Reexamining the Trilemma of Stablecoins: The Setback of Decentralization

Stablecoins, as one of the few products in the cryptocurrency space with a clear product-market fit, have been a focus of attention. Currently, there is a global discussion about the trillions of stablecoins that may flow into traditional financial markets in the next five years. However, superficial glamour does not always imply true value.

The Evolution of the Stablecoin Trilemma

New projects often use charts to showcase their positioning differences from major competitors. It is worth noting that there has been a clear regression in the Decentralization sector 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 stablecoin trilemma is based on three core concepts:

1. Price stability: Maintaining a stable value (usually pegged to the US dollar)
2. Decentralization: Avoid single entity control to achieve anti-censorship and trustless characteristics.
3. Capital efficiency: Maintain the peg without excessive collateral.

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

Recently, the strategies of some major stablecoin projects have gone beyond the mere scope of stablecoins, evolving into more diversified products. However, in this process, the concept of Decentralization has been weakened to just censorship resistance. Although censorship resistance is a fundamental characteristic of cryptocurrencies, it is merely a subset of Decentralization.

Many emerging stablecoin projects, although utilizing decentralized exchanges (DEX), still retain a centralized management team. These teams are responsible for formulating strategies, seeking profits, and distributing them to holders, effectively making holders similar to shareholders. In this model, scalability primarily comes from the amount of profit rather than the composability within the DeFi ecosystem.

True decentralization has been largely compromised.

Decentralization Challenges and Attempts

On March 12, 2020, the market crash caused by the COVID-19 pandemic posed a severe test for decentralized stablecoins like DAI. Subsequently, many projects shifted their reserves to centralized stablecoins like USDC, acknowledging to some extent the failure of decentralization in a market dominated by Circle and Tether. At the same time, attempts at algorithmic stablecoins like UST or rebasing stablecoins like Ampleforth also failed to achieve the expected results.

In this context, Liquity stands out due to the immutability of its contracts 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. Compared to USDT and USDC, its stablecoin loan-to-value ratio (LTV) is about 90%, which is relatively low. In addition, some direct competitors that offer intrinsic yield, such as Ethena, Usual, and Resolv, have already achieved 100% LTV.

More importantly, Liquity may lack an effective large-scale distribution model. While its cyberpunk style aligns with the spirit of cryptocurrency, its mainstream market growth may be limited if it cannot achieve broader application on DEX.

Regulatory Environment and Value Proposition

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 might find themselves in a regulatory gray area or be completely excluded.

Current stablecoin projects in the market can be broadly divided into several categories:

• 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
• Focus on underlying strategy projects, such as Ondo's USDY and Usual's USDO (based on RWA) as well as Ethena's USDe and Resolv's USR (based on Delta-Neutral strategy)

These projects have adopted centralized management models to varying degrees. 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 like MegaETH and HyperEVM bring new hope. For instance, the CapMoney project aims to gradually achieve Decentralization through the economic security provided by Eigen Layer. Additionally, fork projects of Liquity, such as Felix Protocol, have seen significant growth on emerging blockchains.

Conclusion

Centralization is not entirely negative. For projects, it is simpler, more controllable, easier to scale, and more adaptable to regulatory requirements.

However, this is contrary to the original idea of cryptocurrency. A truly censorship-resistant stablecoin is not just an on-chain dollar, but should be an asset truly owned by the user. No centralized stablecoin can fully achieve this.

Therefore, while emerging alternatives are attractive, we should not forget the initial stablecoin trilemma: price stability, Decentralization, and capital efficiency. Striking a balance between these core principles while pursuing scalability and regulatory compliance remains a significant challenge in the cryptocurrency space.