Everyone is talking about stablecoins, and rightly so. Together with speculation, it is one of the rare products that has found clear PMF within crypto. And now, the entire world is talking about the trillions of stables that are expected to flood the TradFi market in the next five years.

However, not all that glitters is gold.

The Original Stablecoin Trilemma

New projects usually like showing graphs comparing their positioning respect to the major competitors in circulation. What stands out, although often downplayed, is the recent shift away from decentralization.

The market is developing, and maturing. The need for scalability is colliding with the dreams of anarchy that were here in the past. But a middle ground should be found somewhere.

Initially, the stablecoin trilemma was based on three key concepts:

• Price Stability: The stablecoin maintains a stable value (usually pegged to USD).
• Decentralization: No single entity controls it, bringing features like censorship resistance and trustlessness.
• Capital Efficiency: no excessive collateral to maintain the peg.

However, after several experiments with debatable success, scalability remains a struggle. Therefore, these concepts are evolving to adjust to these challenges.

The image above is taken from one of the major stablecoin projects of recent years. It deserves credit, mainly thanks to its strategy to extend beyond just stablecoins and evolve into something more.

However, you can see how Price Stability remains the same. Then, Capital Efficiency can be synonymous with Scalability. However, Decentralization is changed to Censorship-Resistant.

Censorship Resistance is a fundamental feature of crypto, but it is a sub-category compared to the concept of Decentralization. This is because the newest stablecoins, apart from Liquity, its forks, and rare other examples, have a centralization aspect that sets them apart.

For instance, even if these projects utilise DEXs, there still is a team who manages the strategies looking for yield that can be redistributed to holders, who basically become like shareholders. In this case, scalability comes from the amount of yield rather than composability within DeFi.

Actual decentralization has taken a setback.

Motivations

Many dreams, not enough reality. Everyone knows what happened with DAI on Thursday, March 12, 2020 when the whole market sank due to Covid. From then on, reserves were mainly changed to USDC, making it a surrogate, and partly admitting the defeat of decentralization against the supremacy of Circle and Tether. In the meantime, attempts with algorithmic stablecoins like UST, or rebasing ones like Ampleforth, have not at all borne the fruits that were hoped for. Later, legislation has only worsened the situation. And in the meantime, the rise of institutional stablecoins has weakened experimentation.

Among these, however, there was an attempt that saw growth. Liquity stood out for its contracts’ immutability and the push for pure decentralization using Ethereum as collateral. However, scalability lacked.

Now, they recently launched V2 with several upgrades to establish greater peg security, and better rates flexibility when minting BOLD, their new stable.

However, some factors have limited its growth. The need for around 90% LTV to mint its stable does not excel in comparison to the more capital-efficient but yield-free USDT and USDC. Also, more direct competitors that offer intrinsic yields, such as Ethena, Usual, and Resolv, maintain a 100% LTV.

However, the main issue might be the lack of a large distribution model. That’s because it still is closely tied to the early Ethereum crowd, with less focus on use cases such as diffusion on DEXes. While the cyberpunk vibe is in line with the crypto ethos, it could limit mainstream growth if not balanced with DeFi or retail adoption.

Still, despite the limited TVL, it is fascinating to see how Liquity is one of the projects whose forks hold the most TVL in crypto, reaching a total of $370M between V1 and V2.

Genius Act

This should bring more stability and recognition to stablecoins in the US but at the same time it only focuses on traditional, fiat-backed stablecoins issued by licensed and regulated entities.

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

Value Proposition And Distribution

Stablecoins are the shovels to dig the gold. Some are hybrid projects mostly focused on institutions (like BlackRock’s BUIDL and World Liberty Financial’s USD1) to expand into the TradFi world, others coming from Web2 (like PayPal’s PYUSD) to expand their Total Addressable Market by immersing themselves among native crypto users, though with scalability issues coming from inexperience in a new sector.

Then there are projects mostly focused on the underlying strategy, such as RWAs (like Ondo’s USDY and Usual’s USDO) that aim for sustainable returns based on real-world value (as long as interest rates are high), and Delta-Neutral strategies (like Ethena’s USDe and Resolv’s USR) that focus on generating yield for their holders.

All of these share a common factor, although to varying degrees: centralization.

Even DeFi-focused ones, like delta neutral strategies, are managed internally by a team. While they may utilize Ethereum in the background, the overall management remains centralized. Actually, these projects should theoretically be classified as derivatives rather than stablecoins, but that’s a topic i discussed a while ago.

There are also new hopes coming from newly developing ecosystems, like MegaETH and HyperEVM.

For example, CapMoney will initially have centralized decision-making for the first months, with the goal of moving towards decentralization through the economic security provided by Eigen Layer. Also, there are Liquity forks like Felix Protocol, which is experiencing significant growth and establishing itself among the native stablecoins of the chain.

These projects have chosen to focus on a distribution model centered around emerging chains, leveraging the novelty effect to their advantage.

Conclusion

Centralization is not inherently negative. For projects, it is simpler, more controllable, more scalable, and more adaptable to legislation.

However, this is not part of the original crypto ethos. What guarantees us that a stablecoin truly is censorship-proof? That it is not just an onchain dollar, but rather a true users’ asset? No centralized stablecoin can make that promise.

For this reason, although the emerging alternatives are intriguing, we should not forget the original stablecoin trilemma.

• Price Stability
• Decentralization
• Capital Efficiency

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