging ecosystems like Hyperliquid, users are seeing alternative DeFi product forms that offer faster matching experiences, interactions closer to centralized exchanges, more concentrated liquidity, and a more straightforward fulfillment of trading demands.

This represents real pressure for Ethereum.

If we only compare transaction speed, fees, and front-end UX, the Ethereum mainnet and some traditional DeFi protocols are not necessarily always the best. Users won't automatically believe a protocol is better just because it's deployed on Ethereum, nor will they ignore a cheaper, more convenient alternative simply because a product is more "orthodox."

Therefore, Ethereum DeFi needs to re-answer the question: Why do users still need Ethereum DeFi?

The answer is certainly not just "because Ethereum is the most secure," nor just "because it has the highest TVL." A truly convincing answer should stem from a deeper capability in financial design.

In the author's opinion, if Ethereum DeFi wants to continue being the core battleground for on-chain finance, it cannot merely focus on replicating traditional financial products to simply increase leverage efficiency. It must build advantages in more challenging areas, such as clearer risk boundaries, more robust oracle mechanisms, fewer mandatory system actions, greater user autonomy, and protocol structures more resilient against extreme scenarios.

In other words, the competitive focus for the next generation of Ethereum DeFi might no longer be who can make users earn more, but rather who can help users avoid being passively ejected in complex financial environments, and who can ensure users truly understand the risks they are taking.

For average users, Vitalik's proposed options-based DeFi design might still be a distant concept, and it may not quickly evolve into mature products. However, the direction it conveys is clear: DeFi should not only pursue higher returns but also strive for a clearer, more explainable, and more manageable risk structure.

Final Thoughts

To be honest, following the frequent security incidents, a common sentiment has arisen: Given the numerous risks in DeFi, does this mean on-chain finance itself is infeasible?

This judgment might be too simplistic.

The problem with DeFi isn't the direction of "decentralization" itself, but rather that many products haven't truly evolved from high-risk experiments to robust financial infrastructure. In the past, the industry was too accustomed to proving value through growth and TVL, while relatively underestimating the importance of risk design and resilience in extreme scenarios.

Vitalik's new idea precisely serves as a reminder to the industry that DeFi's evolution isn't just about moving old finance onto the chain. It's about leveraging the programmable and composable characteristics of blockchains to design novel risk structures that are difficult to achieve in traditional finance.

If it's just a race for speed and speculative efficiency, Ethereum will struggle to win. Ethereum must return to its underlying narrative: security, decentralization, and fundamental innovation in financial paradigms.

This, perhaps, is the true opportunity for Ethereum DeFi.