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, the financial world discusses the potential influx of trillions into traditional finance (TradFi) via stablecoins over the next five years.
But not all that glitters is gold.
The Original Stablecoin Trilemma
New projects often use comparison charts to position themselves against competitors. What’s striking—yet frequently downplayed—is the recent decline in decentralization.
The market is maturing. Scalability needs clash with earlier anarchic ideals. Yet, a balance must be found.
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.
However, after controversial experiments, scalability remains a challenge. Concepts evolve to adapt—censorship resistance now often replaces decentralization, as newer stablecoins adopt centralized traits (e.g., managed yield strategies).
👉 Explore how top stablecoins balance these trade-offs
Motivations
Dreams outpaced reality. The March 12, 2020 ("Black Thursday") crash exposed vulnerabilities:
- DAI shifted reserves to USDC, acknowledging decentralization’s retreat before giants like Circle and Tether.
- Algorithmic stablecoins (e.g., UST) collapsed.
- Regulatory pressures intensified.
Yet, Liquity emerged as a decentralized outlier, with immutable contracts and ETH-backed collateral. Its V2 upgrade enhances peg security but faces scalability limits (90% LTV vs. competitors’ 100%).
The Genius Act
This U.S. bill prioritizes regulated, fiat-backed stablecoins, sidelining decentralized, algorithmic, or crypto-collateralized variants—pushing them into regulatory gray zones.
Value Propositions and Distribution
Stablecoins are "shovels in a gold rush." Key models include:
- Institutional-focused (e.g., BlackRock’s BUIDL).
- Web2.0 entrants (e.g., PayPal’s PYUSD), struggling with crypto-native scalability.
Yield-driven strategies:
- RWA-backed (e.g., Ondo’s USDY).
- Delta-neutral (e.g., Ethena’s USDe).
Common thread? Centralization—even DeFi projects often rely on managed teams.
Emerging ecosystems (e.g., MegaETH) offer hope. Projects like CapMoney aim for gradual decentralization via Eigen Layer, while Liquity forks (e.g., Felix Protocol) thrive on niche chains.
👉 Discover how new chains tackle decentralization
Conclusion
Centralization isn’t inherently bad—it’s scalable and compliant. But it strays from crypto’s ethos. No centralized stablecoin can guarantee censorship resistance.
Thus, amid new alternatives, remember the original trilemma:
- Price Stability
- Decentralization
- Capital Efficiency
FAQs
1. Why is decentralization declining in stablecoins?
Regulatory and scalability pressures push projects toward centralized management for efficiency and compliance.
2. Can algorithmic stablecoins recover?
Past failures (e.g., UST) eroded trust, but innovation continues in niche projects.
3. How does Liquity V2 improve decentralization?
By using ETH collateral and immutable contracts, though its LTV lags behind competitors.
4. What’s the Genius Act’s impact?
It legitimizes fiat-backed stablecoins but marginalizes decentralized alternatives.
5. Are RWA-backed stablecoins sustainable?
Yes, if interest rates remain high, but they’re still centrally managed.
6. What’s the biggest hurdle for decentralized stablecoins?
Distribution—without mainstream adoption, they remain niche.