Rethinking the Trilemma of Stablecoins: The Decline of Decentralization

Stablecoins have always been the focus of the cryptocurrency field. Beyond speculation, stablecoins are one of the few crypto products that have found a clear market positioning. Currently, there are predictions worldwide that tens of trillions of dollars in stablecoins will flow into traditional financial markets over the next five years.

Not everything that glitters is gold.

The Origin of the Stablecoin Trilemma

New projects often use charts to showcase their positioning differences with major competitors. It is worth noting that the recent obvious regression in Decentralization is often downplayed.

As the market develops and matures, the demand for scalability conflicts with the early ideals of Decentralization. However, a balance should be sought to some extent.

The initial stablecoin trilemma is based on three core concepts:

• Price Stability: Stablecoins maintain a fixed value (usually pegged to the US dollar)
• Decentralization: No single entity controls, providing censorship resistance and trustless characteristics.
• Capital efficiency: Maintain peg without excessive collateral

However, after multiple controversial experiments, scalability remains a challenge. Therefore, these concepts are continually evolving to adapt to new challenges.

In recent years, a major stablecoin project chart shows that price stability remains unchanged, capital efficiency can be equated with scalability, but Decentralization has been replaced by censorship resistance.

Resistance to censorship is one of the fundamental characteristics of cryptocurrency, but it is just one aspect compared to Decentralization. This is because the latest stablecoin projects (with a few exceptions) all exhibit a certain degree of centralized features.

For example, even if these projects use decentralized exchanges, there is still a team responsible for managing strategies, seeking profits, and distributing them to holders, who essentially act like shareholders. In this case, scalability comes from the scale of profits, rather than the composability within DeFi.

True Decentralization has been thwarted.

Motivation Analysis

Ideal is plentiful, but reality is thin. On March 12, 2020, due to the market crash caused by the COVID-19 pandemic, DAI was severely impacted. Since then, its reserves have mainly shifted to USDC, which somewhat acknowledges the failure of Decentralization in the face of mainstream centralized stablecoins. At the same time, attempts at algorithmic stablecoins and rebase stablecoins also failed to achieve the expected results. Subsequent regulatory tightening further worsened the situation. Meanwhile, the rise of institutional stablecoins has weakened the space for innovative experiments.

However, Liquity stands out due to its immutable contracts and the use of Ethereum as collateral. However, it lacks in scalability.

Recently, Liquity launched version V2, enhancing peg security through multiple upgrades and providing more flexible interest rates when minting its new stablecoin BOLD.

However, several factors have limited its growth. Compared to the non-yielding but more capital-efficient USDT and USDC, the loan-to-value ratio of its stablecoin is about 90%, which is not high. In addition, direct competitors that offer intrinsic yields, such as Ethena, Usual, and Resolv, have achieved a loan-to-value ratio of 100%.

But the main issue may be the lack of a large-scale distribution model. Because it is still closely associated with the early Ethereum community, there is less focus on use cases like diffusion on decentralized exchanges. Although its cyberpunk style aligns with the spirit of crypto, if it cannot balance with DeFi or retail adoption, it may limit mainstream growth.

Despite the limited total locked value, Liquity is one of the projects with the highest TVL in the crypto space for its forks, with a total of $370 million for V1 and V2, which is fascinating.

The Impact of the Genius Act

This bill may bring more stability and recognition to stablecoins in the United States, but it only focuses on traditional, fiat-backed stablecoins issued by licensed and regulated entities.

Any decentralized, crypto-collateralized, or algorithmic stablecoin either falls into a regulatory gray area or is excluded.

Value Proposition and Distribution Strategy

Stablecoins are tools for mining crypto gold. Some hybrid projects primarily target institutions and aim to expand into traditional finance; some projects from Web 2.0 attempt to broaden their market by deeply engaging native crypto users, but face scalability challenges.

There are also some projects focused on underlying strategies, such as those based on real-world assets, aimed at achieving sustainable returns, as well as Delta-Neutral strategies that focus on generating profits for holders.

These projects have one thing in common: varying degrees of centralization.

Even projects focused on DeFi, such as Delta-Neutral strategies, are managed by internal teams. While they may utilize Ethereum in the background, overall management remains centralized. In fact, these projects should theoretically be classified as derivatives rather than stablecoins.

Emerging ecosystems like MegaETH and HyperEVM have also brought new hope. For instance, the CapMoney project aims to gradually achieve Decentralization through the economic security provided by Eigen Layer. Moreover, fork projects of Liquity such as Felix Protocol are experiencing significant growth and establishing their position among the native stablecoins of the chain.

These projects choose to focus on distribution models centered around emerging blockchains and leverage the advantages of the "novelty effect."

Summary

Centralization itself is not negative. For projects, it is simpler, more controllable, more scalable, and better adapted to regulatory requirements.

However, this does not align with the original idea of cryptocurrency. What can guarantee that a stablecoin truly has censorship resistance? It is not just an on-chain dollar, but a real user asset? No centralized stablecoin can make such a promise.

Therefore, despite the appeal of emerging alternatives, we should not forget the original stablecoin trilemma:

• Price Stability
• Decentralization
• Capital Efficiency

While pursuing innovation and development, it remains crucial to maintain focus on these core principles.