Vitalik wants DeFi price crashes to stop triggering automatic liquidations – Crypto News

Vitalik Buterin is challenging one of DeFi’s most familiar safety mechanisms: the automatic liquidation that closes a debt-backed position when collateral falls below the required backing for the loan.

In a June 1 Ethereum Research post, Buterin proposed building synthetic, index-tracking assets on top of options, with collateralized debt removed from the base design.

The idea would remove the hard liquidation trigger from the base design and replace it with a slower form of risk: the user’s exposure drifts away from the target unless the position is rebalanced.

That distinction is important because the old mechanism is still showing up in market stress. Bitcoin‘s fall below $68,000 triggered about $394 million in one-hour liquidations on June 2, including roughly $87 million in ETH positions, as leveraged bets were force-closed across the market.

The flash crash came one day after Buterin’s post and serves as a market reminder: when price moves hit crowded leverage, automatic closures can turn a drop into a wider market event.

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The proposal is research-stage architecture: a design argument separate from any protocol launch, Ethereum roadmap commitment, or direct replacement for Aave, Maker, or existing stablecoins. It shifts the focus from collateral buffers and faster price feeds to a more fundamental design choice: whether instant liquidation should remain DeFi’s central means of surviving a crash.

Why the safety switch can amplify stress

Most DeFi lending systems are built around the same basic problem. A user locks in collateral, borrows against it, and must keep the position above a required safety level.

In Aave’s borrowing documentation, that level is expressed through a health factor. When it falls below 1, the position can be liquidated: a liquidator repays debt on the borrower’s behalf and receives collateral plus a bonus.

That structure protects the protocol’s solvency, but it also concentrates action at the worst possible moment. If ETH or another collateral asset falls fast enough, users do not choose when to sell. The system chooses for them.

Liquidators compete to close eligible positions, and the collateral can be pushed into markets already short on liquidity.

The record supports that concern. An OECD working paper on DeFi liquidations found a positive relationship between liquidation activity and post-liquidation price volatility across major decentralized exchange pools.

The paper also emphasized that liquidators rely on available liquidity during stress, which means the mechanism designed to restore balance can run into the same liquidity shortage as everyone else.

CryptoSlate has previously covered the operational version of that risk. A 2025 Chainlink-related oracle dispute led to more than $500,000 in liquidations on Euler Finance and revived questions about how protocols should interpret pricing data in illiquid markets.

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Separately, a 2025 ETH decline put nearly $320 million in Ethereum-based DeFi loans within 20% of liquidation, with MakerDAO and Compound exposure concentrated near key price levels.

The common thread is the cliff. DeFi needs a way to handle undercollateralized positions, but the current method often waits until a number is breached and then requires immediate action.

That creates a crowded moment for borrowers, liquidators, oracle feeds, and liquidity providers simultaneously. It also gives sophisticated actors a clear trigger to watch, because the protocol rule announces when a position becomes profitable to close.

For users, the practical consequence is straightforward. A liquidation system can protect a lending pool while still giving the individual borrower the worst possible execution window.

The user may have intended to keep long-term ETH exposure, hedge a cash need, or wait out a sharp wick. Once the threshold is crossed, the system’s priority becomes solvency, and the user’s timing preference disappears.

How options turn a cliff into drift

Buterin’s alternative starts by changing the primitive. A position that can become undercollateralized gives way to a split ETH claim: the proposal divides 1 ETH into two option-like assets, called P and N, tied to a price index, strike price, and maturity date.

At maturity, an oracle resolves the index value and determines how much of the ETH claim each side receives.

The key property is simple: P and N always add back up to 1 ETH. Because the system is dividing a fixed ETH claim between two sides, it can avoid seizing collateral from a borrower to close a deficit.

In Buterin’s framing, the design removes the liquidation event by construction.

For a user trying to hold synthetic dollar exposure, the practical experience differs from a debt-backed stablecoin. In the debt model, a user can appear fully hedged until the collateral threshold is breached, at which point the position is force-closed.

In the options model, the holder avoids the sudden close, but the position can gradually stop behaving as the user intended.

Buterin’s example uses a user who wants some level of dollar exposure while ETH is trading around $2,500. The user could buy a deep option tied to a lower strike, such as $1,500, and rotate into lower-strike options if ETH falls toward the original strike.

If the user does not rebalance, the exposure drifts. The user keeps a claim, but the hedge becomes less exact.

That is the central tradeoff. The design keeps risk in the system, and changes who controls the timing and what form the damage takes.

Liquidation-based systems outsource the decision to a protocol rule and liquidator bots. The options-based design pushes more of that decision toward users, wrappers, market makers, or automated rebalancing systems.

Buterin also acknowledged a limit for stablecoin use. A medium amount of annualized drift may be acceptable for someone seeking price stability relative to future expenses.

It is much less useful for an accounting stablecoin, where users want to treat the token as a dollar for payments, bookkeeping, or tax reporting.

The oracle tradeoff

The oracle argument may be the proposal’s most important protocol-design claim.

Debt-backed liquidations depend on real-time price feeds. A protocol needs a binding price quickly enough to determine when a position is unsafe and to allow liquidators to act.