- Vitalik Buterin identifies three main structural issues in decentralised stablecoins: USD dependence, vulnerable oracles, and destabilising staking yields.
- Past failures, such as the US$40 billion (AU$60.4 billion) TerraUSD collapse, highlight the risks of high yields and weak governance.
- Decentralised stablecoins remain a minor share of the market, with centralised options like Tether dominating the US$291 billion (AU$439 billion) sector.
Ethereum co-founder Vitalik Buterin has emphasised the need for improved decentralised stablecoins, highlighting structural weaknesses that have persisted in the crypto sector. He identified three main challenges: overreliance on the US dollar, oracle designs vulnerable to capture, and competition created by staking yields.
Buterin argued that pegging stablecoins to the dollar may be viable in the short term, but over decades it could pose risks, including moderate hyperinflation. He suggested that a truly resilient stablecoin system might require independence from fiat currencies entirely.
Oracles, which provide external data to blockchain protocols, are another concern. Without designs resistant to manipulation, protocols face trade-offs between security and high fees, often forcing users into systems that extract excessive value. Buterin described this as a “dead end,” noting that financial governance models often offer no asymmetry between attack and defence, making extraction the primary stabilising force.
The issue of staking yields compounds these challenges. High returns on coin lock-ups can destabilise stablecoins, as seen in TerraUSD’s collapse, which cost US$40 billion (AU$60.4 billion) when Terraform Labs failed. Buterin proposed several approaches to address this, such as lowering staking yields to hobbyist levels around 0.2%, creating alternative staking categories without slashing risk, or combining slashable staking with collateral use.
Related: Vitalik Buterin: Ethereum DApps Can Shield Internet From Outages and Centralised Failures
Centralised vs Decentralised Stablecoins
Decentralised stablecoins remain a small segment of the market. USD-pegged options dominate, with Tether’s USDT controlling roughly 56% of the US$291 billion (AU$439 billion) supply, while MakerDAO’s DAI, Ethena’s USDe, and Sky Protocol’s USDS each hold 3–4%.
Buterin’s insights highlight the ongoing challenge of developing decentralised stablecoins that combine security with long-term viability, emphasising the importance of prioritising resilience and decentralisation over short-term gains.
Related: Tether CEO Warns AI Bubble Could Jolt Bitcoin by 2026
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