Stablecoins have captured significant attention, and rightfully so. Beyond speculation, stablecoins represent one of the few products in the cryptocurrency space with clear product-market fit (PMF). The global financial market is abuzz with discussions about the trillions in stablecoins expected to flood traditional finance (TradFi) over the next five years.
However, not all that glitters is gold.
The Original Stablecoin Trilemma
New projects often use comparison charts to position themselves against competitors. What stands out—but is frequently downplayed—is the recent decline in decentralization.
The market is evolving and maturing. Scalability needs clash with earlier anarchic ideals, yet a balance must be struck.
Initially, the stablecoin trilemma was based on three key concepts:
- Price Stability: The ability to maintain a stable value (typically pegged to the USD).
- Decentralization: No single entity controls the stablecoin, ensuring censorship resistance and trustlessness.
- Capital Efficiency: Maintaining the peg without excessive collateral.
Despite numerous controversial experiments, scalability remains a challenge. These concepts continue evolving to address these hurdles.
Shifting Priorities: From Decentralization to Censorship Resistance
Censorship resistance is a fundamental feature of cryptocurrencies, but it’s merely a subset of decentralization. Most modern stablecoins (with rare exceptions like Liquity and its forks) exhibit centralized traits.
For instance:
- Teams manage strategies and redistribute yields to holders (functioning like shareholders).
- Scalability stems from yield volume rather than DeFi’s composability.
True decentralization has taken a backseat.
Motivations Behind the Shift
Dreams outpaced reality. The infamous "Black Thursday" of March 12, 2020, saw DAI’s reliance shift to USDC, effectively admitting defeat against centralized giants like Circle and Tether. Algorithmic stablecoins (e.g., UST) and rebase models (e.g., Ampleforth) failed to deliver. Meanwhile, regulatory pressures and institutional stablecoins stifled experimentation.
Yet, one decentralized project stands out: Liquity. Its immutable contracts and Ethereum-backed collateral champion pure decentralization, though scalability lags.
👉 Discover how Liquity V2 enhances peg security and flexibility
Challenges for Decentralized Stablecoins
Despite Liquity’s TVL of $370M across V1/V2, growth barriers persist:
- Low Loan-to-Value (LTV): ~90% vs. 100% LTV offered by competitors like Ethena and Usual.
- Limited Distribution: Early Ethereum adopters dominate usage, with minimal DEX integration.
- Mainstream Adoption: Cyberpunk ethos may hinder mass appeal if DeFi/retail balance isn’t achieved.
The "Genius Act" and Its Implications
The U.S. bill aims to legitimize regulated, fiat-backed stablecoins but sidelines decentralized, crypto-collateralized, or algorithmic variants. This creates a regulatory gray area for innovation.
Value Propositions and Distribution Models
Stablecoins are shovels in a gold rush. Key models include:
- Institutional Hybrids (e.g., BlackRock’s BUIDL) targeting TradFi.
- Web2.0 Entrants (e.g., PayPal’s PYUSD) struggling with scalability.
Yield-Focused Strategies:
- RWA-Backed: Ondo’s USDY, Usual’s USDO.
- Delta-Neutral: Ethena’s USDe, Resolv’s USR.
All share a common thread: centralization. Even DeFi-centric projects are team-managed, blurring lines between stablecoins and derivatives.
Emerging ecosystems (e.g., MegaETH, HyperEVM) offer hope. Projects like CapMoney plan gradual decentralization via Eigen Layer, while Liquity forks (e.g., Felix Protocol) leverage "novelty effects" for growth.
Conclusion
Centralization isn’t inherently negative—it’s simpler, scalable, and legislative-friendly. But it diverges from crypto’s ethos. Can a centralized stablecoin guarantee censorship resistance or true user ownership? Unlikely.
Thus, amid new alternatives, the original trilemma endures:
- Price Stability
- Decentralization
- Capital Efficiency
FAQ Section
Q: Why is decentralization declining in stablecoins?
A: Scalability demands and regulatory pressures favor centralized models, though they compromise crypto’s foundational principles.
Q: Can algorithmic stablecoins recover from past failures?
A: Innovations are ongoing, but UST’s collapse and regulatory hurdles make a resurgence challenging.
Q: How does Liquity V2 improve upon V1?
A: Enhanced peg security, flexible interest rates, and Ethereum-backed decentralization—though LTV and distribution remain hurdles.
Q: Are RWA-backed stablecoins safer?
A: They offer sustainable yields if interest rates stay high, but still rely on centralized entities for real-world asset management.
👉 Explore the future of decentralized finance with leading stablecoins