Reassessing the Development of Stablecoins: The Current Dilemma of Decentralization

Stablecoins have gained significant attention in the cryptocurrency space, and there is a good reason for that. Aside from speculative factors, stablecoins are one of the few applications that have found a clear product-market fit in the crypto domain. Currently, the industry widely anticipates that tens of trillions of dollars in stablecoins will flow into traditional financial markets over the next five years.

However, surface gloss does not mean there are no problems.

The Evolution of the Stablecoin Trilemma

Emerging projects often use charts to compare their positioning with that of major competitors. It is worth noting that there has been a significant regression in terms of Decentralization recently, although this is often downplayed.

As the market matures, the demand for scalability has collided with the early ideals of Decentralization. However, a balance should be found to some extent.

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

1. Price stability: Maintaining a stable value ( is usually pegged to the US dollar )
2. Decentralization: No single entity controls it, possessing censorship resistance and trustlessness characteristics.
3. Capital efficiency: No need for excessive collateral to maintain the peg.

However, after several controversial experiments, scalability remains a major challenge. Therefore, these concepts are continually evolving to meet new challenges.

In recent years, the strategies of some major stablecoin projects are commendable, mainly because they have transcended the mere category of stablecoins and developed into more comprehensive products. However, it can be seen that price stability remains unchanged, capital efficiency can be equivalent to scalability, while Decentralization is replaced by censorship resistance.

While censorship resistance is one of the fundamental characteristics of cryptocurrency, it is only a subset compared to Decentralization. This is because the latest stablecoin projects (, 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 distributing them to holders, who essentially act like shareholders. In this case, scalability comes from the scale of profits, rather than the composability within DeFi.

True Decentralization has faced setbacks.

The Contradiction Between Motivation and Reality

Idealism is abundant, but reality is stark. On March 12, 2020, due to the impact of the COVID-19 pandemic, the entire market plummeted, and the situation DAI faced is well-known. Since then, reserves have primarily shifted to USDC, making it an alternative, which to some extent acknowledges the failure of Decentralization in the face of mainstream stablecoins. Meanwhile, attempts at algorithmic stablecoins and rebase stablecoins have also failed to meet expectations. After that, the worsening regulatory environment further exacerbated the situation. At the same time, the rise of institutional stablecoins has also weakened the development space for experimental projects.

However, one of the attempts has achieved some growth. A certain project stands out for its contract immutability and its use of Ethereum as collateral to promote pure Decentralization. However, its scalability is still lacking.

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

However, some factors limit its growth. Compared to mainstream stablecoins that have higher capital efficiency but no yield, the loan-to-value ratio of its stablecoin is about 90%, which is not high. In addition, some direct competitors that offer intrinsic yields have achieved a loan-to-value ratio of 100%.

But the main issue may be the lack of a large-scale distribution model. Because it is still closely related to the early Ethereum community, there is less focus on use cases such as diffusion on decentralized exchanges. Although its cyberpunk atmosphere aligns with the spirit of cryptocurrency, if it cannot balance with DeFi or retail adoption, it may limit mainstream growth.

Despite the limited total locked value, the project is one of the projects with the highest total locked value in cryptocurrency due to its forks, with V1 and V2 totaling $370 million, which is fascinating.

The Impact of Regulation on Stablecoins

The new legislation may bring more stability and recognition to stablecoins in the United States, but at the same time, 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.

The Value Proposition and Distribution of Stablecoins

Stablecoins are tools for mining gold mines. Some projects are primarily aimed at institutions, intending to expand into the traditional financial sector; others come from Web2.0, aiming to expand their potential market by reaching out to native cryptocurrency users, but face scalability issues due to a lack of experience in the new field.

There are also some projects that focus on underlying strategies, such as projects based on real-world assets, aiming to achieve sustainable returns ( as long as interest rates remain high ), and Delta-Neutral strategies, which focus on generating profits for holders.

All of these projects have one thing in common, which is 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. In fact, these projects should theoretically be classified as derivatives rather than stablecoins.

The emerging ecosystem has also brought new hope. For example, some projects will adopt a centralized decision-making mechanism in the initial months, aiming to gradually achieve Decentralization through the economic security provided. In addition, there are some fork projects experiencing significant growth and establishing their position among the native stablecoins of the emerging blockchain.

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 regulation.

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

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

1. Price stability
2. Decentralization
3. Capital Efficiency