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 (PMF). Today, there is widespread discussion about the trillions of dollars in stablecoins expected to flood into traditional finance (TradFi) markets 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 major competitors. What stands out—though often downplayed—is the recent noticeable regression in decentralization.
The market is 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 around three key concepts:
- Price Stability: The ability of a stablecoin to maintain a stable value, typically pegged to the US dollar.
- Decentralization: Absence of a single controlling entity, offering censorship resistance and trustlessness.
- Capital Efficiency: Maintaining the peg without requiring excessive collateral.
However, after numerous controversial experiments, scalability remains challenging. As a result, these concepts are continually evolving to meet modern demands.
One of the leading stablecoin projects in recent years has notably adapted its strategy, expanding beyond stablecoins into a broader product ecosystem.
In updated project frameworks, price stability remains unchanged. Capital efficiency is often equated with scalability. But decentralization has been reframed as censorship resistance.
Censorship resistance is a fundamental feature of cryptocurrencies, but compared to decentralization, it is merely a subset. This is because most newer stablecoins (with exceptions like Liquity and its forks) incorporate certain centralized attributes.
For example, even when these projects utilize decentralized exchanges (DEXs), there is often a team managing strategies, seeking yields, and redistributing returns to holders—who essentially function like shareholders. In this model, scalability comes from the volume of yield generated, rather than from DeFi’s internal composability.
True decentralization has taken a step back.
The Driving Forces
Too much dream, too little reality. On Thursday, March 12, 2020, the entire market crashed due to the COVID-19 pandemic. The ordeal faced by DAI that day is well known. Since then, its reserves shifted largely to USDC, making it a substitute and, to some extent, an admission of decentralization’s failure in the face of dominance by centralized entities like Circle and Tether.
Meanwhile, attempts at algorithmic stablecoins like UST or rebase tokens like Ampleforth did not yield the expected results. Subsequent legislation further worsened the landscape. At the same time, the rise of institutional stablecoins diminished experimental efforts.
Yet, one attempt has continued to grow: Liquity stands out due to the immutability of its contracts and its use of Ethereum as collateral, promoting pure decentralization. However, its scalability has been limited.
The recent launch of Liquity V2 introduced several upgrades aimed at improving peg security and offering more flexible interest rates for minting its new stablecoin, BOLD.
Still, certain factors hinder its growth. Its loan-to-value (LTV) ratio sits at around 90%, which is not particularly high compared to more capital-efficient (though non-yielding) options like USDT and USDC. Moreover, direct competitors offering intrinsic yields—such as Ethena, Usual, and Resolv—have achieved LTVs of up to 100%.
The main challenge, however, may be the lack of a large-scale distribution model. Liquity remains closely tied to the early Ethereum community, with less focus on use cases like diffusion across DEXs. While its cyberpunk ethos aligns with the spirit of crypto, it may limit mainstream growth if not balanced with broader DeFi or retail adoption.
Despite a limited total value locked (TVL), Liquity and its forks are among the top projects by TVL in the decentralized stablecoin sector, with V1 and V2 combined reaching $370 million—an impressive feat.
The Impact of Regulation
Legislative efforts, such as the proposed Stablecoin Innovation Act in the US, aim to bring more stability and recognition to stablecoins. However, they focus 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 outright excluded.
Value Proposition and Distribution
Stablecoins are the shovels in the gold rush. Some are hybrid projects targeting institutions (like BlackRock’s BUIDL and World Liberty Financial’s USD1), aiming to expand into TradFi. Others come from Web2.0 giants (like PayPal’s PYUSD), seeking to broaden their total addressable market (TAM) by reaching native crypto users—though they face scalability issues due to lack of experience in the new domain.
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 to offer sustainable returns based on real-world value—as long as interest rates remain high.
- Delta-Neutral strategy stablecoins (e.g., Ethena’s USDe and Resolv’s USR) focus on generating yield for holders.
What all these projects share, to varying degrees, is centralization.
Even those focused on DeFi strategies, such as delta-neutral models, are managed by internal teams. They may leverage Ethereum in the backend, but overall governance remains centralized. In reality, many of these should be classified as derivatives rather than stablecoins—a topic worth deeper discussion.
New ecosystems like MegaETH and HyperEVM also bring fresh hope.
For instance, CapMoney will begin with a centralized decision-making mechanism in its initial months, with the goal of gradually decentralizing through 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 around emerging blockchains, leveraging the "novelty effect" to their advantage.
Conclusion
Centralization is not inherently negative. For projects, it is simpler, more controllable, more scalable, and better adapted to legislation.
However, it does not align with the original spirit of cryptocurrency. What guarantees that a stablecoin is truly censorship-resistant? Not just an on-chain dollar, but a genuine user-owned asset?
No centralized stablecoin can make that promise.
Therefore, while emerging alternatives are attractive, we should not forget the original stablecoin trilemma:
- Price Stability
- Decentralization
- Capital Efficiency
Striking a balance among these three remains the ultimate challenge—and promise—of stablecoin innovation.
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 optimize for two at the expense of the third.
Why is decentralization important for stablecoins?
Decentralization ensures that no single entity has control over the stablecoin, enhancing censorship resistance and aligning with the core values of trustlessness and financial sovereignty in cryptocurrency.
Are algorithmic stablecoins safe?
Algorithmic stablecoins carry higher risks compared to collateralized models. Historical failures, such as UST, highlight the vulnerabilities in their design, especially under extreme market conditions.
What are the advantages of capital-efficient stablecoins?
Capital-efficient stablecoins require less collateral to maintain their peg, reducing overcollateralization costs and improving scalability and usability for borrowers and holders.
How do regulations affect stablecoin development?
Regulations often favor centralized, fiat-backed models, creating challenges for decentralized and algorithmic stablecoins. Compliance requirements may limit innovation in the short term but could bring legitimacy in the long run.
Where can I learn more about advanced stablecoin strategies?
👉 Explore in-depth stablecoin analysis and strategies to better understand the evolving landscape and opportunities in the decentralized finance ecosystem.