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, global discussions revolve around the trillions of dollars in stablecoins expected to flood traditional finance (TradFi) markets 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.
Markets evolve. Scalability needs clash with early anarchic ideals. Yet, balance must be found.
The original stablecoin trilemma rested on three pillars:
- Price Stability: Maintaining a peg (typically to the USD).
- Decentralization: No single point of control, ensuring censorship resistance and trustlessness.
- Capital Efficiency: Sustaining the peg without excessive collateral.
Despite controversial experiments, scalability remains a challenge. Concepts now adapt—shifting decentralization toward "censorship resistance," a subset of the original ideal.
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Motivations
Dreams outpaced reality. The March 12, 2020 ("Black Thursday") crash exposed DAI’s fragility, forcing a pivot to USDC reserves—a de facto admission of decentralization’s retreat against centralized giants like Circle and Tether. Algorithmic stablecoins (e.g., UST) and rebase tokens (e.g., Ampleforth) faltered, while regulation tightened. Institutional stablecoins rose, crowding out experimentation.
Yet, one attempt thrived: Liquity. Its immutable contracts and ETH-backed model championed pure decentralization, though scalability lagged. Its V2 upgrade (introducing BOLD) enhances peg security and rate flexibility but faces growth hurdles:
- 90% LTV trails capital-efficient rivals (e.g., USDT, Ethena’s USDe).
- Limited distribution, prioritizing Ethereum purists over mainstream adoption.
Despite this, Liquity’s forks dominate niche ecosystems (e.g., Felix Protocol), leveraging "novelty effects" on emerging chains.
The "Genius Act"
A U.S. bill aiming to stabilize regulated, fiat-backed stablecoins—while sidelining decentralized, crypto-collateralized, or algorithmic alternatives. The message? Centralization wins.
Value Propositions & Distribution
Stablecoins are "picks and shovels" in the gold rush. Models vary:
- Institutional hybrids (e.g., BlackRock’s BUIDL) target TradFi.
- Web2 entrants (e.g., PayPal’s PYUSD) struggle with crypto-native scalability.
- Yield-focused strategies: RWA (Ondo’s USDY) and delta-neutral (Ethena’s USDe).
All share a common thread: centralized control. Even DeFi projects like Ethena manage strategies internally, blending derivatives with stablecoin labeling.
Emerging ecosystems (MegaETH, HyperEVM) offer hope. For example, CapMoney plans gradual decentralization via Eigen Layer, while forks like Felix Protocol thrive as native chain stablecoins.
Conclusion
Centralization isn’t inherently bad—it’s simpler, scalable, and legislatively compliant. But it betrays crypto’s ethos. Can a stablecoin be truly censorship-resistant? Only decentralized models honor this promise.
Thus, amid shiny alternatives, we must remember the original trilemma:
- Price Stability
- Decentralization
- Capital Efficiency
FAQs
Q: Why did DAI shift to USDC reserves?
A: After Black Thursday’s volatility, USDC offered stronger peg stability, albeit at the cost of decentralization.
Q: Are algorithmic stablecoins viable?
A: Post-UST collapse, most failed; rebase models (e.g., Ampleforth) lacked adoption.
Q: What’s Liquity’s edge?
A: Fully immutable contracts and ETH collateral—but growth is limited by narrow distribution.