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Ethereum founder Vitalik Buterin has drawn clear boundaries around what he considers “true” decentralized finance (DeFi), pushing back against commodity-based stablecoin strategies that he says fail to meaningfully transform risk.
In his talk on X, Buterin said that DeFi gains not only from generating revenue on centralized assets, but also from changing how risk is allocated and managed.
Buterin's comments come amid renewed scrutiny of Defi's core use cases, particularly in lending markets built around fiat-backed stablecoins such as the USDC.
While not specifying specific protocols, Buterin took aim at what he described as a “USDC product,” which he said relied heavily on central issuers while offering little discount on issuer or counterparty risk.
Two stable coin paths are listed.
Buterin outlines two approaches that he believes are more in line with Diffie's original ethos: Ether (ETH)-backed algorithmic stablecoins and real-world asset (RWA)-backed algorithmic stablecoins are overpowered.
In the ETH-backed algorithmic stable coin, he said that although most of the stable coin's liquidity comes from users who create the token by borrowing against crypto collateral, the main innovation risk may shift to markets rather than a single issuer.
“Your ability to put the risk on the dollar to the market maker is still a big feature,” he said.
Buterin said stablecoins backed by RWAs could improve risk outcomes if they were still structured conservatively.
If such a stable coin is sufficiently inflated and diversified so that the collapse of a single underlying asset does not break the peg, the risk to holders is still meaningfully reduced, he said.
USDC regulates DeFi lending
Buterin's comments remain focused on the USD as the entire Ethereum credit markets land.
On Aave's main Ethereum deployment, USDC, worth more than $4.1 billion, represents about $36.4 billion of the total market capitalization, with about $2.77 billion borrowed, according to data from Protocol Dashboard.
A similar pattern is seen in Morpho, which facilitates lending on Aave and Compound-based markets.
In the morpho credit markets, three of the five largest markets by size are denominated in USDC, typically backed by securities such as wrapped Bitcoin or Ether. The largest loan market lends USDC and the market size is 510 million dollars.
On compound, USDC remains one of the protocol's most leveraged assets, with nearly $382 million in leveraged assets and $281 million in leveraged assets. This is backed by approximately $536 million in guarantees.
Cointelegraph reached out to Ave, Morpho and Compound for comment. Ave and Morpho acknowledged the request, but Compound did not respond in print.
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Buterin's call is a decentralized stable coin
Buterin's critique rejects stablecoins, but today's mainstream lending models question the decentralization of risk that DeFi promises.
His comments also build on his earlier criticisms of today's stablecoin market structure.
On January 12, Ethereum argued for stronger decentralized stablecoins, warning against designs too dependent on centralized issuers and a single fiat currency.
At that point, stablecoins should be able to survive long-term macro risks, including financial instability and state-level failures, while being resilient to fraud and protocol errors, he said.
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