Author: Chilla
Translated by: Block unicorn
Preface
Stablecoins are receiving significant attention, and not without reason. Beyond speculation, stablecoins are one of the few products in the cryptocurrency realm with a clear product-market fit (PMF). Today, the world is discussing the trillions of stablecoins expected to flow into the traditional financial (TradFi) market within the next five years.
However, what shines is not necessarily gold.
The Original Stablecoin Trilemma
New projects typically use charts to compare their positioning against major competitors. What is striking but often downplayed is the recent apparent regression in decentralization.
The market is developing and maturing. The need for scalability collides with past anarchic dreams. But a balance should be found to some extent.
Initially, the stablecoin trilemma was based on three key concepts:
- Price Stability: Stablecoins maintain a stable value (usually pegged to the US dollar).
- Decentralization: No single entity controls it, bringing anti-censorship and trustless characteristics.
- Capital Efficiency: Maintaining the peg without excessive collateral.
However, after several controversial experiments, scalability remains a challenge. Therefore, these concepts are continuously evolving to adapt to these challenges.
The image is from one of the most significant stablecoin projects in recent years. It is commendable, primarily due to its strategy of developing beyond the stablecoin scope.
However, you can see that price stability remains unchanged. Capital efficiency can be equated to scalability. But decentralization has been replaced with anti-censorship.
Anti-censorship is a fundamental characteristic of cryptocurrencies, but compared to the concept of decentralization, it is merely a subcategory. This is because the latest stablecoins (except for Liquity and its forks, and a few other examples) have certain centralized characteristics.
For instance, even if these projects utilize decentralized exchanges (DEX), there is still a team managing strategies, seeking yields, and redistributing them to holders, who essentially function like shareholders. In this case, scalability comes from the quantity of yields, not from composability within DeFi.
True decentralization has been compromised.
Motivations
Too many dreams, insufficient reality. On March 12, 2020, the entire market crashed due to the COVID-19 pandemic, and DAI's experience is well-known. Since then, reserves have primarily shifted to USDC, making it an alternative and to some extent acknowledging the failure of decentralization in the face of Circle and Tether's dominance. Meanwhile, attempts like algorithmic stablecoins such as UST or rebase stablecoins like Ampleforth did not achieve the expected results. Subsequently, legislation further deteriorated the situation. Simultaneously, the rise of institutional stablecoins weakened experimentation.
However, one attempt achieved growth. Liquity stood out for its contract immutability and use of Ethereum as collateral, driving pure decentralization. However, its scalability was lacking.
Now, they recently launched V2, enhancing peg security through multiple upgrades and offering better rate flexibility when minting their new stablecoin BOLD.
However, some factors limit its growth. Compared to the more capital-efficient but yield-less USDT and USDC, its stablecoin's Loan-to-Value (LTV) of around 90% is not high. Additionally, direct competitors offering intrinsic yields, such as Ethena, Usual, and Resolv, have achieved an LTV of 100%.
But the primary issue might be the lack of a large-scale distribution model. Because it remains closely associated with the early Ethereum community, with less focus on use cases like DEX diffusion. While the cyberpunk atmosphere aligns with the cryptocurrency spirit, it might limit mainstream growth if not balanced with DeFi or retail adoption.
Despite limited Total Value Locked (TVL), Liquity is one of the most TVL-holding projects among its forks in cryptocurrency, with V1 and V2 totaling $370 million, which is fascinating.
The Genius Act
This should bring more stability and recognition to US stablecoins, but it only focuses on traditional, legally backed stablecoins issued by licensed and regulated entities.
Any decentralized, crypto-collateralized, or algorithmic stablecoins either fall into a regulatory gray area or are excluded.
Value Proposition and Distribution
Stablecoins are the shovels for mining gold. Some are hybrid projects primarily targeting institutions (like BlackRock's BUIDL and World Liberty Financial's USD1), aiming to expand in traditional finance (TradFi); some come from Web2.0 (like PayPal's PYUSD), seeking to expand their Total Addressable Market (TAM) by penetrating native cryptocurrency users, but they face scalability issues due to lack of experience in new domains.
Then there are projects focusing on underlying strategies, such as RWA (like Ondo's USDY and Usual's USDO), aiming to achieve sustainable returns based on real-world value (as long as interest rates remain high), and Delta-Neutral strategies (like Ethena's USDe and Resolv's USR), focusing on generating yields for holders.
All these projects share a common trait, to varying degrees: centralization.
Even projects focused on decentralized finance (DeFi), like Delta-Neutral strategies, are managed by internal teams. While they might utilize Ethereum in the backend, overall management remains centralized. In fact, these projects should theoretically be classified as derivatives rather than stablecoins, a topic I've discussed previously.
Emerging ecosystems (like MegaETH and HyperEVM) also bring new hope.
For instance, CapMoney will initially adopt a centralized decision-making mechanism, aiming to gradually achieve decentralization through the economic security provided by Eigen Layer. Additionally, Liquity's fork projects like Felix Protocol are experiencing significant growth and establishing their position in the chain's native stablecoins.
These projects choose to focus on distribution models centered on emerging blockchains and leverage the "novelty effect".
Conclusion
Centralization itself is not negative. For projects, it is simpler, more controllable, more scalable, and more adaptable to legislation.
However, this does not align with the original spirit of cryptocurrencies. What can guarantee a stablecoin's true anti-censorship? More than just an on-chain dollar, but a genuine user asset? No centralized stablecoin can make such a promise.
Therefore, despite the appealing emerging alternatives, we should not forget the original stablecoin trilemma:
- Price Stability
- Decentralization
- Capital Efficiency
