Ethereum co-founder Vitalik Buterin published a research proposal on June 1, 2026, titled "Building index-tracking assets on top of options instead of debt," calling for the replacement of collateralized debt positions (CDPs) — the mechanism underlying $10 billion in locked capital across 143 pro...
"What if we use options as the base of DeFi, instead of CDPs and liquidations?" — Vitalik Buterin, Ethereum Co-Founder, EthResearch post, June 1, 2026
Ethereum co-founder Vitalik Buterin published a research proposal on June 1, 2026, titled "Building index-tracking assets on top of options instead of debt," calling for the replacement of collateralized debt positions (CDPs) — the mechanism underlying $10 billion in locked capital across 143 protocols — with an options-based architecture that eliminates forced liquidations by construction. Within 10 days, at least three independent teams had shipped prototype implementations, including a physically settled version live on Base and a testnet options exchange called Cleave.
The proposal arrives amid a year in which DeFi liquidation failures have generated material losses. Aave absorbed $196 million in bad debt following the Kelp rsETH exploit in April 2026. In January, a single day saw over 182,000 trader positions force-closed across $1.08 billion in liquidations. Buterin's architecture defines paired option assets (P and N) that always sum to one ETH, making the system solvent by construction and removing the dependency on real-time oracle feeds that current CDP models require.
The CDP-based lending model that dominates DeFi operates on a simple premise: borrowers post collateral exceeding the value of their loan, and if the collateral's value drops below a threshold, automated liquidation bots sell it to repay the debt. When markets move fast enough, this mechanism fails.
The data from the first half of 2026 quantifies the cost:
The CDP market itself remains substantial. According to DeFi Llama, 143 CDP protocols hold a combined $10.035 billion in total value locked. Sky (formerly MakerDAO) accounts for $6.077 billion, followed by JustStables at $1.348 billion and Liquity at $547.72 million.
The structural weakness is not a bug but a feature of the design: CDPs rely on real-time oracle feeds to determine solvency. When those feeds lag, are manipulated, or when liquidation bots cannot execute fast enough during volatile moves, the system generates bad debt — losses that must be socialized across protocol participants or covered by DAO treasuries.
Buterin's proposal replaces the debt-collateral-liquidation loop with a paired options structure. The mechanics, as described in the EthResearch post:
Minting: One ETH is deposited and split into two complementary assets, P (positive/upside exposure) and N (negative/downside protection), with a defined strike price S and maturity date M. The pair can be redeemed for one ETH at any time.
Settlement: At maturity, an oracle resolves the index to value x. P receives min(1, S/x) ETH and N receives max(0, 1 - S/x) ETH. The critical property: P + N always equals 1 ETH.
Solvency by construction: Because the two assets always sum to one ETH of value, there is no insolvency scenario. As Buterin stated in the proposal: "there is no possibility of liquidation." Losses materialize gradually as the value of each option leg shifts, rather than through abrupt forced selling.
Oracle requirements: The system does not need real-time price feeds. Because it is solvent by construction, the oracle can resolve at maturity or at periodic intervals, using slower, dispute-resolution-compatible feeds similar to prediction market oracles. This removes the attack surface exploited in flash loan and oracle manipulation attacks.
The model effectively converts what is currently a binary event (liquidated or not) into a continuous exposure curve. A holder of P sees their position decrease in value as ETH price drops, but they are never forcibly ejected from their position.
| Feature | CDP Model (Current) | Options Model (Proposed) | |---|---|---| | Collateral requirement | 150-200% overcollateralization typical | 100% (1 ETH = P + N) | | Liquidation mechanism | Automated forced selling at threshold | None — value adjusts continuously | | Oracle dependency | Real-time, every block | Periodic, at maturity or intervals | | Bad debt risk | Yes — when liquidations fail | No — solvent by construction | | User experience during crash | Position forcibly closed | Position loses value gradually | | Flash loan attack surface | High (oracle manipulation) | Low (slow oracles acceptable) | | Rebalancing requirement | None | Required to maintain target exposure | | Stablecoin issuance | Direct (mint against collateral) | Indirect (requires additional structure) | | Capital efficiency | Lower (overcollateralization) | Higher (no overcollateralization buffer) | | Maturity concept | None (perpetual) | Fixed maturity, must roll |
The trade-off is explicit: CDPs are perpetual and require no user action beyond maintaining collateral ratios. Options-based positions require periodic rebalancing and rolling at maturity, introducing execution costs and slippage.
The speed of prototype development has been notable. By June 11, Buterin posted on X: "Looks like the options thing is happening already!"
Cleave: A testnet options exchange positioning itself as DeFi's "third pillar" alongside Uniswap for spot trading and Hyperliquid for perpetuals. The platform splits assets into upside exposure and a cash floor with no margin, funding, or liquidation mechanics.
Base prototype: An unnamed developer deployed a physically settled implementation on Base, executing the complete lifecycle: minting paired claims from WETH, transferring them, exercising against USDC strikes, and settling vaults through asset movement rather than price feeds. Physical settlement bypasses oracle dependency entirely.
Perpetual liquidity-backed variant: A separate team adapted the no-liquidation principle to perpetual contract structures, though details remain limited.
The existing on-chain options ecosystem provides context for scale. According to DeFi Llama, current on-chain options protocols hold approximately $160 million in combined TVL, led by Opyn ($50 million) and Premia ($7 million on Arbitrum/Ethereum). Panoptic offers perpetual, oracle-free options built on Uniswap v3 liquidity pools. The centralized options market is substantially larger: Deribit processed $79.54 billion in BTC options volume in February 2026 alone, with $31.3 billion in open interest as of May 2026.
Buterin urged that "any design heading to mainnet quickly be formally verified first," tagging the Vyper team and formal verification developers.
Buterin's proposal is explicit about what the options model does not solve:
Rebalancing costs: Holders must periodically rebalance positions to maintain target exposure. Each rebalance is a trade, subject to gas costs and slippage. On Ethereum mainnet, this could erode returns for smaller positions. Buterin acknowledged "it remains unclear whether those adjustments can be made cheaply and efficiently enough to avoid excessive trading costs or slippage."
Maturity management: Unlike CDPs, which are perpetual, options-based positions have fixed maturities. Users must roll their positions, creating periodic friction and potential liquidity gaps at expiry dates.
Stablecoin unsuitability: The proposal does not directly address accounting stablecoins. CDP-based stablecoins like DAI mint a synthetic dollar against overcollateralized ETH. An options-based model produces exposure to price movements, not a pegged asset. Building a stablecoin on top of the options structure would require an additional layer of mechanism design.
Liquidity requirements: The model requires deep liquidity in both P and N assets for efficient trading and rebalancing. Bootstrapping this liquidity is a cold-start problem that existing options protocols have struggled with — the $160 million combined TVL in on-chain options versus the $10 billion in CDPs illustrates the scale gap.
Complexity: The user mental model shifts from "deposit collateral, borrow asset" to "hold synthetic options exposure with periodic rebalancing." This is a significantly more complex proposition for retail users.
The proposal does not call for the elimination of existing lending protocols, but it does raise structural questions:
Aave and Compound: These variable-rate lending protocols have invested heavily in liquidation engine optimization. Aave V4 introduced a redesigned liquidation engine specifically to address the failures seen in the Kelp rsETH exploit. If the options model gains traction, it competes directly with the CDP lending model for the same capital — users seeking leveraged exposure to crypto assets.
Sky (MakerDAO): With $6.077 billion in TVL, Sky represents the largest CDP implementation. Its stablecoin DAI/USDS depends on the CDP mechanism. An options-based model does not directly threaten DAI issuance, since it does not produce stablecoins, but it could redirect capital from CDP-based borrowing if users find the no-liquidation property more attractive.
Morpho: The protocol's recent $175 million funding round, valuing it at $2 billion, positions it as an on-chain credit infrastructure layer with $10.6 billion in total deposits. Its modular architecture could potentially accommodate options-based primitives alongside traditional lending, though no such integration has been announced.
Oracle providers: Chainlink, Pyth, and other real-time oracle networks derive revenue from the DeFi ecosystem's need for continuous, accurate price feeds. A shift toward slow oracles would reduce demand for high-frequency oracle updates, though would not eliminate the need for oracles entirely — settlement still requires price resolution.
Buterin's proposal is a research-stage design, not a deployment plan. The gap between a formally verified mainnet protocol and a testnet prototype remains substantial. The economic question — whether rebalancing costs make the system uncompetitive — is unanswered and will only be resolved through empirical testing at scale.
What the proposal does accomplish is framing the liquidation mechanism not as an unfortunate side effect to be optimized but as a structural flaw to be designed out entirely. In a year where DeFi has generated hundreds of millions in avoidable losses through liquidation cascades and engine failures, that framing has data behind it.
The parallel with traditional finance is instructive. Options markets are already the largest derivatives class globally. The question is not whether options-based exposure is a viable financial primitive — it is — but whether it can be implemented on-chain with sufficient capital efficiency and low enough friction to compete with the simplicity of "deposit collateral, borrow asset." The 10-day prototype-to-testnet timeline suggests that at minimum, the design space will be explored aggressively.