Rethinking the Trilemma of Stablecoins: The Decline of Decentralization

Stablecoins have always been a hot topic in the cryptocurrency space. As one of the few applications that have found a clear product-market fit in the crypto world, the importance of stablecoins is self-evident. Currently, the industry generally expects that tens of trillions of dollars in stablecoins will flow into traditional financial markets in the next five years. However, not all that glitters is gold.

The Evolution of the Stablecoin Trilemma

The three dilemmas initially faced in the stablecoin sector include:

1. Price stability: Maintain a stable peg to fiat currencies such as the US dollar.
2. Decentralization: Avoid single entity control, achieve censorship resistance and trustlessness.
3. Capital efficiency: Maintain the peg without excessive collateral.

However, after multiple controversial experiments, scalability remains a significant challenge. This has prompted the industry to reassess these concepts to adapt to the new reality.

Recent positioning maps of some major stablecoin projects show that Decentralization has been replaced by "censorship resistance". Although censorship resistance is one of the fundamental characteristics of cryptocurrencies, it is merely a subset of Decentralization. In fact, with few exceptions, most emerging stablecoins exhibit certain degrees of centralization characteristics.

For example, even if these projects utilize decentralized exchanges, there is still a team responsible for managing strategies, seeking profits, and redistributing them to holders similar to shareholders. In this case, scalability comes from the scale of profits, rather than the composability within DeFi.

True Decentralization has faced setbacks.

Decentralization Dilemma

On March 12, 2020, the market crash triggered by the COVID-19 pandemic exposed the vulnerabilities of decentralized stablecoins like DAI. Subsequently, reserves shifted primarily towards USDC, which to some extent acknowledged the failure of decentralization in a market dominated by Circle and Tether. At the same time, attempts at algorithmic stablecoins like UST or rebase stablecoins like Ampleforth also failed to achieve the expected results. The tightening of the regulatory environment further exacerbated this trend. The rise of institutional stablecoins has also weakened the development space for experimental projects.

Against this background, Liquity stands out for its contract immutability and the use of Ethereum as collateral, representing a pure attempt at Decentralization. However, its scalability still needs improvement. The recently launched V2 version enhances peg security through multiple upgrades and offers more flexible interest rate options when minting the new stablecoin BOLD.

Nevertheless, Liquity's growth still faces some limiting factors. Compared to the capital-efficient but non-yielding USDT and USDC, its stablecoin's loan-to-value ratio of (LTV) is about 90%, which does not offer a clear advantage. In addition, direct competitors providing intrinsic yield, such as Ethena, Usual, and Resolv, have reached an LTV of 100%.

More importantly, Liquity may lack a large-scale distribution model. It still primarily relies on the early Ethereum community, with less focus on use cases such as diffusion on DEXs. While its cyberpunk atmosphere aligns with the spirit of cryptocurrency, it could limit its mainstream growth if it cannot strike a balance with DeFi or retail adoption.

Emerging Trends and Challenges

The introduction of the "Genius Act" in the United States may bring more stability and recognition to the country's stablecoin, but the bill mainly focuses on licensed and regulated entities issuing traditional, fiat-backed stablecoins. This means that decentralized, crypto-collateralized, or algorithmic stablecoins may fall into a regulatory gray area or be excluded.

Currently, there are various types of stablecoin projects emerging in the market:

• Hybrid projects aimed at institutions, such as BlackRock's BUIDL and World Liberty Financial's USD1
• Projects from Web2.0, such as PayPal's PYUSD
• Projects focused on underlying strategies, such as Ondo's USDY and Usual's USDO( RWA strategy), as well as Ethena's USDe and Resolv's USR( Delta-Neutral strategy).

The commonality among these projects is varying degrees of centralization. Even projects focused on DeFi, such as Delta-Neutral strategies, are managed by internal teams. While they may leverage Ethereum in the background, the overall management remains centralized.

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

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

Conclusion

Centralization is not entirely negative. For projects, it is simpler, more controllable, scalable, and easier to adapt to regulatory requirements. However, this contradicts the original spirit of cryptocurrency. No centralized stablecoin can truly guarantee censorship resistance and complete control over user assets.

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 adaptability, it remains crucial to maintain focus on these core principles.