Re-examining the Trilemma of Stablecoins: The Decline of Decentralization

Stablecoins occupy an important position in the cryptocurrency field, not only because of their speculative value but also because they are one of the few products that have found a clear market positioning. Currently, the industry widely expects that tens of trillions of dollars in stablecoins will flow into traditional financial markets over the next five years. However, there may be hidden risks beneath this shiny surface.

The Initial Three Dilemmas of Stablecoins

Emerging projects often use charts to show their positioning differences with major competitors. It is worth noting that there has been a noticeable regression in the degree of Decentralization recently.

As the market develops and matures, the demand for scalability conflicts with the early ideals of Decentralization. Ideally, a balance should be found between the two.

Initially, the three dilemmas of stablecoin are based on the following three core concepts:

1. Price stability: Maintaining a stable value pegged to a specific asset (usually the US dollar).
2. Decentralization: Not controlled by a single entity, with censorship resistance and trustlessness characteristics.
3. Capital efficiency: Price stability can be maintained without excessive collateral.

However, after multiple controversial experiments, scalability remains a huge challenge. Therefore, these concepts are constantly evolving to adapt to new challenges.

In recent years, the strategies of some major stablecoin projects have transcended the mere category of stablecoins, evolving into more diversified products. In this process, price stability remains unchanged, capital efficiency can be equated with scalability, but the concept of Decentralization has been weakened to anti-censorship.

While censorship resistance is one of the fundamental characteristics of cryptocurrency, it is merely a subset compared to the concept of Decentralization. This change reflects the prevalent centralized features in the latest stablecoin projects (with the exception of Liquity and its forks, as well as a few other exceptions).

For example, even if these projects utilize decentralized exchanges, they are still managed by a centralized team responsible for managing strategies, seeking profits, and distributing them to holders, who essentially play a role similar to that of shareholders. In this model, scalability primarily comes from the amount of profits rather than the composability within the DeFi ecosystem.

The true concept of Decentralization has faced setbacks.

The contradiction between reality and ideals

On March 12, 2020, the global market plummeted due to the COVID-19 pandemic, and the DAI stablecoin faced severe challenges. Subsequently, stablecoin reserves mainly shifted to USDC, which to some extent acknowledged the failure of Decentralization when facing mainstream centralized stablecoins. Meanwhile, attempts at algorithmic stablecoins like UST and rebase stablecoins like Ampleforth did not achieve the expected results. Subsequently, the introduction of relevant legislation further exacerbated this trend. At the same time, the rise of institutional stablecoins also weakened the developmental space for experimental projects.

In this context, Liquity stands out for its contract immutability and pure reliance on Ethereum as collateral, representing the pinnacle of Decentralization. However, it has shortcomings in terms of scalability.

Recently, Liquity launched version V2, enhancing peg security through multiple upgrades and offering more flexible interest rate options when minting the new stablecoin BOLD.

However, some factors limit the growth of Liquity. Compared to the capital-efficient but non-yielding USDT and USDC, Liquity's stablecoin loan-to-value (LTV) ratio is around 90%, which does not present a significant advantage. Additionally, some direct competitors that offer intrinsic yields, such as Ethena, Usual, and Resolv, have already reached an LTV of 100%.

The main challenge Liquity faces may be the lack of an effective large-scale distribution model. Since it is still closely related to the early Ethereum community, it pays less attention to the diffusion of use cases such as decentralized exchanges. Although its cyberpunk style aligns with the spirit of cryptocurrency, failing to achieve a balance in the DeFi ecosystem or retail adoption may limit its mainstream growth.

Despite the limited total value locked (TVL), Liquity remains one of the projects with the highest TVL among its forks, with a total of $370 million for versions V1 and V2, which is an impressive achievement.

The Impact of the Genius Act

The "Genius Act" is expected to bring more stability and recognition to the stablecoin market in the United States, but it primarily focuses on traditional, fiat-backed stablecoins issued by licensed and regulated entities.

This means that Decentralization, crypto collateral, or algorithmic stablecoins are either in a regulatory gray area or completely excluded.

Value Proposition and Distribution Strategy

Stablecoins play an important role in the cryptocurrency ecosystem. Different projects have adopted different strategies:

• Some hybrid projects are primarily aimed at institutional investors and are designed to expand into the traditional finance sector.
• Some projects from Web2.0 are trying to expand their market share by delving into the native cryptocurrency user base, but they face scalability challenges due to a lack of relevant experience.
• There are also some projects focusing on underlying strategies, such as utilizing real-world assets (RWA) or Delta-Neutral strategies, aimed at generating sustainable returns for holders.

The commonality among these projects is that, despite varying degrees, there is a certain level of centralization present. Even projects focused on decentralized finance (DeFi), such as those utilizing Delta-Neutral strategies, are managed by internal teams. Although they may leverage Ethereum in the backend, the overall management remains centralized.

Emerging blockchain ecosystems, such as MegaETH and HyperEVM, have brought new possibilities for the development of stablecoins. For example, the CapMoney project initially adopts a centralized decision-making mechanism, and subsequently aims to achieve decentralization through the economic security provided by Eigen Layer. Additionally, fork projects of Liquity like Felix Protocol have also seen significant growth on emerging blockchains.

These projects choose to focus on emerging blockchain-centered distribution models, leveraging the advantages of the "novelty effect."

Conclusion

Centralization is not inherently negative. For projects, it is easier to manage, control, and scale, and it is also easier to adapt to regulatory requirements.

However, this trend contradicts the original intention of cryptocurrency. A truly censorship-resistant stablecoin should not merely be a representation of dollars on the chain, but rather an asset that is genuinely controlled by users. Currently, no centralized stablecoin can make such a promise.

Therefore, despite the appeal of emerging alternatives, we should not forget the original stablecoin trilemma: price stability, Decentralization, and capital efficiency. Balancing these three core characteristics while pursuing development remains a significant challenge faced by the stablecoin sector.