Revisiting the Stablecoin Trilemma: The Current Decline of Decentralization

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By Chilla
Compiled by: Block Unicorn

Preface

Stablecoins are rightfully in the spotlight. Beyond speculation, they are among the few cryptocurrency products with a clear product-market fit (PMF). Today, the world anticipates trillions in stablecoins flooding traditional finance (TradFi) within the next five years.

However, not all that glitters is gold.

The Original Stablecoin Trilemma

New projects often use charts to compare their positioning against competitors. What stands out—yet is frequently downplayed—is the recent regression of decentralization.

As the market matures, the need for scalability clashes with the anarchic dreams of the past. But balance must be found.

Initially, the stablecoin trilemma revolved around three key pillars:

  1. Price Stability: Stablecoins maintain a stable value (typically pegged to the USD).
  2. Decentralization: No single entity controls the asset, ensuring censorship resistance and trustlessness.
  3. Capital Efficiency: Parity can be maintained without excessive collateral.

Yet, scalability remains a challenge despite controversial experiments. These concepts continually evolve to address such hurdles.

The chart above references a leading stablecoin project from recent years. It deserves credit for expanding beyond stablecoins into broader products.

However, while price stability remains unchanged and capital efficiency aligns with scalability, decentralization has been reduced to "censorship resistance."

Censorship resistance is a core feature of cryptocurrencies but is merely a subset of decentralization. Most modern stablecoins (except Liquity, its forks, and a handful of others) exhibit centralization traits.

For instance, even if these projects use decentralized exchanges (DEXs), teams still manage strategies, seek yields, and redistribute them to holders—functionally akin to shareholders. Here, scalability stems from profit generation, not DeFi composability.

True decentralization has been sidelined.

Motivation

Dreams outweigh reality. On March 12, 2020, markets crashed during the pandemic, and DAI’s collapse became infamous. Since then, reserves largely shifted to USDC, tacitly admitting decentralization’s failure against Circle and Tether’s dominance. Algorithmic stablecoins like UST or rebase models (e.g., Ampleforth) also fell short. Legislation worsened the landscape, while institutional stablecoins stifled experimentation.

Yet, one attempt thrived. Liquity stands out for immutable contracts and Ethereum-backed collateral, enabling pure decentralization. However, its scalability is limited.

Recently, Liquity launched V2 with upgrades like enhanced safety mechanisms and flexible interest rates for its new stablecoin, BOLD. But growth faces hurdles:

Despite a modest $370M total value locked (TVL) across V1/V2, Liquity’s forks dominate crypto’s TVL rankings—a fascinating outlier.

The Genius Law

This U.S. framework aims to stabilize and recognize stablecoins but exclusively favors fiat-backed, regulated issuers.

Decentralized, crypto-collateralized, or algorithmic stablecoins fall into regulatory gray areas or are outright excluded.

Value Proposition vs. Distribution

Stablecoins are shovels digging for gold. Hybrid models target institutions (e.g., BlackRock’s BUIDL, World Liberty’s USD1) expanding into TradFi. Web2 entrants (e.g., PayPal’s PYUSD) aim for crypto-native users but lack scalability due to inexperience.

Others focus on underlying strategies:

All share a common thread: centralization.

Even DeFi-centric projects like delta-neutral strategies are managed internally. While Ethereum may underpin them, oversight remains centralized. Technically, these are derivatives—not stablecoins—as previously debated.

Emerging ecosystems (MegaETH, HyperEVM) offer new hope.

For example:

These projects prioritize blockchain-native distribution models and the "novelty effect."

Conclusion

Centralization isn’t inherently negative. For projects, it’s simpler, controllable, scalable, and legally adaptable.

But it diverges from crypto’s original ethos. What guarantees a stablecoin is truly censorship-resistant? Is it more than an on-chain dollar—an actual asset for users?

No centralized stablecoin can promise this.

So while emerging alternatives are enticing, let’s not forget the original trilemma:

  1. Price Stability
  2. Decentralization
  3. Capital Efficiency

FAQs

1. What is the stablecoin trilemma?

The trilemma refers to the trade-offs between price stability, decentralization, and capital efficiency—challenging projects to optimize all three simultaneously.

2. Why is decentralization declining in stablecoins?

Scalability demands and regulatory pressures push projects toward centralized models for efficiency and compliance.

3. How does Liquity differ from other stablecoins?

Liquity emphasizes decentralization by using Ethereum as collateral and immutable contracts, though it sacrifices scalability.

👉 Explore innovative stablecoin solutions

4. Are algorithmic stablecoins viable after UST’s collapse?

Current iterations face skepticism, but research continues. Most now hybridize with collateralized models for stability.

👉 Discover decentralized finance trends

5. Can stablecoins bridge TradFi and DeFi?

Yes—institutional stablecoins (e.g., BUIDL) and RWA-focused projects are key conduits, though centralization concerns persist.

6. What’s next for stablecoin regulation?

Expect clearer frameworks for fiat-backed stablecoins, while decentralized models navigate uncertain legal landscapes.


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