Revisiting the Trilemma of Stablecoins: The Setback of Decentralization

Stablecoins are in the spotlight, and this is not a coincidence. They are one of the few applications in the cryptocurrency space that have truly found product-market fit. Currently, discussions are taking place globally about the trillions of dollars in stablecoins that may flow into traditional financial markets over the next five years.

However, things that shine on the surface are not always real gold.

The Evolution of the Stablecoin Trilemma

New projects often use charts to show their positioning relative to major competitors. It is worth noting, but often overlooked, that the level of Decentralization has clearly decreased recently.

The market is constantly evolving and maturing. The demand for scalability conflicts with the early anarchist ideals. However, a balance should be sought to some extent.

Initially, the stablecoin trilemma is based on three core concepts:

• Price Stability: Maintaining a stable value (usually pegged to the US dollar)
• Decentralization: Avoid single entity control, achieve censorship resistance and trustlessness
• Capital efficiency: Maintain the peg without excessive collateral

After several controversial experiments, scalability remains a challenge. Therefore, these concepts are constantly being adjusted to meet new challenges.

In recent years, a major stablecoin project's chart shows that price stability remains unchanged, capital efficiency can be seen as scalability, but Decentralization has been replaced by censorship resistance.

Resistance to censorship is one of the fundamental characteristics of cryptocurrency, but it is just one aspect compared to Decentralization. This is because the latest stablecoins (with a few exceptions) exhibit a certain degree of centralization.

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, who effectively act like shareholders. In this case, scalability comes from the quantity of profits rather than the composability within decentralized finance.

True Decentralization has been thwarted.

Motivation and Challenges

There is a gap between ideals and reality. On March 12, 2020, impacted by the COVID-19 pandemic, the entire market plummeted, and DAI was severely hit. Subsequently, reserves were mainly transferred to USDC, making it a substitute, acknowledging to some extent the failure of Decentralization in the face of mainstream stablecoins. At the same time, attempts at algorithmic stablecoins and rebase stablecoins failed to achieve the expected results. Subsequent legislation further exacerbated the situation. Meanwhile, the rise of institutional stablecoins weakened experimentation.

However, some attempts have still achieved growth. A certain project stands out due to the immutability of its contract and the use of Ethereum as collateral to promote pure Decentralization. However, it has shortcomings in scalability.

The project recently launched the V2 version, enhancing the peg security through multiple upgrades and providing more flexible interest rates when minting new stablecoins.

However, several factors limit its growth. Compared to mainstream stablecoins that have higher capital efficiency but no returns, the loan-to-value ratio of its stablecoin is about 90%, which is not outstanding. In addition, direct competitors that provide intrinsic returns have also achieved a 100% loan-to-value ratio.

The main issue may lie in the lack of a large-scale distribution model. Due to still being closely associated with the early Ethereum community, there is less focus on use cases like diffusion on DEXs. While the cyberpunk atmosphere aligns with the spirit of cryptocurrency, it may limit mainstream growth if it cannot balance with Decentralization finance or retail adoption.

Despite the limited total locked value, the project is one of the projects with the highest TVL in cryptocurrency among its forks, with a total of $370 million for V1 and V2, which is noteworthy.

Regulatory Impact

The new bill may bring more stability and recognition to stablecoins in the United States, but it only focuses on traditional, fiat-backed stablecoins issued by licensed and regulated entities.

Any decentralized, crypto-collateralized, or algorithmic stablecoin either falls into a regulatory gray area or is excluded.

Value Proposition and Distribution

Stablecoins are tools for mining gold mines. Some projects are primarily aimed at institutions, seeking to expand the traditional financial sector; others come from Web 2.0, aiming to expand their market by reaching out to native cryptocurrency users, but face scalability challenges.

There are also some projects focusing on underlying strategies, such as stablecoins based on real-world assets, aimed at achieving sustainable returns, and Delta-Neutral strategies, focused on generating income for holders.

These projects all share a common point: varying degrees of centralization.

Even projects focused on Decentralization finance, such as Delta-Neutral strategies, are managed by internal teams. While they may utilize Ethereum in the background, overall management remains centralized.

The emerging ecosystem has also brought new hope. Some projects initially adopted centralized decision-making mechanisms, aiming to gradually achieve Decentralization through new technologies. In addition, some fork projects are experiencing significant growth and have established their position in the native stablecoin of the new chain.

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

Conclusion

Centralization itself is not entirely negative. For projects, it is simpler, more controllable, more scalable, and better suited to regulation.

However, this does not align with the original idea of cryptocurrency. What can guarantee that a stablecoin truly has censorship resistance? It is not just an on-chain dollar, but a real user asset? No centralized stablecoin can make such a promise.

Therefore, although emerging alternatives are attractive, we should not forget the original stablecoin trilemma:

• Price Stability
• Decentralization
• Capital efficiency

While pursuing innovation and adapting to market demands, it is still crucial to maintain a balance of these core principles.