Ethereum’s Vitalik Says Algorithmic Stablecoins Are “True DeFi”: Here’s Why

• Vitalik says ETH-backed algorithmic stablecoins shift USD counterparty risk to market makers effectively.
• RWA-backed stablecoins qualify as DeFi if overcollateralized and diversified against single asset failure.
• Buterin proposes moving from dollar-pegged coins to broader indices as the ultimate unit of account goal.

Vitalik Buterin has weighed in on what qualifies as “true DeFi.” The Ethereum co-founder made his stance clear during a recent exchange on social media. 

He argued that algorithmic stablecoins deserve recognition as genuine decentralized finance. His comments came in response to claims that DeFi only serves crypto holders seeking self-custody.

The debate started when a crypto commentator suggested most DeFi applications are “cargo cults.” They claimed USDC yield farming doesn’t qualify as real DeFi. 

Buterin responded by defending algorithmic stablecoins as the authentic alternative.

ETH-Collateralized Stablecoins Shift Counterparty Risk

Buterin explained why ETH-backed algorithmic stablecoins matter. 

Even if 99% of liquidity comes from CDP holders, the system offers unique benefits. These holders might maintain negative algorithmic dollar positions while holding regular dollars elsewhere. However, the ability to transfer counterparty risk to market makers remains valuable.

This design shifts dollar-related risks away from end users. Market makers absorb the exposure instead. Buterin described this feature as significant for genuine decentralization. 

The mechanism preserves self-custody while providing financial services.

RWA-Backed Models Can Work With Proper Design

The Ethereum founder also addressed real-world asset-backed stablecoins. These can function as legitimate DeFi if designed correctly. 

Overcollateralization becomes essential in this model. Diversification matters just as much.

Buterin set specific criteria for RWA-backed systems. Any individual asset should represent less than the overcollateralization ratio. This ensures the stablecoin remains collateralized even if one asset fails. Such a design improves risk properties for holders.

He positioned this approach as a backup option. ETH-collateralized designs should take priority. RWA models serve as the fallback alternative.

Moving Beyond USD as Unit of Account

Buterin outlined a development roadmap for stablecoins. 

The immediate focus should be on ETH-collateralized algorithmic designs. Diversified RWA models come next in priority. Both represent improvements over centralized alternatives.

The long-term vision extends further. Buterin suggested moving away from the dollar entirely. He proposed shifting toward broader, diversified indices as units of account. This represents the final evolution in his outlined progression.

Current DeFi products didn’t escape criticism. Buterin noted that “put USDC into Aave” mechanisms fail both criteria. These gadgets rely on centralized stablecoins. They don’t offer the risk mitigation that algorithmic designs provide.

The Future of Decentralized Stablecoins

The conversation highlights ongoing debates about DeFi’s purpose.

Some argue it primarily serves crypto holders wanting self-custody. Others see broader potential for financial innovation. Buterin’s position firmly supports the latter camp.

His framework creates clear standards for evaluating stablecoin projects. Decentralization, overcollateralization, and diversification serve as key metrics. These factors determine whether a project qualifies as genuine DeFi.

The Ethereum co-founder’s comments may influence future development priorities. Teams building stablecoins now have guidance from one of crypto’s most respected voices. Whether the industry follows this roadmap remains to be seen.