V God: Algorithmic stablecoins are the true DeFi! Calls for protocols to de-dollarize and embrace diversified indices
Vitalik argues that algorithmic stablecoins are the true DeFi, emphasizing the need for risk transfer and decentralization mechanisms. He calls on protocols to reduce reliance on centralized stablecoins like USDC and shift towards a multi-index de-dollarization model.
V God: Algorithmic Stablecoins Are the True DeFi
Ethereum co-founder Vitalik Buterin posted on February 9th in response to a claim that the purpose of DeFi is merely for investors to hold long positions in cryptocurrencies under self-custody.
Vitalik counters by asserting that “algorithmic stablecoins” are the real DeFi, and he lists specific criteria for this.
Two Major Risk Transfer Features for True DeFi
What kind of algorithmic stablecoin qualifies as true DeFi? Vitalik proposes two standards:
- First, for Ethereum-collateralized algorithmic stablecoins, even if up to 99% of liquidity is supported by collateral providers, and these providers hold fiat off-chain, as long as the protocol has the ability to transfer “counterparty risk to USD” to market makers, it remains a significant advantage.
- Additionally, if the algorithmic stablecoin is backed by real-world assets (RWA), it must have sufficient over-collateralization and decentralization mechanisms. The maximum proportion of a single supporting asset must be below the over-collateralization rate, ensuring that even if one asset defaults, the overall system does not fall into under-collateralization, greatly improving the risk profile faced by token holders.
Mainstream DeFi Relies on USDC, USDT Liquidity, Not a Long-term Solution
Vitalik bluntly states that the current mainstream DeFi operations, such as depositing USDC into Aave and similar services, do not meet his standards for true DeFi.
He further calls for DeFi protocols to gradually move away from using the US dollar as the sole pricing unit, adopting more universal multi-diversified indices instead.
Image source: X V God: Algorithmic Stablecoins Are the True DeFi, Must Have Two Major Risk Transfer Features
Many DeFi protocols, although claiming decentralization, are actually heavily reliant on fiat-backed stablecoins issued by centralized entities like USDC or USDT as liquidity sources, which makes it difficult for DeFi to truly escape centralized control.
Wintermute Founder: Stablecoins Have Not Yet Brought True Transformation
Crypto market maker Wintermute founder Evgeny Gaevoy recently criticized the current market situation. He believes that the development of stablecoins is only a victory for niche markets and has not fundamentally changed the nature of the financial system.
Gaevoy points out that the current state is merely replacing one set of centralized intermediaries with another smaller, slightly more efficient set, without achieving true decentralization.
He also laments that, as institutions enter the space, the crypto punk spirit emphasizing privacy and freedom has been gradually overwhelmed by corporate-controlled culture, and he considers Vitalik Buterin the only current thought leader still holding onto the original ideals.
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