coindesk.com
Ethereum co-founder Vitalik Buterin says the crypto industry has not yet solved some of the most basic design problems behind truly decentralized stablecoins, arguing that many existing systems rely on fragile assumptions that could break down over time.
In a post published on X on Sunday, Buterin laid out what he described as three core challenges that remain unresolved. Rather than promoting a specific project or proposing a new stablecoin, he framed the post as a critique of how decentralized stablecoins are currently designed and why those designs may not hold up over the long term.
At the most basic level, stablecoins are cryptocurrencies designed to maintain a stable value, typically by pegging to the U.S. dollar. While some stablecoins are issued by centralized companies that hold dollars or dollar-equivalent assets, decentralized stablecoins aim to maintain stability through code, collateral and market incentives, rather than relying on a single issuer.
Buterin’s first concern was that most decentralized stablecoins still depend on the U.S. dollar as their reference point. While he acknowledged that tracking the dollar makes sense in the short term, he argued that systems meant to be resilient to political or economic shocks should not be tied indefinitely to a single national currency. Over long time horizons, he wrote, even moderate inflation could erode the usefulness of a dollar peg. Buterin suggested that future stablecoins might instead track broader price indexes or measures of purchasing power, rather than the dollar alone.
The second issue Buterin highlighted involved oracles — the mechanisms that supply blockchains with real-world data such as asset prices. Because blockchains cannot access external information directly, they rely on oracles to report prices used by smart contracts. According to Buterin, if an oracle can be manipulated by someone with enough capital, the entire system becomes vulnerable.
He argued that when oracles are weak, protocols are forced to defend themselves economically rather than technically. In practice, that means designing systems where the cost of attacking the oracle exceeds the total value of the protocol. Buterin said this often requires extracting significant value from users through fees, inflation or governance control. He tied this dynamic to his long-standing criticism of “financialized governance,” arguing that systems governed primarily by token ownership lack natural defensive advantages and instead rely on making attacks too expensive to attempt.
The third problem Buterin discussed was staking yield, which he described as a hidden source of tension for decentralized stablecoins. On Ethereum, staking involves locking up ether to help secure the network in exchange for yield. But when stablecoins are backed by staked ether, users face an implicit trade-off: the staking yield earned by the collateral competes with the returns stablecoin users could otherwise earn.
According to Buterin, this creates a situation where stablecoin holders are effectively accepting lower returns, which he described as a suboptimal outcome.
To illustrate the difficulty of resolving this, he outlined three broad theoretical approaches. One would involve reducing staking returns to very low levels. Another would involve creating a new form of staking that offers yield without the same risks. A third would involve passing some of the risks of staking onto stablecoin users themselves. Buterin emphasized that these were not proposals, but examples of the limited solution space.
A key risk Buterin returned to repeatedly was slashing. Slashing refers to penalties imposed on validators — participants who help secure the Ethereum network — if they behave incorrectly or fail to remain online. Buterin stressed that slashing risk is often misunderstood. It does not only apply to deliberate wrongdoing, he wrote, but also to situations where validators are offline for extended periods or end up on the losing side of a network-wide censorship conflict. These penalties can reduce the value of staked collateral, making it a risky foundation for stablecoins.
Finally, Buterin argued that decentralized stablecoins cannot rely on fixed collateral levels. In periods of sharp market declines, he wrote, systems must be able to rebalance dynamically to remain solvent. Without mechanisms to adjust collateral in real-time, stablecoins risk breaking their pegs during periods of extreme volatility.