# the stablecoin trilemma shows no design simultaneously achieves decentralization stability and capital efficiency Three competing properties constrain stablecoin design: **Decentralization**: No centralized issuer or regulatable point of control. **Stability**: Reliable peg, redemption liquidity, resistance to death spirals. **Capital efficiency**: Creating $100 of stablecoin without locking $150+ of collateral. Each property's mechanism undermines another: - **Fiat-backed (USDC, USDT)**: Stability and efficiency, but the issuer can freeze addresses, regulatory pressure halts redemptions, and banking collapse breaks the peg. Sacrifices decentralization. - **Crypto-collateralized CDPs (DAI, LUSD)**: Decentralization and stability via overcollateralization, but $150 ETH locked per $100 DAI. Sacrifices capital efficiency. - **Algorithmic (Terra/UST)**: Attempts decentralization and efficiency via supply/demand mechanics, but since [[algorithmic stablecoin death spirals are triggered by reflexive depegging where falling price reduces demand accelerating the fall]], pure algorithmic designs have universally collapsed. Sacrifices stability. **Delta-neutral (Ethena USDe)**: A fourth approach holding spot collateral and shorting perpetuals. Better capital efficiency than CDPs but introduces exchange counterparty risk and funding rate reversal risk. The trilemma determines failure modes for security analysis: fiat-backed risk is regulatory/custodial, CDP risk is oracle manipulation and liquidation mechanics, algorithmic risk is the death spiral. --- Relevant Notes: - [[algorithmic stablecoin death spirals are triggered by reflexive depegging where falling price reduces demand accelerating the fall]]: the canonical failure mode for the efficiency-first corner of the trilemma - [[delta-neutral stablecoins face funding rate inversion risk when perpetual markets turn negative]]: the emerging fourth design archetype not captured in the original trilemma Topics: - [[protocol-mechanics]] - [[vulnerability-patterns]]