Vitalik Buterin Draws Line on ‘Real’ DeFi, Slams USDC Yield Models

Ethereum co-founder Vitalik Buterin has clarified what he considers true decentralised finance (DeFi), saying that centralised stablecoin yield models, such as those leveraging USDC, do not qualify because they don’t meaningfully change the risk profile for end users.

Commenting February 9 on X in response to a post from another user, Buterin discussed algorithmic stablecoins, contrasting them with centralised stablecoins such as USDC. He argued that algorithmic stablecoins are “genuine DeFi.”

Buterin explained that his distinction between the two models all comes down to how risk is distributed between users and market makers. 

If we had a good ETH-backed algorithmic stablecoin, then *even if* 99% of the liquidity is backed by CDP [collateralized debt position] holders…the fact that you have the ability to punt the counterparty risk on the dollars to a market maker is still a big feature.

Vitalik Buterin, Ethereum Co-founder

Collateralised debt position holders refers to DeFi users who have locked other crypto assets into a protocol’s smart contract in order to borrow stablecoins. Doing this allows users to borrow stablecoins against their other crypto assets without having to sell any assets.

Buterin said that algorithmic stablecoins backed by tokenised real-world assets (RWAs) could also improve the risk profile for end users if they’re correctly structured and significantly over-collateralised.

“Even if an algorithmic stablecoin is backed by RWAs, if it is overcollateralized and diversified to the extent that it would still be collateralized if any single RWA failed (ie. max share of any individual backing asset <= overcollateralization ratio), then that’s also still a meaningful improvement to the risk properties experienced by a holder,” Buterin said.

Buterin said that ideally the crypto industry should create DeFi models based on algorithmic stablecoins and then ultimately move away from the US dollar as a unit of account “toward some kind of more generalized diverse index.”

The Ethereum co-founder specifically called out current protocols that use centralised stablecoins to generate a yield as not fitting his vision of true DeFi, saying “of course, current ‘put USDC into Aave’ gadgets do not qualify under either of my categories.” 

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Buterin Lays out Roadmap for Better Stablecoins

Buterin’s call for wider use of algorithmic stablecoins in DeFi follows another X / Twitter post he made last month, laying out his vision of better decentralised stablecoins.

In the earlier post, the Ethereum co-founder said a new crop of improved decentralised stablecoins should include 3 keys features:

1. Value pegged to some new, as yet undefined index, rather than the US dollar (or any other national currency).
2. Decentralised “oracle design” that isn’t able to be controlled by a single large pool of money.
3. Measures that resolve the issues that arise from staking yield being a form of competition.

Buterin said that without implementing all three of these features, stablecoins will face issues associated with potential US dollar hyperinflation and will struggle to provide worthwhile yields to users in the longer term.

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He also noted that a stablecoin can’t be secured with a fixed amount of ETH collateral, as large drops in the value of ETH will necessitate significant rebalancing. Although he suggests there may be ways to partially ameliorate these issues by limiting yields until users “take some other action.”