Ethereum Needs Better Decentralized Stablecoins: Vitalik Buterin

Ethereum co-founder Vitalik Buterin has highlighted the need for better decentralized stablecoins to address long-term structural issues. He emphasized that current systems rely on fragile assumptions and are heavily tied to the U.S. dollar. In a recent post, Buterin outlined three core problems: the need for a more resilient reference index, the risk of oracle capture, and the competition between staking yields and stablecoin returns according to analysis.

The reliance on the U.S. dollar is a short-term solution, Buterin argues, as it does not account for long-term macroeconomic risks like inflation or currency debasement. He suggested that stablecoins should aim to track broader price indexes.

Oracle design is another major challenge. Buterin stated that current oracle systems are vulnerable to manipulation by large capital pools. This forces protocols to extract more value from users to remain secure, which he described as inefficient and harmful.

Staking yield introduces further economic tension. When stablecoins are backed by staked ether, users face a trade-off: staking yield competes with the returns that could be earned from stablecoin usage. This creates suboptimal return rates for stablecoin users.

Buterin proposed three potential solutions to address the staking yield issue. These include reducing staking yields to near-zero levels, creating new staking categories with reduced slashing risks, or making slashable staking compatible with collateral usage. However, each approach has its trade-offs.

Slashing risk is a concern in Ethereum-based systems. Validators can be penalized for inactivity or for participating in network censorship conflicts. This risk can reduce the value of staked collateral, making it a risky foundation for stablecoins.

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