Decentralization stablecoin: The race is still on, who will win the championship?

Stablecoins are an important infrastructure in the cryptocurrency ecosystem, known as the "Holy Grail" of the crypto world. However, the stablecoin market is currently dominated by centralized stablecoins, while decentralized stablecoins face severe challenges. This article will delve into the current development status, opportunities, and challenges of decentralized stablecoins.

Why do we need decentralized stablecoins

The significance of the existence of decentralized stablecoins mainly has three points:

1. Create credit independent of centralized institutions.

Traditional stablecoins are issued by centralized institutions and lack minting rights. Decentralized stablecoins aim to break away from centralized power and create stable credit.

2. Avoid Centralization Risks

Centralized stablecoins face regulatory risks and their credibility can be easily questioned. Decentralized stablecoins provide an alternative.

3. Meet specific market demands

User groups sensitive to centralization risks will prioritize choosing decentralized stablecoins, which constitutes their inherent market.

The Development Dilemma of Stablecoins

Stablecoins face a dilemma:

1. Scale effects and centralization risks

Stablecoins need to reach a certain scale to achieve a positive cycle, but scale growth will attract regulatory attention.

2. Conflict Between Credit Creation and Traditional Power

Algorithmic stablecoins aim to replace central banks in creating credit, inevitably leading to conflicts of interest with the traditional financial system.

This predicament forces stablecoin projects to either become dependencies of traditional finance or to be fully prepared to sever ties with the existing system.

Stablecoin Market Landscape

Currently, the stablecoin market shows a "one strong and many strong" pattern:

• Centralized stablecoins such as USDT and USDC dominate absolutely.
• Algorithmic stablecoins like DAI and FRAX rank in the second tier.
• A large number of small stablecoin projects compete for the remaining market

From a functional perspective, stablecoins can be divided into:

1. High-energy coins: such as USDT, USDC, used as the main trading medium
2. Broad money: Most small stablecoins primarily provide liquidity through trading pairs with mainstream stablecoins.

The Competitive Landscape of Algorithmic Stablecoins

algorithm stablecoin with centralized risk

1. Curve's CrvUSD

Advantages: It has the largest stablecoin exchange, allowing for quick liquidity establishment; it uses a clearing interval mechanism to reduce risk.

2. AAVE's GHO

Advantages: Having a large number of active users; stablecoins can be generated through various methods to reduce costs.

3. MakerDAO's DAI

Disadvantages: Involves real-world assets, with centralization risks; annual losses of nearly ten million dollars.

4. Frax's FRAX

Disadvantages: The collateral assets include USDC, which has not eliminated the risk of centralization.

These algorithmic stablecoins, although adopting a decentralization mechanism, have not completely eliminated centralization risks and will find it difficult to compete with fully centralized stablecoins like USDT and USDC in the long run.

fully decentralized algorithm stablecoin

1. Liquity's LUSD

Features: Only ETH is used as collateral, completely isolating centralized risks; additional demand scenarios have been designed.

Disadvantages: lower stability, lack of liquidity incentive mechanisms.

2. Inverse Finance's DOLA

Features: Use ETH and OETH as collateral; designed a flexible interest rate tool DBR.

Disadvantages: The lending interest rates are too high, making it difficult to scale.

3. Reflexer’s RAI

Features: Anchored by a custom index, free from the influence of the US dollar.

Disadvantages: High cost of price consensus, insufficient economies of scale.

These fully decentralized stablecoin projects, while avoiding centralization risks, generally face issues such as small scale and insufficient liquidity, and have not yet formed effective competitive advantages.

Conclusion

The stablecoin market structure has basically taken shape:

1. Centralized stablecoins dominate the market, forming a monopoly pattern.
2. Algorithmic stablecoins that include centralization risks find it difficult to break through bottlenecks.
3. Fully decentralized stablecoins are still in the early stages of development, and their prospects are uncertain.

Decentralization stablecoin, although facing challenges, still has room for development:

1. A small market share means great growth potential.
2. Have an inherent user base sensitive to centralization risks
3. The segmented track has not yet formed a monopoly, and there are still breakthrough opportunities.

In the future, as the demand for Decentralization increases, fully decentralized stablecoins are still expected to achieve breakthroughs. However, to stand out in the fierce market competition, continuous innovation in aspects such as mechanism design and liquidity management is necessary.