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

If you have been in the industry for more than one cycle, you must have witnessed this repeatedly reenacted scene:

During extreme market conditions, prices flash crash, then oracle feeds become distorted, liquidation robots swarm in, and a batch of positions gets cascaded within minutes. The selling pressure continues to stomp downwards, eventually escalating into a liquidity crunch across the entire ecosystem. Starting from "312" in 2020, through several stampedes like "519" and "1011", forced liquidation has always been the most criticized trigger.

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

According to Vitalik's vision, the core advantage of this design lies in replacing real-time oracles with "slow oracles," thereby significantly reducing the risk of oracle manipulation. A user's exposure to the index would drift away from the target smoothly (close to a quadratic curve) instead of facing instant forced liquidation.

I. The Achilles' Heel of Traditional DeFi

Before discussing Vitalik's new idea, it's necessary to review why "CDP + forced liquidation" became the core model of DeFi, 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 a user depositing assets like ETH into a protocol, receiving a loan amount. As long as the collateral value is sufficiently high, the position is safe. However, once the collateral price drops below a certain threshold, the protocol triggers liquidation, selling the collateral to repay the debt to protect the system's solvency.

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

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

However, its problems are also obvious:

• Forced liquidation relies on real-time and reliable oracles: Protocols must rely on external oracles for second-level price feeds. If the oracle experiences delays, manipulation, extreme network congestion, or if the asset itself lacks liquidity, the protocol might execute liquidations based on temporarily distorted prices.
• Forced liquidation amplifies pressure during extreme market conditions: When collateral prices drop rapidly, liquidators and MEV robots compete intensively for liquidation opportunities. The collateral is sold off en masse, further increasing market pressure and potentially triggering a liquidity crunch across the entire ecosystem.
• Liquidity illusion: Traditional lending protocols assume "there is always enough liquidity in the market to absorb liquidation pressure." However, in truly extreme market environments, liquidity can evaporate instantly. Prices fall, fewer people are willing to take on risk, making liquidation harder to complete smoothly. If the protocol cannot handle bad positions in time, it might be left with bad debt.

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

It concentrates risk heavily on a single liquidation threshold. Everything seems normal before the threshold is triggered. Once the threshold is breached, users often have no choice but to passively accept the consequences.

II. Vitalik's New Idea: Reconstructing 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 the underlying building block instead of "debt"?

The traditional CDP model is based on debt. When a user borrows assets, there must be a mechanism ensuring the debt is always sufficiently collateralized. If the collateral falls short, the protocol can only avoid systemic bad debt through forced liquidation.

In contrast, the options-based design takes a completely different approach. Instead of having users create a debt that must be protected in real-time, it breaks down the underlying asset into a set of contracts with complementary returns. 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 sum of returns from these two assets always corresponds to the underlying 1 ETH.

This means the system no longer needs to forcibly liquidate a user suddenly at a certain price point. In the traditional liquidation model, a user might be abruptly kicked out when the price hits a line. In the options-based model, the user faces a gradual deviation of exposure from the target and needs to rebalance at an appropriate time. A more common analogy can help understand this:

• Traditional Model (CDP): It's like you pledge ETH worth $10,000 to a lending protocol and borrow $5,000. The lending protocol watches the price through an oracle; once ETH falls to a critical point, it sells your ETH without a second thought, charges you a hefty fee, and you have no room for defense.
• New Options-based Model: You pledge your ETH and also receive $5,000, but this is not called lending. Its form is more like a "right" with an expiration date. Before the agreed time, no matter how ETH drops, your position won't be liquidated midway. The initiative is always in your hands. Upon expiration, if the price recovers, you can redeem your collateral; if the price drops, you can simply choose not to exercise the right, letting the protocol take the collateral, while you have already secured your $5,000, without being "burgled" by a sudden wick in your sleep.

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

Overall, 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 clearly in advance and decides when to adjust the position themselves." This shift in mechanism will undoubtedly bring several profound changes to DeFi:

• No more "hard liquidations": Because the lending position is transformed into an options with a time cycle, the protocol no longer needs to set a "trigger-and-liquidate-immediately" line. Users no longer need to anxiously watch the K-line daily, nor will they be forcibly liquidated in their sleep due to a malicious wick.
• Significantly reduces reliance on oracles: The new mechanism greatly reduces dependence on high-frequency, real-time oracle feeds. The protocol only needs to settle at maturity dates or specific time points, directly compressing the space for hackers to launch attacks using "flash loans + oracle manipulation."
• Inherent resistance to MEV: Without instantaneous forced liquidations, there will be no more "cascading liquidation" triggered gas bidding wars on-chain. MEV robots lose their most profitable liquidation arbitrage scenario, and the value created by the protocol is more likely to genuinely 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 DeFi aims to serve not only high-risk traders but also more ordinary users and real payment scenarios. For these groups, what truly matters is often not maximizing capital efficiency, but having options during extreme market conditions and avoiding being forcibly kicked out of the system due to a short-term fluctuation.

III. Do Users Still Need Ethereum DeFi?

This question becomes more realistic today.

With the rise of emerging ecosystems like Hyperliquid, users are seeing another form of DeFi product. These offer faster matching experiences, interactions closer to centralized exchanges, more concentrated liquidity, and more direct fulfillment of trading needs.

This is real pressure for Ethereum.

If one only compares transaction speed, fees, and frontend experience, the Ethereum mainnet and some traditional DeFi protocols may not always have the advantage. Users won't automatically believe a protocol is better just because it's deployed on Ethereum, nor will they overlook cheaper and more convenient alternatives just because a product is more "orthodox."

So, Ethereum DeFi needs to answer a new question: Why do users still need Ethereum DeFi?

The answer certainly isn't just "because Ethereum is the most secure" or "because Ethereum has the largest TVL." A truly convincing answer must come from deeper financial design capabilities.

In my opinion, if Ethereum DeFi wants to continue being the core battleground for on-chain finance, it cannot merely stay at replicating traditional financial products to simply improve leverage efficiency. It needs to build advantages in more difficult areas, such as more transparent risk boundaries, more robust oracle mechanisms, fewer mandatory system actions, stronger user autonomy, and protocol structures more resilient to extreme scenarios.

In other words, the competition point for the next generation of Ethereum DeFi might no longer be who can make users earn more, but who can make users be eliminated passively less often in complex financial environments and truly understand what risks they are undertaking.

For ordinary users, the optionalized DeFi design proposed by Vitalik might still seem distant and may not become a mature product soon. However, the direction it conveys is clear: DeFi should not only pursue higher yields but also strive for clearer, more explainable, and more manageable risk structures.

Concluding Thoughts

To be honest, after the frequent security incidents, a common sentiment emerged: since DeFi has so many risks, does it mean on-chain finance itself is infeasible?

This judgment might be too simplistic.

The problem with DeFi is not the direction of "decentralization" itself, but that many products have not truly completed the evolution from high-risk experiments to robust financial infrastructure. In the past, the industry was too accustomed to proving value with growth and TVL, relatively underestimating the importance of risk design and resilience in extreme scenarios.

The new idea proposed by Vitalik precisely serves as a reminder to the industry: the evolution of DeFi is not just about moving old finance onto the chain, but about leveraging the programmable and composable nature of the chain to design novel risk structures that traditional finance may not easily achieve.

If it only competes on speed and speculative efficiency, Ethereum will find it hard to win. Ethereum must return to its underlying narrative: the fundamental innovation in security, decentralization, and financial paradigms.

This perhaps is the true opportunity for Ethereum DeFi.