Reassessing the Trilemma of Stablecoins: The Setback of Decentralization

Stablecoins, as one of the few products in the cryptocurrency field with a clear product-market fit, have received much attention. Currently, there is a global discussion about the trillions of stablecoins that may flow into traditional financial markets over the next five years. However, not everything that glitters is gold.

The Evolution of the Stablecoin Trilemma

Initially, the stablecoin trilemma revolves around three core concepts:

1. Price stability: Maintain a stable value linked to fiat currencies such as the US dollar.
2. Decentralization: Avoid single entity control, achieving censorship resistance and trustless characteristics.
3. Capital efficiency: Maintain the peg without excessive collateral.

However, after multiple controversial experiments, scalability remains a huge challenge. This has led to these concepts continuously evolving to adapt to new realities.

Recently, the strategic roadmaps of some major stablecoin projects show that the concept of Decentralization has been replaced by censorship resistance. Although censorship resistance is one of the fundamental characteristics of cryptocurrency, it is merely a subset of Decentralization. This change reflects the general adoption of some degree of centralized management by the latest stablecoin projects.

For example, many projects utilize decentralized exchanges, but are still managed by teams that strategize, seek profits, and distribute them to holders. In this model, scalability mainly comes from the scale of profits rather than the composability within the DeFi ecosystem.

Decentralization Setbacks

The market crash on March 12, 2020, exposed the vulnerabilities of purely decentralized stablecoins. Since then, many projects have turned to using centralized stablecoins like USDC as reserves, which to some extent acknowledges the failure of decentralization in a market dominated by Circle and Tether. At the same time, attempts at algorithmic stablecoins and rebase stablecoins have also failed to meet expectations.

The increasing regulatory pressure has further intensified this trend. Institution-led stablecoin projects have emerged, weakening the development space for experimental projects. In this environment, projects like Liquity that adhere to the pure Decentralization concept have seen some growth, but still face challenges in scalability.

The Future Direction of Stablecoins

Currently, the stablecoin market is showing a trend of diversification:

• Some projects are aimed at institutional investors, attempting to bridge traditional finance and the crypto world.
• Some Web2 giants have launched stablecoins in hopes of expanding their market share.
• Some projects focus on underlying strategies, such as physical asset collateralization or Delta-Neutral strategies, to provide sustainable returns.

The common point of these projects is the varying degrees of centralized management. Even projects focused on DeFi are often run by centralized teams.

Emerging blockchain ecosystems like MegaETH and HyperEVM bring new possibilities. Some projects plan to balance efficiency and ideals through gradual Decentralization. However, whether these attempts can truly achieve Decentralization remains to be seen.

Conclusion

Centralization is not entirely negative; it provides better control and scalability for projects and makes it easier to adapt to regulatory requirements. However, this contradicts the original intention of cryptocurrency. True resistance to censorship and ownership of user assets are difficult to guarantee with centralized stablecoins.

Therefore, despite the allure of emerging alternatives, we should not forget the essence of the stablecoin trilemma: balancing price stability, Decentralization, and capital efficiency. While pursuing efficiency and compliance, how to maintain the core value of cryptocurrency remains a significant challenge faced by the industry.