Stablecoins are attracting significant attention, and for good reason. Beyond speculation, stablecoins are one of the few products in the cryptocurrency space with a clear product-market fit (PMF). Today, the world is discussing the trillions of stablecoins expected to flood into the traditional financial (TradFi) market over the next five years.
However, not everything that glitters is gold.
The original stablecoin trilemma
New projects often use charts to compare their positioning against major competitors. What is striking yet often downplayed is the recent noticeable regression toward decentralization.
The market is evolving and maturing. The demand for scalability is colliding with past anarchic ideals. However, a balance must be found to some extent.
Originally, the stablecoin trilemma was based on three key concepts:
Price stability: Stablecoins maintain a stable value (typically pegged to the US dollar). Decentralization: No single entity controls them, enabling censorship resistance and trustlessness. Capital efficiency: They maintain their peg without requiring excessive collateral.
However, after several controversial experiments, scalability remains a challenge. Therefore, these concepts are evolving to adapt to these challenges.
The chart above is from one of the most prominent stablecoin projects in recent years. It is commendable, primarily due to its strategy of expanding beyond the stablecoin category to develop into a broader range of products.
However, you can see that price stability remains unchanged. Capital efficiency can be equated with scalability. But decentralization has been redefined as censorship resistance.
Censorship resistance is a fundamental characteristic of cryptocurrency, but it is merely a subset of the concept of decentralization. This is because the latest stablecoins (except for Liquity and its forks, along with a few other examples) have certain centralized characteristics.
For instance, even though these projects utilize decentralized exchanges (DEXs), there is still a team responsible for managing strategies, seeking returns, and redistributing them to holders, who essentially act like shareholders. In this case, scalability stems from the volume of returns rather than the composability within DeFi.
True decentralization has been compromised.
Motivation
Too many dreams, not enough reality. On Thursday, March 12, 2020, the entire market crashed due to the COVID-19 pandemic, and DAI’s fate is well-known. Since then, reserves have primarily shifted to USDC, making it an alternative and, to some extent, acknowledging the failure of decentralization in the face of Circle and Tether’s dominance. Meanwhile, attempts at algorithmic stablecoins like UST or rebase stablecoins like Ampleforth have failed to achieve the expected results. Legislation has further exacerbated the situation. Meanwhile, the rise of institutional stablecoins has undermined experimentation.
However, one attempt has seen growth. Liquity stands out for its immutable contracts and use of Ethereum as collateral to drive pure decentralization. However, its scalability is lacking.
Now, they have recently launched V2, enhancing peg security through multiple upgrades and offering better interest rate flexibility when minting their new stablecoin BOLD.
However, some factors limit its growth. Compared to USDT and USDC, which are more capital-efficient but yield-free, its stablecoin’s loan-to-value ratio (LTV) is approximately 90%, which is not particularly high. Additionally, direct competitors offering intrinsic yields, such as Ethena, Usual, and Resolv, have achieved an LTV of 100%.
However, the main issue may be the lack of a large-scale distribution model. As it remains closely tied to the early Ethereum community, it has paid less attention to use cases like DEX expansion. While the cyberpunk aesthetic aligns with the spirit of cryptocurrency, it may limit mainstream growth if not balanced with DeFi or retail adoption.
Despite its limited total value locked (TVL), Liquity is one of the projects with the highest TVL in cryptocurrency among its forks, with V1 and V2 combined reaching $370 million, which is fascinating.
The Genius Act
This should bring more stability and recognition to stablecoins in the US, but it only focuses on traditional, fiat-backed stablecoins issued by licensed and regulated entities.
Any decentralized, crypto-collateralized, or algorithmic stablecoins either fall into a regulatory gray area or are excluded altogether.
Value Proposition and Distribution
Stablecoins are the shovels for mining gold. Some are hybrid projects targeting institutions (e.g., BlackRock’s BUIDL and World Liberty Financial’s USD1), aiming to expand into the traditional finance (TradFi) space; others originate from Web2.0 (e.g., PayPal’s PYUSD), aiming to expand their total addressable market (TOMA) by penetrating native crypto users, but face scalability issues due to lack of experience in new domains.
Then there are projects focused on underlying strategies, such as RWA (e.g., Ondo’s USDY and Usual’s USDO), aiming to achieve sustainable returns based on real-world value (as long as interest rates remain high), and Delta-Neutral strategies (e.g., Ethena’s USDe and Resolv’s USR), focused on generating yields for holders.
All these projects share one common trait, albeit to varying degrees: centralization.
Even projects focused on decentralized finance (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, but this is a topic I have discussed previously.
Emerging ecosystems (such as MegaETH and HyperEVM) also bring new hope.
For example, CapMoney will adopt a centralized decision-making mechanism in its initial months, with the goal of gradually achieving decentralization through the economic security provided by Eigen Layer. Additionally, there are forks of Liquity like Felix Protocol, which is experiencing significant growth and has established its position in the native stablecoin of that chain.
These projects choose to focus on distribution models centered around emerging blockchains and leverage the advantages of the “novelty effect.”
Conclusion
Centralization itself is not inherently negative. For projects, it is simpler, more controllable, more scalable, and more adaptable to legislation.
However, this does not align with the original spirit of cryptocurrency. What guarantees that a stablecoin is truly censorship-resistant? Is it merely dollars on the chain, or a genuine user asset?
No centralized stablecoin can make such a commitment.
Therefore, while emerging alternatives are appealing, we must not forget the original stablecoin trilemma:
Price stability
Decentralization
Capital efficiency
