Buterin Proposes Slow-Moving Liquidation Mechanism for DeFi

Vitalik Buterin has proposed an alternative to DeFi's automatic liquidation mechanism in a recent Ethereum Research post. The current system closes debt-backed positions when collateral falls below the required backing, but this can lead to concentrated action at the worst possible moment and concentrate risk in illiquid markets.

Buterin suggests replacing this with a slower form of risk, where users' exposure drifts away from the target unless they rebalance their position. This approach would remove the hard liquidation trigger from the base design and instead use synthetic, index-tracking assets on top of options.

The key property of Buterin's proposal is that it avoids seizing collateral from borrowers to close a deficit. Instead, users can hold onto their claims even if the price moves against them, but they will gradually lose the exactness of their hedge.

This design keeps risk in the system and changes who controls the timing and what form the damage takes. It also shifts the focus away from collateral buffers and faster price feeds to a more fundamental design choice: whether instant liquidation should remain DeFi's central means of surviving a crash.