Stablecoins have captured significant attention, and for good reason. Beyond speculation, they represent one of the few products in the cryptocurrency space with clear product-market fit. Today, the financial world is abuzz with discussions about the trillions of dollars in stablecoins expected to enter traditional finance (TradFi) markets in the next five years.
But not everything that glitters is gold.
The Original Stablecoin Trilemma
New projects often use comparison charts to position themselves against major competitors. What’s striking—yet often downplayed—is the recent clear retreat from decentralization.
Markets are evolving and maturing. The need for scalability clashes with earlier anarchic ideals. Still, a balance must be found somewhere.
Originally, the stablecoin trilemma was built around three core concepts:
- Price Stability: The ability of a stablecoin to maintain a steady value (often pegged to the US dollar).
- Decentralization: No single point of control, providing censorship resistance and trustlessness.
- Capital Efficiency: The capacity to maintain the peg without excessive collateral.
However, after numerous controversial experiments, scalability remains a challenge. As a result, these concepts are evolving to adapt.
Many recent projects have reframed the trilemma. For instance, one of the most significant stablecoin projects in recent years—praised for its strategy of expanding beyond stablecoins into broader offerings—has updated the framework.
In this revised model, price stability remains unchanged. Capital efficiency is equated with scalability. But decentralization has been replaced with "censorship resistance."
Censorship resistance is a fundamental feature of cryptocurrency, but compared to decentralization, it is merely a subset. This shift reflects a trend: most new stablecoins (with exceptions like Liquity and its forks) incorporate certain centralized features.
For example, even if these projects use decentralized exchanges (DEXs), a core team often manages strategy, seeks yield, and redistributes returns to holders—who function much like shareholders. Here, scalability comes from the volume of yield generated, not from intrinsic DeFi composability.
True decentralization has taken a back seat.
Why Decentralization Faded
Too much dream, too little reality. On March 12, 2020—"Black Thursday"—the entire market crashed amid COVID-19 fears. The ordeal faced by DAI that day is well-known. Since then, its reserves shifted largely to USDC, making it a quasi-substitute and, to some extent, an admission of defeat for decentralization in the face of dominance by centralized entities like Circle and Tether.
Algorithmic stablecoins such as UST, or rebase experiments like Ampleforth, failed to deliver. Subsequent legislation made matters worse. Meanwhile, the rise of institutional stablecoins reduced the appetite for experimentation.
Still, one notable effort persisted. Liquity stood out for its immutable contracts and use of Ethereum as collateral, championing pure decentralization. Yet, its scalability was limited.
The recent launch of Liquity V2 introduced upgrades to enhance peg security and provide better interest rate flexibility when minting its new stablecoin, BOLD.
However, several factors curbed its growth. Its loan-to-value (LTV) ratio sits at around 90%, which is decent but not competitive against capital-efficient, non-yielding giants like USDT and USDC. Newer rivals like Ethena, Usual, and Resolv offer both intrinsic yield and LTVs of up to 100%.
A more fundamental challenge may be the lack of a large-scale distribution model. Liquity remains closely tied to the early Ethereum community, with less emphasis on use cases such as DEX liquidity. While its cyberpunk ethos aligns with crypto’s roots, failure to balance DeFi integration with retail adoption could limit mainstream growth.
Despite its relatively limited total value locked (TVL), Liquity and its forks hold one of the largest TVLs among decentralized stablecoins, with V1 and V2 together reaching $370 million—an impressive feat.
The Impact of the Lummis-Gillibrand Bill
The proposed Responsible Financial Innovation Act (also referred to as the Lummis-Gillibrand Bill) aims to bring more stability and recognition to stablecoins in the U.S.—but it focuses exclusively on licensed, regulated entities issuing traditional, fiat-backed stablecoins.
Any decentralized, crypto-collateralized, or algorithmic stablecoin would either fall into a regulatory gray area or be excluded entirely.
This regulatory direction reinforces the shift toward centralized models and may further sideline decentralized alternatives.
Value Propositions and Distribution Strategies
Stablecoins are the shovels in a gold rush. Some are hybrid projects targeting institutions (like BlackRock’s BUIDL and World Liberty Financial’s USD1), aiming to bridge into TradFi. Others come from Web2 giants (like PayPal’s PYUSD), seeking to expand their total addressable market by reaching native crypto users—though they often face scalability issues due to lack of expertise in the new landscape.
Then there are projects focused primarily on underlying strategies:
- Real-World Asset (RWA) backed stablecoins (e.g., Ondo’s USDY and Usual’s USDO) aim for sustainable returns based on real-world yield (as long as interest rates remain high).
- Delta-neutral synthetic stablecoins (e.g., Ethena’s USDe and Resolv’s USR) focus on generating yield for holders through derivatives mechanisms.
What all these projects share, to varying degrees, is centralization.
Even DeFi-native projects like those using delta-neutral strategies are managed by core teams. They may use Ethereum in the background, but overall governance is centralized. In fact, such projects might be better classified as derivatives rather than stablecoins—a topic worth deeper discussion.
New ecosystems like MegaETH and HyperEVM also bring fresh hope. For example, CapMoney will start with centralized decision-making, with a goal to decentralize over time using economic security provided by EigenLayer. There are also Liquity forks, such as Felix Protocol, which are experiencing significant growth and establishing themselves as native stablecoins on their respective chains.
These projects are choosing to focus on distribution models centered on emerging blockchains, leveraging the "novelty effect" for growth.
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Frequently Asked Questions
What is the stablecoin trilemma?
The stablecoin trilemma refers to the challenge of achieving three ideal properties simultaneously: price stability, decentralization, and capital efficiency. Most projects prioritize two at the expense of the third.
Why are many new stablecoins more centralized?
Centralization often allows for greater scalability, regulatory compliance, and easier integration with traditional finance. Many projects sacrifice decentralization for growth and stability, especially under increasing regulatory pressure.
Can a stablecoin be truly decentralized and scalable?
It remains a significant technical and economic challenge. Projects like Liquity have made progress in decentralization but face limits in scalability. New solutions, including Layer 2 chains and innovative collateral mechanisms, are being explored to overcome these hurdles.
How does regulation affect decentralized stablecoins?
Regulation tends to favor centralized, auditable models. Decentralized stablecoins may face legal uncertainties or exclusion from regulatory frameworks, limiting their adoption in traditional markets.
What is the difference between censorship resistance and decentralization?
Censorship resistance is a property that prevents third parties from freezing or reversing transactions. Decentralization refers to the distribution of control across many participants. A system can be decentralized and censorship-resistant, but censorship resistance alone does not imply full decentralization.
Are algorithmic stablecoins still viable?
After the collapse of UST, confidence in algorithmic models dropped significantly. However, research continues into more resilient designs, often incorporating over-collateralization or hybrid mechanisms to improve safety.
Conclusion
Centralization is not inherently negative. For projects, it simplifies control, improves scalability, and ensures better adaptation to legislation.
However, it conflicts with the original ethos of cryptocurrency. What guarantees that a stablecoin is truly censorship-resistant? That it’s not just an on-chain dollar but a genuine user-owned asset? No centralized stablecoin can credibly make that promise.
Therefore, even as attractive new alternatives emerge, we must not forget the original stablecoin trilemma:
- Price Stability
- Decentralization
- Capital Efficiency
The future may lie in hybrid models or new technologies that better balance these goals. For now, the tension between idealism and practicality continues to shape the evolution of stablecoins.