Decentralization stablecoin: The race is not over, who will emerge victorious?

Decentralization stablecoins have long been the "Holy Grail" of the cryptocurrency world, consistently attracting industry attention. In recent years, as regulatory pressures have increased, centralized stablecoins have faced frequent blows, highlighting the growing importance of decentralized stablecoins. This article will delve into the current development status of decentralized stablecoins, the challenges they face, and their future prospects.

Why do we need decentralized stablecoins?

The emergence of decentralized stablecoins is inevitable:

1. Centralized stablecoins face regulatory risks. In recent years, USDT, USDC, and others have been subjected to government intervention multiple times, demonstrating the vulnerability of centralized stablecoins.

2. Decentralization stablecoins can achieve true minting rights. Centralized stablecoins are essentially credit certificates that cannot create new credit.

3. Decentralization stablecoins can resist censorship. Centralized stablecoins may have their assets frozen at the request of the government, while decentralized stablecoins do not have this risk.

4. Decentralization stablecoins have their inherent market demand. User groups that are sensitive to centralized risks need true decentralized stablecoin options.

The Core Challenges of Stablecoins

Stablecoins face a core dilemma: the trade-off between scale and risk.

On one hand, stablecoins need to reach a certain scale to reduce transaction costs and increase usage. On the other hand, an expansion in scale can attract regulatory attention, facing greater risks. This is the "Icarus's Wings" dilemma of stablecoins.

Currently, stablecoins are mainly divided into two categories:

1. High-energy coins: such as USDT, USDC, etc., can be directly used for trading, with good liquidity.

2. Broad money: Most small stablecoins need to be exchanged for high-energy currency before they can be used, similar to broad money in traditional finance.

Analysis of Mainstream Stablecoin Mechanisms

The mainstream stablecoin mechanisms currently include:

1. Rebalancing mechanism: like Ampleforth, stabilizes price by adjusting the number of tokens. However, the effect is not good and it has basically been eliminated by the market.

2. Circulation restrictions: Limit buying and selling when prices deviate from the target. However, it will affect liquidity, and the failure of FEI indicates that there are issues with this mechanism.

3. Seigniorage mechanism: Like UST-LUNA, it stabilizes the price through the exchange of stablecoin and volatile coin. However, it is prone to form a death spiral, which carries significant risk.

4. Over-collateralization: Currently the most mainstream mechanism, such as DAI, LUSD, etc. It ensures stability through over-collateralization, but has low capital efficiency.

The Competitive Landscape of Decentralized Stablecoins

The current market structure of decentralized stablecoins is as follows:

1. DAI: A well-established algorithmic stablecoin leader, but facing challenges recently. Involves RWA which has centralization risks and is currently in a loss state.

2. FRAX: The second-ranked algorithmic stablecoin, but its collateral includes USDC and is not fully decentralized.

3. Liquity(LUSD): Completely Decentralization, but smaller in scale and less stable.

4. Inverse Finance(DOLA): Innovatively designed the interest rate tool DBR, but the high borrowing rates have limited expansion.

5. RAI: Completely decentralized and free from the US dollar, but consensus costs are high and scaling is difficult.

In terms of newcomers, Curve and AAVE, with their strong DeFi ecosystem advantages, are expected to make an impact in the stablecoin field. However, their products CrvUSD and GHO are still not fully decentralized.

Future Prospects of Decentralized Stablecoins

The decentralized stablecoin track is still in its early stages of development and faces many challenges:

1. The scale effect is insufficient, making it difficult to compete with centralized stablecoins.

2. Complete decentralization sacrifices efficiency and affects user experience.

3. It is difficult to balance price stability and capital efficiency.

4. Establishing a value-anchored consensus is costly.

However, in the long run, with the development of the crypto ecosystem and increasing regulatory pressure, decentralized stablecoins still have a broad prospect:

1. Decentralization stablecoin has its inherent demand and target user group.

2. With the improvement of the DeFi ecosystem, the application scenarios of decentralized stablecoins will continue to expand.

3. The new stablecoin mechanism and innovative design are expected to break through existing bottlenecks.

4. Large DeFi projects are entering the market, expected to bring breakthroughs in scale effects.

In summary, the battlefield of decentralized stablecoins is still ongoing, and it remains uncertain who will ultimately emerge victorious. However, it is certain that a true decentralized stablecoin is still the "Holy Grail" that the crypto world urgently needs, and there is still great potential for the future.