Ethereum co-founder Vitalik Buterin drew a transparent line at what he sees as “real” decentralized finance (DeFi), pushing back against yield-focused stablecoin strategies that he says don’t meaningfully transform risk.
In a discussion about
Buterin's comments come amid re-examination of DeFi's prevailing use cases, particularly in credit markets based on fiat-backed stablecoins similar to USDC (USDC).
While he didn't name specific protocols, Buterin took aim at products he dubbed “USDC yield,” saying they rely heavily on centralized issuers while offering little reduction in issuer or counterparty risk.
Source: Vitalik Buterin
Two stablecoin paths are described
Buterin outlined two paths that he believes are more aligned with the unique ethos of DeFi: an algorithmic stablecoin backed by Ether (ETH) and an overcollateralized algorithmic stablecoin backed by real-world assets (RWA).
Regarding an ETH-backed algorithmic stablecoin, he said that even when the vast majority of a stablecoin's liquidity comes from users minting the token by borrowing against crypto collateral, the important thing innovation is that risk will be shifted to markets relatively than a single issuer.
“The proven fact that you’ve got the power to transfer the dollar's counterparty risk to a market maker remains to be an enormous feature,” he said.
Buterin said stablecoins backed by RWAs could still improve risk outcomes if structured conservatively.
He said if such a stablecoin was sufficiently overcollateralized and diversified in order that the failure of a single collateral asset wouldn’t break the peg, the chance to holders would still be significantly reduced.
USDC dominates DeFi lending
Buterin’s comments come at a time when credit markets across Ethereum remain heavily focused on USDC.
According to protocol dashboard data, Aave's most important Ethereum stake currently has greater than $4.1 billion value of USDC deployed out of a complete market volume of about $36.4 billion, with about $2.77 billion borrowed.
USDC reserve status and configuration. Source: Aave
An identical pattern is obvious at Morpho, which optimizes lending on Aave and Compound-based markets.
In Morpho's credit markets, three of the five largest markets by size are denominated in USDC, typically backed by collateral similar to wrapped Bitcoin or Ether. The largest lending market is issuing USDC loans and has a market size of $510 million.
On Compound, USDC stays one among the protocol's most used assets, with roughly $382 million of assets generating income and $281 million being borrowed. This is supported by roughly $536 million in collateral.
Cointelegraph has reached out to Aave, Morpho and Compound for comment. Aave and Morpho confirmed the request, while Compound didn’t respond via publication.
Buterin's call for decentralized stablecoins
Buterin's criticism does in a roundabout way reject stablecoins, but relatively asks whether today's dominant lending models enable the decentralization of risk that DeFi guarantees.
The comments also construct on previous criticisms he has made concerning the structure of today's stablecoin market.
On January 12, he argued that Ethereum needs more resilient decentralized stablecoins and warned against designs that rely too heavily on centralized issuers and a single fiat currency.
At the time, he said stablecoins should give you the option to weather long-term macroeconomic risks, including currency instability and sovereign defaults, while remaining proof against oracle manipulation and protocol errors.
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