The prophecy and reality of stablecoins: the triple dilemma of the decentralized path

Ethereum co-founder Vitalik Buterin recently shared in-depth insights on social platforms, sharply questioning the long-term reliance of the crypto industry on decentralized stablecoins. He not only pointed out the fundamental challenges that remain unresolved in this field but also revealed a prophetic dilemma—the reason why the highly anticipated decentralized stablecoin solutions have yet to break the monopoly of centralized stablecoins. The intertwined nature of these three core issues vividly illustrates this predicament.

The Deadlock of Incentive Structures: The Temptation of High Yields and Reality

The appeal of decentralized stablecoins has always stemmed from a seemingly simple promise—higher returns. But it is precisely this promise that has become the final straw crushing multiple projects.

The most representative case in history is Terra ecosystem’s UST stablecoin. Once, with nearly 20% annualized returns offered via Anchor Protocol, UST rapidly attracted massive capital inflows. However, this grand experiment ended in a catastrophic $40 billion collapse. Founder Do Kwon was sentenced to 15 years at the end of last year, and this lesson continues to serve as a reminder to the industry—that high yields and long-term stability are fundamentally incompatible.

Vitalik Buterin’s diagnosis hits the core: staking yields inherently contain structural contradictions. To attract enough funds to sustain the system, protocols must offer competitive returns. But once yields surpass a certain threshold, they inevitably fall into a Ponzi trap—requiring continuous new capital injections to maintain payouts.

Possible solutions he proposed include: drastically lowering staking yields to around 0.2%; creating new types of staking that carry no risk of confiscation; or allowing confiscatable staked assets to also serve as collateral. These solutions seem rational but face enormous implementation challenges. Take RAI, issued by the Reflexer project—once praised by Vitalik as “an ideal model of collateralized automatic stablecoin”—which uses ETH as the sole collateral and is not pegged to any fiat currency. Ironically, Vitalik himself shorted RAI for seven months and profited $92,000.

The fundamental reason for RAI’s failure lies in the ultimate dilemma faced by holders: to mint RAI, they must give up the staking yields they could have earned from holding ETH. This directly confirms the third major challenge Vitalik pointed out—the irreconcilable conflict between staking incentives and economic motivation. Ameen Soleimani, co-founder of Reflexer, later admitted, “Using only ETH as collateral was a mistake,” which is essentially a reflection on the entire design approach.

Oracle Security Dilemma: The Trade-off Between Technical Defense and Economic Cost

The second major pain point of decentralized stablecoins stems from a structural technical flaw—oracle risk. Oracles are responsible for continuously feeding real-world data (such as asset prices) into the blockchain for smart contract execution. But once oracles are manipulated by “well-funded participants,” the entire stability system’s defenses can collapse instantly.

Deeper still is the problem that, if oracle design is weak, protocols are forced into a choice: abandon “technical defenses” and rely on “economic defenses.” This means the system must be designed so that attacking the oracle costs more than the total value of the protocol, thus barely maintaining a security margin.

But Vitalik candidly states that such defensive logic often comes with heavy costs. To raise attack costs, protocols are often forced to extract significant value from users—manifested as high transaction fees, continuous issuance of inflationary tokens, or excessive concentration of power within governance mechanisms. The ultimate result is always the same—user experience deteriorates, and long-term trust is gradually eroded.

This dilemma is closely related to Vitalik’s long-standing critique of “financialized governance.” When token holdings form the main basis for governance, the system inherently lacks asymmetric defensive advantages. It cannot mitigate attack risks through sophisticated technical or institutional design, and ultimately must rely on making potential attacks “too expensive to justify.” But such defensive logic is passive, costly, and difficult to sustain over time.

The Long-term Hidden Danger of USD Dependence: Conflict Between Design and Reality

The first major challenge is perhaps the easiest to overlook but potentially the most destructive in the long run—dependence on the USD. Currently, most decentralized stablecoins are pegged to the USD as their foundational design. While this may be feasible in the short term, Vitalik presents a broader perspective: from a “national resilience” long-term vision, this dependence harbors structural risks.

Even mild inflation over a 20-year horizon can gradually erode the stability promise of USD-pegged stablecoins. Therefore, escaping the reliance on the USD exchange rate is the ultimate challenge that decentralized stablecoins must face.

His question cuts to the core: “If we extend the timeline to 20 years, what happens if a severe hyperinflation occurs—even if it’s just mild hyperinflation?” This is not alarmism but a fundamental questioning of the underlying assumptions in design. Finding a better tracking index than the “USD price” becomes a central challenge in this direction.

Market Reality: Why Do Centralized Stablecoins Still Dominate?

Despite Vitalik’s warnings and calls, the current stablecoin landscape remains dominated by centralized entities. This fact perhaps best illustrates the complexity of the issue. According to the latest statistics, the total market cap of USD stablecoins has surpassed $291 billion, with Tether (USDT) holding an absolute dominance—about 56% market share.

In contrast, the decentralized camp appears much dimmer. Ethena’s USDe, MakerDAO’s DAI, and its upgraded version Sky Protocol’s USDS together account for only about 3% to 4% of the market. Although giants like Binance and Kraken recently co-led a new project, Usual, this has yet to challenge the advantages of centralized issuers.

The reason behind this is straightforward: users’ demand for “simplicity and reliability” often outweighs their pursuit of “decentralization.” Centralized stablecoins offer the most direct promise of stability, while decentralized solutions face complex trade-offs in efficiency, usability, and risk management.

Diverging Regulatory Frameworks

Another important backdrop is the gradual clarification of regulatory frameworks. The US passed the “GENIUS Act” in 2025, establishing the first clear regulatory framework for payment stablecoins. Meanwhile, venture capital giant a16z crypto is actively lobbying the US Treasury to clarify boundaries, aiming to exclude decentralized stablecoins issued via automated smart contracts from this strict regulation.

This process of regulatory divergence is effectively redefining the future competitive landscape of stablecoins. Clear legal frameworks may strengthen the compliance advantages of centralized stablecoins while creating differentiated niches for certain tech-driven decentralized solutions. But to truly break through the current deadlock of decentralized stablecoins, mere regulatory exemptions are far from enough—they must fundamentally address the three structural challenges outlined above.

The three dilemmas posed by Vitalik Buterin are not merely technical issues but foretell the systemic, economic, and technical challenges faced by decentralized stablecoins. Until these problems are truly solved, the future narrative of decentralized stablecoins remains unwritten.