Ethereum co-founder Vitalik Buterin has reignited debate in crypto by defending some algorithmic stablecoins as “genuine DeFi.” He argues that well-designed, overcollateralized stablecoins backed by assets like ETH can be truly decentralized, unlike many strategies built around centralized tokens.
Responding to criticism that most DeFi is “fake,” Buterin said algorithmic stablecoins qualify as real DeFi when they spread counterparty risk across market makers and smart contracts instead of a single company. In his view, simply depositing USDC into lending protocols for yield does not meet that standard.
Why Algorithmic Stablecoins Still Matter
Buterin believes the sector should not dismiss all algorithmic stablecoins because of past failures like TerraUSD. He has previously outlined tests for sustainable designs, including the ability to unwind safely and withstand a significant drop in demand without collapsing. Current comments build on that idea, focusing on overcollateralization and diversified collateral rather than reflexive “ponzi-like” models.
He now highlights ETH-backed and real-world-asset (RWA)- backed stablecoins that use high collateralization and diversification to absorb shocks. In these models, most liquidity can come from CDP (collateralized debt position) holders, while market makers absorb USD counterparty risk, which he calls a key feature.
DeFi, Centralized Stablecoins, and Risk
Buterin distinguishes clearly between centralized and decentralized methods. He claims that USDC-based yield methods that just park centralized stablecoins in DeFi apps are ineffective at eroding traditional intermediaries’ credibility. According to him, true DeFi must encourage self-custody and open access while reducing dependence on a single issuer.
At the same time, he warns that decentralized stablecoins face serious technical risks. He points to three big challenges: dependence on the U.S. dollar as a unit of account, oracle vulnerabilities, and tricky staking-yield trade-offs. He argues that stablecoins must adapt their collateral during stress, secure their oracles, and manage yield without hiding additional risk from users.
Buterin’s stance suggests he wants DeFi to move beyond dollar-pegged systems toward diversified indices and new units of account. He sees decentralized, overcollateralized stablecoins as core infrastructure for that future, not just speculative tools.
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