Introduction
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, discussions abound about the trillions in stablecoins expected to flood traditional finance (TradFi) markets within the next five years.
Yet, not all that glitters is gold.
The Original Stablecoin Trilemma
New projects often use comparison charts to position themselves against competitors. What’s striking—but frequently downplayed—is the recent decline in decentralization.
The market is maturing. Scalability demands clash with early anarchic ideals. But balance remains essential.
The original stablecoin trilemma rested on three pillars:
- Price Stability: Maintaining a peg (e.g., to the USD).
- Decentralization: No single point of control, ensuring censorship resistance and trustlessness.
- Capital Efficiency: Minimal collateral requirements to sustain the peg.
Despite controversial experiments, scalability persists as a challenge. Concepts evolve to adapt—but at what cost?
The Shift: Decentralization vs. Censorship Resistance
Recent projects replace "decentralization" with "censorship resistance"—a narrower subset. This reflects rising centralization, where teams manage strategies and redistribute yields to holders (akin to shareholders). Scalability now stems from yield generation, not DeFi composability.
True decentralization has suffered.
Motivations and Market Realities
Lessons from Failures
- March 2020 ("Black Thursday"): DAI’s reliance on USDC reserves signaled decentralization’s retreat against centralized giants like Circle and Tether.
- Algorithmic Stablecoins: UST’s collapse and rebase experiments (e.g., Ampleforth) underscored inherent risks.
- Regulation: Legislation favors licensed, fiat-backed stablecoins, sidelining decentralized or algorithmic alternatives.
Liquity’s Standout Model
Liquity champions immutable contracts and Ethereum-backed decentralization. Yet, scalability lags:
- V2 Upgrades: Enhanced peg security via BOLD stablecoin and flexible interest rates.
Challenges:
- 90% LTV trails capital-efficient (but non-yielding) USDT/USDC.
- Competitors like Ethena and Usual offer 100% LTV with intrinsic yields.
- Limited distribution—tightly coupled to Ethereum’s early community, missing broader DeFi integration.
Despite modest TVL ($370M across V1/V2), Liquity remains a top forkable project by value locked.
The Genius Act and Its Implications
This U.S. bill aims to stabilize and legitimize stablecoins—but exclusively for licensed, fiat-backed issuers. Decentralized or algorithmic options face regulatory gray zones or outright exclusion.
Value Propositions and Distribution Strategies
Stablecoins are "shovels in a gold rush." Current models fall into three camps:
- TradFi Bridges: Institutional-focused (e.g., BlackRock’s BUIDL).
- Web2.0 Entrants: PayPal’s PYUSD struggles with crypto-native scalability.
Yield-Generating Strategies:
- RWA-Backed: Ondo’s USDY, Usual’s USDO (reliant on high interest rates).
- Delta-Neutral: Ethena’s USDe, Resolv’s USR (derivatives masquerading as stablecoins).
Common Thread: Centralization. Even DeFi projects employ internal management teams.
Emerging Hope
New ecosystems (MegaETH, HyperEVM) and forks like Felix Protocol leverage novelty effects and chain-native distribution. Projects like CapMoney aim for gradual decentralization via Eigen Layer’s economic security.
Conclusion
Centralization isn’t inherently bad—it’s simpler, scalable, and legislatively compliant. But it betrays crypto’s original ethos.
Key Questions:
- Can a centralized stablecoin guarantee censorship resistance?
- Is it truly a user-owned asset or just an on-chain dollar?
The original trilemma still holds:
- Price Stability
- Decentralization
- Capital Efficiency
As alternatives emerge, we mustn’t forget the trade-offs.
FAQs
1. Why is decentralization declining in stablecoins?
Scalability demands and regulatory pressures favor centralized models, sacrificing trustlessness for efficiency.
2. How does Liquity’s model differ from competitors?
It prioritizes immutable contracts and Ethereum collateral but lacks yield mechanisms and broad distribution.
3. Are algorithmic stablecoins viable post-UST?
Current designs remain high-risk; RWA-backed and delta-neutral strategies dominate yield-focused alternatives.
4. What’s the impact of the Genius Act?
It legitimizes fiat-backed stablecoins while marginalizing decentralized options—potentially stifling innovation.
5. Can new ecosystems revive decentralization?
Projects like Felix Protocol show promise, but mainstream adoption requires balancing DeFi integration and user accessibility.