Vitalik Buterin Highlights Three Core Flaws in Decentralized Stablecoins

In Brief

• Buterin warns stablecoins relying on USD pegs may fail under long-term inflation.
• Oracle manipulation risks force protocols to rely on costly economic defenses.
• Staking yield conflicts reduce stablecoin returns and compromise system usability.

Vitalik Buterin has outlined three key design flaws that still weaken decentralized stablecoins. These include price benchmarks, oracle security, and staking yield conflicts, all of which carry long-term implications.

He argued that relying on the U.S. dollar as a peg limits stability in the face of inflation and geopolitical shifts. Thus, he believes future stablecoins must explore new reference indexes based on purchasing power or broader asset baskets.

Oracles and staking create deeper system vulnerabilities

Buterin pointed out that decentralized stablecoins depend on oracles, which are often vulnerable to manipulation if well-funded actors intervene. As a result, systems become reliant on economic deterrents, leading to high costs for users through inflation or fees.

He warned that protocols relying on financialized governance must extract value to survive attacks, which damages user trust and long-term sustainability. Additionally, this model offers no inherent defense, pushing protocols to prioritize profit over resilience.

Moreover, he emphasized that staking yield competes directly with the stablecoin’s utility and user returns. If stablecoins are backed by staked collateral, yield expectations conflict with risk and usability as collateral.

To address this issue, he outlined three approaches: reduce staking returns, introduce lower-risk staking models, or pass slashing risks to users. Each of these comes with trade-offs that limit the effectiveness of current stablecoin models.

He also noted that slashing includes both malicious actions and extended inactivity, increasing collateral risk even without validator misconduct. Therefore, stablecoins backed by staked assets must be able to handle volatility without losing user trust.

Buterin concluded that fixed collateral levels are not sufficient during major price shifts and rebalancing mechanisms are essential. Without dynamic adjustments, decentralized stablecoins will continue to face solvency risks during market crashes.