Ethereum co-founder Vitalik Buterin has drawn a clear line around what he considers “true” decentralized finance (DeFi), opposing yield-based stablecoin strategies that he believes do not significantly change risk.
In the discussion about X Buterin he said that DeFi derives its value from changing the way risk is allocated and managed, rather than simply generating profit from centralized assets.
Buterin’s comments come after a renewed look at DeFi’s dominant employ cases, particularly in credit markets built around fiat-backed stablecoins like USDC (USDC).
While he didn’t name specific protocols, Buterin focused on what he called “USDC income” products, saying they are highly reliant on centralized issuers while offering little reduction in issuer or counterparty risk.
Two stablecoin paths have been outlined
Buterin outlined two paths that he sees as more consistent with the original DeFi ethos: an algorithmic stablecoin based on Ether (ETH) and an algorithmic stablecoin based on real-world assets (RWA) that is overcollateralized.
In the case of the ETH-backed algorithmic stablecoin, he said that even though most of the stablecoin’s liquidity comes from users who mint the token by borrowing against crypto collateral, the key innovation is that risk can be transferred to markets rather than to a single issuer.
“The fact that you have the ability to transfer counterparty risk in dollars to the market maker is still an important feature,” he said.
Buterin said RWA-backed stablecoins could still improve risk scores if structured conservatively.
He said that if such a stablecoin is sufficiently overcollateralized and diversified so that the failure of a single backing asset does not break the link, the risk its holders face would still be significantly reduced.
USDC dominates DeFi lending
Buterin’s comments land as Ethereum’s lending markets remain largely focused on USDC.
On the main Ethereum Aave applicationcurrently sources over $4.1 billion in USDC out of a total market size of approximately $36.4 billion, with loans of approximately $2.77 billion, According to to the protocol panel data.
Similar pattern appears on Morpho, which optimizes lending on Aave and Compound-based marketplaces.
In Morpho’s lending markets, three of the five largest markets by volume are denominated in USDC and typically backed by collateral such as wrapped Bitcoin or Ether. The largest lending market is USDC lending, with a size of $510 million.
On Compound, USDC remains one of the protocol’s most widely used assets, with approximately $382 million in asset income and $281 million in loans. This is backed by approximately $536 million in collateral.
Cointelegraph has reached out to Aave, Morpho and Compound for comment. Aave and Morpho confirmed the inquiry, while Compound did not respond via publication.
Related: CFTC Expands Stablecoin Payment Criteria to Include National Custodian Banks
Buterin’s call for decentralized stablecoins
Buterin’s critique does not completely dismiss stablecoins, but it does question whether today’s dominant lending models deliver the risk decentralization that DeFi promises.
The comments also build on previous criticism he has made about the structure of today’s stablecoin market.
On January 12, he argued that Ethereum needs more resilient decentralized stablecoins, warning against projects that rely too heavily on centralized issuers and a single fiat currency.
He said then that stablecoins should be able to weather long-term macro risks, including currency instability and sovereign failures, while remaining resistant to oracle manipulation and protocol errors.
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