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

Stablecoins, as one of the few products in the cryptocurrency field with a clear product-market fit, have always attracted attention. Currently, there is global discussion about the trillions of stablecoins that may flow into traditional financial markets over the next five years. However, not everything that glitters is gold.

The Evolution of the Stablecoin Trilemma

The initial stablecoin trilemma is based on three core concepts: price stability, Decentralization, and capital efficiency. However, after multiple controversial experiments, scalability remains a major challenge. As a result, these concepts are continuously being adjusted to adapt to new challenges.

In recent years, the strategies of some major stablecoin projects have gone beyond the mere scope of stablecoins. In these projects, price stability remains unchanged, capital efficiency can be equated with scalability, but Decentralization has been replaced by censorship resistance. Although censorship resistance is a fundamental characteristic of cryptocurrency, it is only a subset of the concept of Decentralization.

Most emerging stablecoin projects exhibit a certain degree of centralization characteristics. For example, even if these projects utilize decentralized exchanges, there are still teams responsible for managing strategies, seeking profits, and distributing them to holders, who essentially act like shareholders. In this case, scalability comes from the amount of profit rather than the composability within decentralized finance.

Decentralization Setbacks

On March 12, 2020, due to the market crash caused by the COVID-19 pandemic, the decentralized stablecoin DAI suffered severe blows. Subsequently, its reserves were mainly shifted to USDC, which to some extent acknowledged the failure of decentralization in the face of mainstream stablecoins. At the same time, attempts at algorithmic stablecoins and rebase stablecoins also failed to achieve the expected results. The tightening of regulations further exacerbated this situation, while the rise of institutional stablecoins weakened the development space for experimental projects.

In this context, Liquity stands out for its contract immutability and the use of Ethereum as collateral, promoting pure Decentralization. However, its scalability still has shortcomings. The recently launched V2 version has enhanced peg security through multiple upgrades and offers more flexible interest rate options when minting the new stablecoin BOLD.

Nevertheless, Liquity's growth is still limited by some factors. Its loan-to-value ratio (LTV) of about 90% is not considered high compared to mainstream stablecoins that have higher capital efficiency but no yield. In addition, some direct competitors that offer intrinsic yield have achieved 100% LTV. But the more critical issue may be the lack of a large-scale distribution model, as it is still primarily associated with the early Ethereum community, with less focus on use cases such as diffusion on decentralized exchanges.

Changes in Regulatory Environment

The U.S. "Genius Act" may bring more stability and recognition to stablecoins, but it primarily focuses on traditional, fiat-backed stablecoins issued by licensed and regulated entities. This means that decentralized, crypto-collateralized, or algorithmic stablecoins may fall into a regulatory gray area or be excluded.

Strategies of Different Stablecoin Projects

Currently, there are various types of stablecoin projects in the market, including hybrid projects aimed at institutions, projects from Web 2.0, and projects focused on underlying strategies, among others. Although these projects have different strategies, they all exhibit varying degrees of centralization. Even projects focused on Decentralization finance, such as stablecoins that use a Delta-Neutral strategy, still have centralized overall management.

Emerging ecosystems like MegaETH and HyperEVM bring new hope. For example, the CapMoney project plans to gradually achieve Decentralization through the economic security provided by Eigen Layer. In addition, fork projects of Liquity such as Felix Protocol have also seen significant growth on emerging blockchains.

Conclusion

Centralization is not entirely negative; it provides projects with a simpler, more controllable, and scalable management approach, making it easier to adapt to regulatory requirements. However, this contradicts the original ideals of cryptocurrency. Stablecoins, which truly possess censorship resistance and serve as real assets for users, should not be controlled by centralized entities.

Therefore, despite the appeal of emerging alternatives, we should not forget the original stablecoin trilemma: price stability, Decentralization, and capital efficiency. While pursuing innovation and expansion, it remains crucial to maintain focus on these core principles.