Rethinking the Trilemma of Stablecoins: The Setback of Decentralization

Stablecoins play an important role in the cryptocurrency space. Apart from speculation, they are one of the few products with a clear product-market fit. Currently, there are predictions that trillions of stablecoins will flow into the traditional financial markets over the next five years. However, surface glamour does not always represent true value.

The Evolution of the Stablecoin Trilemma

New projects usually use charts to compare their positioning with major competitors. It is worth noting that there has been a significant regression in Decentralization recently. As the market develops and matures, the demand for scalability has collided with the early anarchist ideals, necessitating the search for a balance.

The original stablecoin trilemma is based on three core concepts:

1. Price stability: Maintain a stable value anchored to assets such as the US dollar.
2. Decentralization: Avoid single entity control, achieve censorship resistance and trustlessness.
3. Capital efficiency: Maintaining the peg without excessive collateral.

However, after multiple controversial experiments, scalability remains a challenge. These concepts are constantly being adjusted to meet new challenges.

In recent years, the strategies of some major stablecoin projects have gone beyond the mere category of stablecoins. However, it is worth noting that while price stability remains unchanged, capital efficiency can be equated with scalability, and decentralization has been replaced by censorship resistance.

While censorship resistance is a fundamental characteristic of cryptocurrencies, it is merely a subset compared to the concept of Decentralization. This reflects that the latest stablecoin projects (with few exceptions) exhibit a certain degree of centralization. For example, even when using decentralized exchanges, there are still teams responsible for managing strategies, seeking returns, and distributing them to holders similar to shareholders. In this case, scalability comes from the amount of returns rather than the composability within DeFi.

True Decentralization has faced setbacks.

Motivation and Reality

On March 12, 2020, affected by the COVID-19 pandemic, the market plummeted, and DAI suffered a heavy blow. Subsequently, reserves mainly shifted to USDC, somewhat acknowledging the failure of Decentralization in front of certain large stablecoin issuers. At the same time, attempts at algorithmic stablecoins and elastic supply stablecoins also did not meet expectations. The subsequent legislation further worsened the situation, and the rise of institutional stablecoins also weakened the experimental nature.

However, Liquity stands out due to its contract immutability and the use of Ethereum as collateral to promote pure Decentralization, despite some shortcomings in scalability. Their recently launched V2 version enhances anchoring security through multiple upgrades and provides more flexible interest rates when minting the new stablecoin BOLD.

However, Liquity's growth is still constrained by several factors. Its loan-to-value ratio (approximately 90%) is not high compared to certain non-yielding but more capital-efficient stablecoins. Moreover, the LTV of some direct competitors that provide intrinsic yield has reached 100%.

However, the main issue may be the lack of a large-scale distribution model. Due to its continued close ties with the early Ethereum community, there has been less focus on use cases such as diffusion on DEXs. While its cyberpunk atmosphere aligns with the spirit of cryptocurrency, failing to balance with DeFi or retail adoption may limit mainstream growth.

Despite the limited Total Value Locked (TVL), Liquity is one of the projects with the highest TVL in cryptocurrency among its forks, totaling $370 million for V1 and V2, which is fascinating.

Hope of Emerging Ecosystems

Some emerging ecosystems have brought new hope. For example, certain projects will adopt a centralized decision-making mechanism in the initial months, aiming to gradually achieve Decentralization through the economic security provided by specific technologies. Additionally, some forked projects are experiencing significant growth and establishing their position in the native stablecoin of specific chains.

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 negative. For projects, it is simpler, more controllable, more scalable, and better adapted to legislation.

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

Therefore, despite the appeal of emerging alternatives, we should not forget the original stablecoin trilemma: price stability, Decentralization, and capital efficiency. While pursuing innovation and adapting to market demands, it remains crucial to maintain these core values.