Ethereum creator Vitalik Buterin published a research post proposing a redesign of how synthetic assets and algorithmic stablecoins work in an effort to replace debt and liquidations in DeFi with options as the base primitive. Vitalik highlights the issues with Collateral Debt Position (CDP) systems, which require real-time oracles to trigger liquidations. Oracles are the weakest link. All it takes is one bad price feed to trigger cascading liquidations.

Instead of debt positions that get liquidated, users could split ETH into two assets long exposure and short exposure assets tied to a strike price and maturity date. At maturity, an oracle resolves and each side gets its share. Because both assets always equals 1 ETH, liquidation becomes mathematically impossible.

In the proposed design, the system can use the same long-delay oracles that prediction markets use. The tradeoff, however, is a need for regular rebalancing, and slippage costs across repeated rebalances. Vitalik concluded that the design makes more sense when the goal is price stability rather than a perfect USD peg.

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