Circle Core

P(x) + N(x) = 1 ETH

A protocol for holding dollar exposure without liquidation risk.

[Circle Core @circlecoreeth]

@VitalikButerin This is exactly why we chose the options-backed architecture for @circlecoreeth.

By treating stability as a settlement-based option (P + N = 1 ETH) rather than a debt-based CDP, we’ve decoupled the security of the protocol from the volatility of the index.

[Circle Core @circlecoreeth]

Vitalik posted an idea about building synthetic exposure on top of options instead of debt, so that liquidations stop existing as a concept. The shape of it is simple. You split 1 ETH into two tokens, P and N, parameterised by a strike S and a maturity M, and at settlement they always add back to exactly 1 ETH no matter where the price went, which means there's nothing the protocol could be forced to pay out that it isn't already holding, and nothing to liquidate.

The mechanics are straight from the post. You deposit 1 ETH into a series, you receive one cP and one cN, and at maturity an oracle reports the price x. cP pays you min(1, S/x) ETH per unit, cN pays max(0, 1 - S/x), and the two sides always sum to 1, so the protocol can't run insolvent regardless of how ugly the price action got. Holding a deep in-the-money cP gives you approximately stable USD-equivalent exposure denominated in ETH, with no CDP, no margin call, and no bot deciding when you exit.

The oracle is where every previous attempt at this kind of thing has fallen over, so we leaned hard into the slow-oracle approach Vitalik described instead of trying to invent something cleverer. There's no real-time feed and no Chainlink dependency at settlement. At maturity anyone posts a proposed price with a bond, a 24-hour challenge window opens, anyone else can submit a counter-claim with their own bond, and a guardian role resolves the rounds that get contested. The whole point is to make manipulating the settlement price expensive and reviewable instead of cheap and instant, which is the entire reason for moving off real-time oracles in the first place.

The tradeoff he flagged is real and we're not pretending it isn't. Stable-exposure positions experience a 1 to 4 percent annualised drift versus their target depending on volatility, and if ETH moves a lot you have to actively rotate into a lower strike rather than wait for an automatic system to do it for you. That cost is what buys you the absence of liquidation risk, and anyone who has actually held dollar-equivalent exposure in DeFi for more than a week at a time will probably recognise it as a good trade.

[vitalik.eth @VitalikButerin]

Building index-tracking assets on top of options instead of debt

https://t.co/gFNEvCbHct

What if the use options as the base of defi, instead of CDPs and liquidations? So instead of extreme price movements creating a sharp and global "you get liquidated" effect, instead your exposure to the index diverges quadratically from your preferred exposure in a smoother way?

A key benefit is getting rid of the need for instant oracles, and instead making everything work on top of "slow oracles" (ie. the type that prediction markets use)

This design has a significant downside - the need to do regular rebalancing - and an open question of whether and how this rebalancing can be made slippage-resistant enough. But it's worth considering and trying IMO. I would feel much safer holding algostables inside something like this, than in something that depends on an oracle that has to give real-time answers (and therefore could be tricked into giving wrong real-time answers with no time for human recourse).