The comments come as the USD-pegged stablecoin market approaches $300 billion, with centralized issuers Tether and Circle controlling the vast majority of supply.
Ethereum co-founder Vitalik Buterin said the crypto industry needs better decentralized stablecoins, identifying three core problems that remain unaddressed.
“We need better decentralized stablecoins,” Buterin wrote in a post on X on Sunday. “[In my opinion there are] three problems: 1. Ideally figure out an index to track that’s better than USD price 2. Oracle design that’s decentralized and is not capturable with a large pool of money 3. Solve the problem that staking yield is competition.”
On the first point, Buterin argued that dollar-pegged stablecoins may not be sustainable over longer time horizons. “Tracking USD is fine short term, but [in my opinion] part of the vision of nation state resilience should be independence even from that price ticker,” he wrote. “On a 20 year timeline, well, what if it hyperinflates, even moderately?”
On oracles, he warned that without capture-resistant designs, protocols face a painful trade-off: “you have to ensure cost of capture > protocol token market cap, which in turn implies protocol value extraction > discount rate, which is quite bad for users.”
This dynamic, he added, is “a big part of why I constantly rail against financialized governance btw: it inherently has no defense/offense asymmetry, and so high levels of extraction are the only way to be stable.”
In the past, decentralized stablecoins such as Terra USD have offered high yields (nearly 20% through the Anchor Protocol, in Terra’s case) that proved unsustainable long-term. Terraform Labs founder Do Kwon was sentenced to 15 years in prison last month over his role in the $40 billion collapse of the Terra-Luna protocol.
For the staking yield problem, Buterin enumerated possible solutions, like reducing staking yields to “like 0.2%, basically hobbyist level,” creating a new staking category without slashing risk, or making slashable staking compatible with collateral use, but he cautioned these ideas should be treated “as enumeration of the solution space, not endorsement.”
The challenges Buterin describes have proven difficult in practice. Reflexer’s RAI, an ETH-backed stablecoin not pegged to fiat, embodies the design philosophy Buterin has praised — he once called it the “pure ideal type of a collateralized automated stablecoin.” But Buterin also shorted RAI in a seven-month trade that netted him $92,000, and Reflexer co-founder Ameen Soleimani used that trade to argue the protocol’s design was flawed. “ETH-only RAI was a mistake,” Soleimani said, because holders miss out on staking yields available on the underlying collateral, precisely the problem Buterin now highlights.
Decentralized stablecoins remain a small fraction of the broader market. The USD-pegged stablecoin sector now exceeds $291 billion, with Tether’s USDT commanding roughly 56% market share, per The Block’s data. Ethena’s USDe, MakerDAO’s DAI, and Sky Protocol’s USDS (the upgraded and rebranded version of DAI) each have between 3% and 4% of the overall market share. Newer entrants continue to attract capital, with Binance and Kraken leading a $10 million round into Usual in late 2024, but centralized issuers remain dominant.
Buterin’s comments came in response to a post calling Ethereum a “contrarian bet” against VC-favored trends like custodial stablecoins and crypto neobanks. The remarks echo his New Year’s message urging developers to build applications that are “actually decentralized.”
Meanwhile, regulatory clarity is taking shape around centralized stablecoins. The GENIUS Act, passed last year, established the first U.S. framework for payment stablecoins. Venture firm a16z crypto has urged U.S. Treasury officials to clarify that decentralized stablecoins issued through autonomous smart contracts fall outside the law’s scope.
