Stablecoins have captured significant attention, and for good reason. Beyond speculation, they represent one of the few products in the cryptocurrency space with a clear product-market fit (PMF). Today, the world is discussing the trillions of dollars in stablecoins expected to flow into traditional finance (TradFi) markets in the coming five years.
However, not all that glitters is gold.
Understanding The Original Stablecoin Trilemma
New projects often use charts to compare their positioning against major competitors. What's striking, yet frequently downplayed, is the recent apparent retreat from decentralization.
Markets are evolving and maturing. The need for scalability clashes with past anarchic dreams. Yet, a balance must be found somewhere.
Originally, the stablecoin trilemma was built on three key concepts:
- Price Stability: The stablecoin maintains a stable value, typically pegged to a currency like the U.S. dollar.
- Decentralization: No single entity controls it, offering censorship resistance and trustless properties.
- Capital Efficiency: The peg is maintained without requiring excessive collateral.
Through numerous, often controversial experiments, scalability remained a challenge. Consequently, these concepts are evolving to meet these demands.
The most significant stablecoin projects in recent years deserve credit, primarily due to strategies that extend beyond mere stablecoins into broader product ecosystems.
You can observe that price stability remains constant. Capital efficiency can be equated to scalability. But decentralization has been altered to "censorship resistance."
Censorship resistance is a fundamental property of cryptocurrency, but compared to the concept of decentralization, it is merely a sub-category. This is because the latest stablecoins (with exceptions like Liquity and its forks) possess certain centralized traits.
For instance, even if these projects utilize decentralized exchanges (DEXs), a team is still responsible for managing strategies, seeking yield, and redistributing it to holders, who essentially act like shareholders. In this scenario, scalability comes from the amount of yield generated, not from internal DeFi composability.
True decentralization has taken a back seat.
The Driving Forces Behind The Shift
Too much dream, not enough reality. The events of Thursday, March 12, 2020 ("Black Thursday"), are well-known in the crypto world, where the entire market crashed due to the COVID-19 pandemic, and DAI faced significant issues. Since then, its reserves primarily shifted to USDC, making it a substitute and, to some extent, an admission of decentralization's failure in the face of the dominance of Circle and Tether.
Meanwhile, attempts with algorithmic stablecoins like UST or rebase models like Ampleforth simply did not yield the expected results. Subsequent legislation further worsened the landscape. Concurrently, the rise of institutional stablecoins crowded out more experimental models.
However, one attempt has seen growth. Liquity stands out for the immutability of its contracts and its push for pure decentralization by using only Ether as collateral. Yet, its scalability has been limited.
Their recent launch of V2 introduces multiple upgrades to enhance peg security and offer better interest rate flexibility when minting their new stablecoin, BOLD.
Some factors limit its growth. Its loan-to-value (LTV) ratio for stablecoin loans is around 90%, which is not high compared to the higher capital efficiency (and non-yield-bearing) USDT and USDC. Furthermore, direct competitors offering intrinsic yield, such as Ethena, Usual, and Resolv, achieve LTVs of up to 100%.
The main issue, however, might be the lack of a large-scale distribution model. It remains closely tied to the early Ethereum community, with less focus on use cases like proliferation on DEXs. While the cyberpunk vibe aligns with the crypto ethos, it can limit mainstream growth if not balanced with DeFi integration or retail adoption.
Despite a limited Total Value Locked (TVL), it is fascinating that Liquity is one of the most forked projects in crypto by TVL, with V1 and V2 combined reaching $370 million.
The Impact Of The Lummis-Gillibrand Payment Stablecoin Act
This U.S. legislation aims to bring more stability and recognition to stablecoins, but it focuses exclusively on traditional, fiat-backed stablecoins issued by licensed and regulated entities.
Any decentralized, crypto-collateralized, or algorithmic stablecoin falls into a regulatory gray area or is explicitly excluded.
Value Propositions And Distribution Models
Stablecoins are the shovels in a gold rush. Some are hybrid projects targeting institutions primarily (e.g., BlackRock's BUIDL and World Liberty Financial's USD1), aiming to tap into TradFi; others come from Web2.0 (e.g., PayPal's PYUSD), aiming to expand their total addressable market (TAM) by reaching native crypto users but face scalability issues due to a lack of experience in the new domain.
Then, there are projects focused primarily on underlying strategies. These include Real World Asset (RWA) backed models (like Ondo's USDY and Usual's USDO), aiming for sustainable returns based on real-world value (as long as interest rates remain high), and Delta-Neutral strategies (like Ethena's USDe and Resolv's USR), focused on generating yield for holders.
All these projects share one common trait, albeit to varying degrees: centralization.
Even DeFi-native projects, like those employing delta-neutral strategies, are managed by an internal team. While they may leverage Ethereum in the backend, the overall management is centralized. In practice, these projects should theoretically be classified as derivatives rather than stablecoins—a topic for another discussion.
Emerging ecosystems (like MegaETH and HyperEVM) also bring new hope.
For example, CapMoney will adopt a centralized decision-making model in its initial months, aiming for a gradual shift towards decentralization using economic security provided by EigenLayer. There are also Liquity forks, like Felix Protocol, which is experiencing significant growth and establishing itself as the native stablecoin on its chain.
These projects choose to focus on distribution models centered on emerging blockchains, leveraging the "novelty effect."
👉 Discover advanced strategies for stablecoin integration
Frequently Asked Questions
What is the stablecoin trilemma?
The stablecoin trilemma is a concept stating that it's extremely difficult for a stablecoin to simultaneously achieve three ideal properties: price stability, decentralization, and capital efficiency. Projects often have to sacrifice one to excel in the other two.
Why is decentralization important for a stablecoin?
Decentralization is crucial for censorship resistance and reducing counterparty risk. It ensures that no single entity can freeze funds or shut down the stablecoin network, aligning with the original ethos of cryptocurrency as a permissionless and trustless system.
Are algorithmic stablecoins considered decentralized?
While some algorithmic models aim for decentralization by using on-chain logic and crypto collateral, many have failed to maintain their peg reliably. Most current successful models incorporate some element of centralized control or off-chain assets to ensure stability.
What are the main types of stablecoins available today?
The primary types are fiat-collateralized (e.g., USDC, USDT), crypto-collateralized (e.g., DAI, LUSD), and algorithmic. A new hybrid category is emerging, combining elements of derivatives and yield-bearing assets to create scalable, yield-generating "stable" assets.
How does new legislation affect stablecoin development?
Regulation like the Lummis-Gillibrand Act provides clarity for fiat-backed stablecoins but creates uncertainty for decentralized and algorithmic models. This pushes innovation towards more centralized, compliant structures, potentially at the expense of decentralization.
Can a stablecoin be truly capital efficient and decentralized?
It remains a significant challenge. Projects like Liquity attempt this by using volatile crypto collateral (ETH) at high LTV ratios, but this introduces liquidity risks. Achieving high capital efficiency without centralized backing or excessive risk is an active area of innovation.
Conclusion
Centralization is not inherently negative. For projects, it is simpler, more controllable, more scalable, and better adapted to evolving legislation. It often leads to a more stable product for the average user.
However, this compromises the original spirit of cryptocurrency. What guarantees that a stablecoin is truly censorship-resistant? That it's not just a dollar on-chain, but a genuine user-owned asset? No centralized stablecoin can make that promise.
Therefore, while emerging alternatives are attractive, we must not forget the original stablecoin trilemma and the ongoing pursuit of its three core pillars:
- Price Stability
- Decentralization
- Capital Efficiency
The future likely lies in innovative models that find new equilibriums between these competing demands, perhaps through layered security or novel cryptographic proofs. The journey to solve the trilemma continues.