Stablecoins remain a focal point in cryptocurrency—and for good reason. Beyond speculation, they are one of the few crypto products with clear product-market fit. Today, many anticipate trillions in stablecoin value flowing into traditional finance (TradFi) in the coming years.
But not all that glitters is gold.
The Original Stablecoin Trilemma
New projects often use comparison charts to position themselves against competitors. One noteworthy—yet frequently overlooked—trend is the recent regression in decentralization.
As the market matures, the need for scalability clashes with earlier anarchic ideals. A new balance must be struck.
The original stablecoin trilemma was built on three pillars:
- Price Stability: Maintaining a steady value, typically pegged to the US dollar.
- Decentralization: Avoiding single-entity control, enabling censorship resistance and trustlessness.
- Capital Efficiency: Maintaining the peg without requiring excessive collateral.
Yet, after numerous controversial experiments, scalability remains a challenge. These core concepts continue to evolve in response.
Many recent stablecoin projects—with exceptions like Liquity and its forks—exhibit clear centralized traits. Even those using decentralized exchanges (DEXs) often have core teams managing strategy, yield generation, and shareholder-like distributions.
Here, scalability stems from profit generation—not from DeFi composability. True decentralization has taken a backseat.
Why Decentralization Faded
Ideals met reality on March 12, 2020, when markets crashed amid pandemic panic. The fallout for DAI is well-known: its reserves shifted largely to USDC, tacitly admitting decentralization’s failure against centralized giants like Circle and Tether.
Algorithmic stablecoins like UST and rebase models like Ampleforth also fell short. Regulatory pressure further stifled innovation, while institutional stablecoins gained traction.
One notable exception has been Liquity, which emphasizes immutable contracts and Ethereum-native collateral. However, its capital efficiency remains limited.
Liquity recently launched V2 with updates to improve security and interest rate flexibility for its new stablecoin, BOLD. Still, it faces growth constraints. Compared to capital-efficient (but non-yield-bearing) USDT and USDC, Liquity’s loan-to-value (LTV) ratio is around 90%. Competitors like Ethena, Usual, and Resolv offer 100% LTV and intrinsic yield.
More importantly, Liquity lacks a large-scale distribution model. Its deep ties to the Ethereum core community limit broader adoption on DEXs and in retail use cases. While its cyberpunk ethos aligns with crypto’s roots, it may hinder mass-market growth.
Despite a relatively modest total value locked (TVL), Liquity and its forks collectively hold around $370 million—a sign of persistent appeal.
Regulatory Pressures and Stablecoin Legitimacy
Recent U.S. legislative proposals aim to bring stability and recognition to stablecoins—but only for fiat-backed versions issued by regulated entities.
Decentralized, crypto-collateralized, and algorithmic stablecoins remain in a regulatory gray zone—or are explicitly excluded. This further incentivizes centralization.
Value Proposition vs. Distribution
Stablecoins are like shovels in a gold rush. Some are hybrid, institutionally-focused assets (like BlackRock’s BUIDL or World Liberty’s USD1) aimed at TradFi expansion. Others, like PayPal’s PYUSD, target the crypto-native market but face scalability challenges due to limited Web3 experience.
Then there are yield-focused strategies: Real World Assets (RWAs) like Ondo’s USDY and Usual’s USDO, which rely on interest rate environments, and delta-neutral strategies like Ethena’s USDe and Resolv’s USR, which generate yield for holders.
What these projects share—in varying degrees—is centralization.
Even DeFi-native strategies like delta-neutral are managed by internal teams. Though they may use Ethereum in the background, overall governance is centralized. In truth, many such products are better classified as derivatives rather than stablecoins.
Emerging ecosystems like MegaETH and HyperEVM offer new hope. CapMoney, for instance, will begin with centralized decision-making, gradually decentralizing via EigenLayer’s economic security.
Liquity forks like Felix Protocol are also gaining traction as native chain stablecoins. These projects focus on emerging blockchain-centric distribution models and leverage the "novelty effect."
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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 prioritize two at the expense of the third.
Why are many stablecoins becoming more centralized?
Centralization offers simpler governance, easier regulatory compliance, faster scalability, and better capital efficiency. In the short term, these benefits often outweigh ideological commitments to decentralization.
Can a stablecoin be truly decentralized?
It is difficult, but possible. Projects like Liquity use immutable smart contracts and crypto-native collateral to reduce centralized control. However, achieving scale without sacrificing principles remains a major hurdle.
What are the risks of using centralized stablecoins?
Centralized stablecoins may be subject to regulatory action, freezing of funds, or issuer insolvency. They also contradict the censorship-resistant ethos of cryptocurrency.
How do algorithmic stablecoins work?
Algorithmic stablecoins use smart contracts and monetary policy mechanisms to maintain their peg without full collateralization. However, many have failed under extreme market conditions, as seen with UST.
Are yield-bearing stablecoins safe?
Not necessarily. While they offer returns, they often involve additional risks such as smart contract vulnerabilities, dependency on specific protocols, or complex financial engineering that may fail in volatile markets.
Conclusion
Centralization is not inherently negative. For projects, it simplifies control, improves scalability, and aids regulatory adaptation. But it strays from crypto’s original vision.
What ensures that a stablecoin is truly censorship-resistant? Is it just a dollar on the chain, or a genuine user-owned asset? No centralized stablecoin can fully make that promise.
As new alternatives emerge, it’s important to revisit the original trilemma:
- Price Stability
- Decentralization
- Capital Efficiency
The future may lie in balancing these—rather than abandoning decentralization entirely.