Revisiting the Stablecoin Trilemma: The Decline of Decentralization

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Stablecoins have captured global attention—and for good reason. Beyond speculation, they represent one of the few clear product-market fits in the crypto space. As trillions of dollars are projected to flow into traditional finance (TradFi) via stablecoins over the next five years, their role as financial infrastructure is more critical than ever.

But not all that glitters is gold.

While stablecoins promise stability and innovation, a closer look reveals a troubling trend: the erosion of decentralization. In the race for scalability and regulatory compliance, one of crypto’s core principles is being quietly compromised.

The Original Stablecoin Trilemma

The concept of the stablecoin trilemma has long guided development in this space. It posits that a stablecoin can only optimize two out of three key attributes at any given time:

Historically, projects have struggled to balance these three pillars. However, recent developments show a shift: while price stability remains non-negotiable and capital efficiency has evolved into a proxy for scalability, decentralization has taken a backseat.

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Many leading stablecoin projects now emphasize censorship resistance over full decentralization. While important, censorship resistance is only a subset of true decentralization. Most modern stablecoins—even those built on decentralized exchanges (DEXs)—rely on centralized teams to manage yield strategies, allocate returns, and govern protocol upgrades. These teams function much like corporate boards, with token holders acting as shareholders rather than autonomous participants.

This model boosts scalability through yield generation but sacrifices the foundational ethos of DeFi: permissionless, distributed control.

The Reality Check: Why Decentralization Faded

Idealism met reality on March 12, 2020—“Black Thursday”—when market turmoil triggered by the pandemic caused DAI to lose its peg. In response, MakerDAO increasingly relied on USDC, a regulated, fiat-backed stablecoin issued by Circle. This strategic pivot acknowledged a hard truth: pure decentralization struggled under pressure.

At the same time, algorithmic experiments like UST and rebase models like Ampleforth failed to deliver sustainable stability. Regulatory scrutiny intensified, further discouraging radical innovation. Institutional players entered the arena with regulated, asset-backed tokens such as BlackRock’s BUIDL and PayPal’s PYUSD, prioritizing compliance over decentralization.

Yet amid this centralization wave, one project stood out: Liquity.

Built on Ethereum with immutable smart contracts and zero governance, Liquity offered a vision of truly decentralized lending. Its stablecoin, LUSD, required no active management and maintained a 1:1 peg through over-collateralization. Recently, Liquity launched V2, enhancing peg resilience and introducing flexible interest mechanisms for its new token, BOLD.

Despite these innovations, adoption remains limited. With a loan-to-value (LTV) ratio of around 90%, it lags behind competitors like Ethena (USDe), Usual (USDO), and Resolv (USR), which offer 100% LTV and built-in yield generation. More importantly, Liquity lacks a robust distribution strategy beyond early Ethereum adopters, limiting its reach in broader DeFi ecosystems.

Still, Liquity and its growing number of forks collectively hold $370 million in total value locked (TVL)—a testament to enduring demand for decentralized alternatives.

Regulatory Pressure and the Exclusion of True Innovation

Legislation like the proposed Genius Act in the U.S. aims to bring clarity to stablecoins—but at a cost. The bill focuses exclusively on fiat-collateralized stablecoins issued by licensed entities like Circle and Tether. Any form of crypto-backed or algorithmic stablecoin is either left in regulatory limbo or outright excluded.

This creates a paradox: the most innovative and decentralized models face the highest barriers to entry, while centralized, permissioned systems gain legitimacy and market dominance.

The Rise of Hybrid Value Models

Today’s stablecoin landscape is defined by hybrid value propositions:

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Notably, even these “DeFi-native” projects are centrally managed. Teams control risk parameters, adjust collateral types, and manage treasury assets. While they operate on public blockchains, their governance structures mirror traditional financial institutions.

Are these still stablecoins—or are they just on-chain derivatives?

New Hope: Emerging Ecosystems and Gradual Decentralization

Despite setbacks, new ecosystems offer renewed promise.

Projects like CapMoney adopt a phased approach: starting with centralized decision-making but aiming for full decentralization using EigenLayer’s restaking mechanism to secure economic finality. Similarly, Felix Protocol, a Liquity fork on emerging chains like MegaETH and HyperEVM, is gaining traction by leveraging novelty effects and native chain incentives.

These models recognize that full decentralization cannot be rushed. Instead, they prioritize product-market fit first, then gradually decentralize—balancing innovation with sustainability.

Frequently Asked Questions

Q: What is the stablecoin trilemma?
A: It refers to the challenge of achieving price stability, decentralization, and capital efficiency simultaneously—most stablecoins can only optimize two at once.

Q: Why has decentralization declined in modern stablecoins?
A: Scalability demands, regulatory pressures, and the need for reliable yield generation have led teams to adopt centralized control for faster decision-making and risk management.

Q: Can a stablecoin be both scalable and decentralized?
A: Theoretically yes, but practically difficult. Liquity shows it's possible with strong collateral models, though adoption lags due to lower capital efficiency.

Q: Are yield-bearing tokens like USDe truly stablecoins?
A: They function as stable-value assets but rely on complex financial engineering. Their governance and risk models are often centralized, blurring the line between stablecoins and synthetic derivatives.

Q: How does regulation impact decentralized stablecoins?
A: Legislation like the Genius Act favors regulated issuers, leaving crypto-native or algorithmic models in legal gray areas—hindering innovation and adoption.

Q: Is there still demand for fully decentralized stablecoins?
A: Yes. With $370M TVL across Liquity and its forks, there's clear appetite for trustless systems—especially among privacy-conscious and DeFi-native users.

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Final Thoughts: Remembering the Core Promise

Centralization isn’t inherently bad—it brings efficiency, compliance, and resilience under stress. But it contradicts the original spirit of cryptocurrency: user sovereignty, censorship resistance, and trustless exchange.

True抗审查ness doesn’t come from being on-chain alone—it comes from having no single point of control. No centralized stablecoin can make that claim.

As we move forward, let’s not forget the original trilemma:

The goal shouldn’t be to abandon decentralization for scalability—but to innovate until we achieve all three.