Hassan Maishera
TL;DR
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Ethereum co-founder Vitalik Buterin said decentralized stablecoins remain fragile despite years of development.
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Buterin argued that the reliance on the U.S. dollar, vulnerable price feeds, and staking yields creates long-term risks.
Buterin Warns of Risks Associated with Decentralized Stablecoins
Ethereum co-founder Vitalik Buterin has warned that the cryptocurrency industry has not yet solved some of the most basic design problems behind truly decentralized stablecoins.
According to Buterin, several existing systems rely on fragile assumptions that could break down over time.
In his X post on Sunday, the Ethereum co-founder pointed out what he described as three core challenges that remain unresolved.
He argued that at the most basic level, stablecoins are cryptocurrencies designed to maintain a stable value, typically by pegging to the U.S. dollar. His primary concern is that most decentralized stablecoins still depend on the U.S. dollar as their reference point.
Buterin pointed out that while tracking the dollar makes sense in the short term, the systems meant to be resilient to political or economic shocks should not be tied indefinitely to a single national currency.
In the long run, even moderate inflation could erode the usefulness of a dollar peg. To address this issue, Buterin suggests that future stablecoins should consider tracking broader price indexes or measures of purchasing power, rather than the dollar alone.
The second issue the Ethereum co-founder highlighted involved Oracles. Oracles are a crucial part of the blockchain ecosystem as they report prices used by smart contracts. Buterin argued that if an oracle can be manipulated by someone with enough capital, the entire system becomes vulnerable.
He added that when oracles are weak, protocols are forced to defend themselves economically rather than technically. Buterin pointed out that their mechanism means that when designing the systems, the cost of attacking the oracle exceeds the total value of the protocol. This design usually requires extracting significant value from users through fees, inflation, or governance control.
Buterin argued that systems governed primarily by token ownership lack natural defensive advantages and instead rely on making attacks too expensive to attempt.
The final problem he discussed in his post was on staking yield. According to Buterin, staking yield is a source of tension for decentralized stablecoins. He argued that staking yield creates a situation where stablecoin holders are effectively accepting lower returns, which he described as a suboptimal outcome.
Buterin Outlines Solutions to Solve the Three Key Problems
To address these issues, Buterin outlined three broad theoretical approaches. The first one involved reducing staking returns to very low levels. The second would see the creation of a new form of staking that offers yield without the same risks.
Finally, the third would involve passing some of the risks of staking onto stablecoin users themselves. He added that these theories were not proposals but examples of the limited solution space.
Buterin added that,
“If you're going to try to reason through this in detail, remember that the "slashing risk" to guard against is *both* self-contradiction, *and* being on the wrong side of an inactivity leak, ie, engaging in a 51% censorship attack. In general, we think too much about the former and not enough about the latter. Also, remember that a stablecoin cannot be secured with a fixed amount of ETH collateral; in the event of large drops, you need to be able to handle rebalancing (though of course, you could choose to partially drop this goal cleverly, eg, if ETH price moves too much, you stop earning staking yield until you take some other action)."
Buterin concluded that decentralized stablecoins cannot rely on fixed collateral levels. He pointed out that in periods of sharp market decline, systems must be able to rebalance dynamically to remain solvent.
However, without mechanisms to adjust collateral in real-time, stablecoins risk breaking their pegs during periods of extreme volatility.
