Vitalik Buterin called for replacing DeFi's automatic liquidation systems with options-based assets in a research post published Monday. The proposal follows Tuesday's Bitcoin flash crash that triggered $394 million in liquidations within one hour.
Tuesday's Liquidation Surge
Bitcoin fell below $68,000 on June 2. That single-hour drop forced $394 million in liquidations across decentralized protocols. Ethereum positions made up $87 million of that total as health factors dropped below critical thresholds.
How the New Design Would Work
Buterin's model splits Ethereum collateral claims into two option-like assets: P for positive exposure and N for negative. This avoids hard liquidation triggers by tracking synthetic indexes. The system replaces immediate position closures when health factors fall below 1.
Proof of Market Instability
An OECD working paper last year confirmed liquidation events increase post-crash volatility. The study found this pattern consistently across major DEX pools. Tuesday's crash showed the same volatility spike after forced closures began.
Prior Oracle Failures
The current system's fragility emerged before. A 2025 Chainlink oracle dispute liquidated over $500,000 on Euler Finance due to misinterpreted price data. That same year, nearly $320 million in Ethereum loans approached liquidation during a sharp price drop, mostly in MakerDAO and Compound.
DeFi developers will now examine Buterin's proposal on the Ethereum Research forum. The discussion could shape whether protocols adopt indexed solutions to prevent next month's volatility.
