Vitalik Buterin Backs Algorithmic Stablecoins as Genuine DeFi

Ethereum co-founder Vitalik Buterin has reignited debate across the crypto market by defending algorithmic stablecoins as “genuine DeFi.” His comments were in response to a post on X that questioned the true purpose of decentralized finance.

According to a crypto analyst, DeFi is primarily useful for investors who are long on crypto and want financial services while maintaining self-custody. He argued that this reality explains how DeFi was originally bootstrapped. Furthermore, the post dismissed many newer applications as “cargo cults” and insisted that USDC yield farming is not true DeFi.

> inb4 “muh USDC yield”, that’s not DeFi

Would algorithmic stablecoins fall under this?

IMO no (ie. algorithmic stablecoins are genuine defi)

Easy mode answer: if we had a good ETH-backed algorithmic stablecoin, then *even if* 99% of the liquidity is backed by CDP holders who…

— vitalik.eth (@VitalikButerin) February 8, 2026

Buterin Defends Algorithmic Stablecoins as DeFi

Rather than rejecting the premise outright, Buterin acknowledged that the framing accurately describes DeFi’s early growth. However, he pushed the conversation further by presenting algorithmic stablecoins as a legitimate path toward deeper decentralization. 

He pointed out that ETH-backed stablecoins using collateralized debt positions (CDPs) still provide important benefits, even when CDP holders balance negative and positive algorithmic dollars. Buterin explained that these stablecoins let users transfer counterparty risk to market makers. 

Critics argue that much of today’s DeFi is driven by speculation rather than true decentralization. For example, depositing centralized stablecoins into lending protocols imitates DeFi without following its core principles. Buterin offers a broader perspective. According to him, real DeFi should decentralize risk, not rely on trusted intermediaries. Properly designed algorithmic stablecoins meet this standard.

Why Algorithmic Stablecoins Stand Out

Buterin explained that ETH-backed algorithmic stablecoins strengthen the system by shifting dollar counterparty risk to market makers. Users can access financial services while keeping control of their assets, a core promise of DeFi.

Additionally, he noted that overcollateralization and diversification improve token holder protection. Even if a stablecoin is backed by real-world assets, it remains effective as long as it stays fully collateralized, even if any single asset fails.

At the same time, he criticized strategies like “putting USDC into Aave,” which rely on centralized issuers and fail decentralization tests. Therefore, he suggested that developers focus first on ETH-backed stablecoins, followed by highly diversified real-world asset models.

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