Vitalik Buterin, Ethereum co-founder, floated a novel framework for developing synthetic assets and algorithmic stablecoins that could potentially eliminate forced liquidations. As a result, it will also drastically reduce the reliance on real-time oracle data.
Buterin pushes for less reliance on oracle data
In a recent post published on the Ethereum research forum, Buterin highlighted that the major risk associated with the existing algorithmic stablecoin designs is their dependence on real-time oracle feeds.
For the uninitiated, real-time oracle feeds are systems that continuously supply up-to-date external data (like prices) to blockchain applications so smart contracts can react instantly to market changes. They are critical for DeFi, because they help trigger actions like liquidations or settlements based on the latest available information.
Algorithmic stablecoins like Ampleforth are dependent on them since they provide the latest price data that the protocol uses to decide when and how to adjust supply. Without accurate real-time pricing, the system could react too slowly or incorrectly, leading to instability or misaligned supply changes.
It is this potential point of failure that Buterin alluded to, saying that these pain points are technically difficult to secure and challenging to protect against oracle manipulation. The Ethereum co-founder’s proposed solution involves taking out liquidations entirely.
Options-based, liquidation-free stablecoin design
Buterin stated that his proposed solution would split one unit of ETH into 2 separate assets – a protected position and a leveraged position. Both these positions will be tied to a pre-determined strike price and maturity date.
When the asset matures, an oracle would resolve the index value and distribute the ETH between the two holders based on a fixed formula. Since the two positions will always equal one unit of ETH, it will remove the insolvency risk associated with undercollateralized debt positions.
The result of such a mechanism will be that it will help overcome instant, sharp liquidation events. Instead, a user’s exposure to the underlying index will move quadratically – in a curved, non-linear way – as the price moves closer to the strike price.
According to Buterin, the tradeoff is fair since the user must actively rebalance positions before maturity to maintain their desired exposure.
He added that the deviation from strike price is more manageable than it appears, since fiat currencies like USD, GBP, EUR, JPY themselves move by more against each other.
Perhaps the biggest advantage of the framework Buterin proposed is that it will work on the so-called “slow oracles” that are typically used by prediction markets that allow enough room for contesting disputes, and human recourse in the event of manipulation.
Meanwhile, Ethereum developers continue burning the midnight oil as the protocol seeks to implement new improvement proposals. On May 25, Tom Lehman, co-founder of Ethereum layer-2 network Facet floated the idea of including EIP-8182 in the upcoming Hegota upgrade.