# the stablecoin trilemma shows no design simultaneously achieves decentralization stability and capital efficiency The stablecoin design space is constrained by three competing properties: **Decentralization**: No centralized issuer, no trusted custodian, no regulatable point of control. Resistance to censorship, seizure, and regulatory shutdown. **Stability**: Reliable peg to target value, sufficient liquidity for redemption, resistance to death spirals and bank runs. **Capital efficiency**: The ability to create $100 of stablecoin without locking up $150+ of collateral. Optimal deployment of the underlying capital. The trilemma holds because each property's mechanism undermines another: - **Fiat-backed stablecoins (USDC, USDT)** achieve stability (backed 1:1 by real assets) and capital efficiency (no overcollateralization required), but sacrifice decentralization — the issuer can freeze any address, regulatory pressure can halt redemptions, and a banking collapse affecting reserves could break the peg. - **Crypto-collateralized CDPs (DAI, LUSD)** achieve decentralization (no central issuer) and stability (overcollateralization provides buffer), but sacrifice capital efficiency — $150 of ETH locked to mint $100 DAI represents capital that cannot be deployed elsewhere. - **Algorithmic stablecoins (Terra/UST)** attempt decentralization and capital efficiency by using supply/demand mechanics instead of collateral, but sacrifice stability — the mechanism is inherently reflexive. Since [[algorithmic stablecoin death spirals are triggered by reflexive depegging where falling price reduces demand accelerating the fall]], pure algorithmic designs have universally collapsed. **Delta-neutral stablecoins (Ethena USDe)** represent a fourth approach: hold spot collateral and short perpetuals, using funding rates as yield. This achieves better capital efficiency than CDPs but introduces exchange counterparty risk and funding rate reversal risk — not yet captured in the traditional trilemma framing. The trilemma has practical implications for security analysis: understanding which corner a stablecoin occupies determines its specific failure modes. A fiat-backed stablecoin's primary risk is regulatory or custodial. A CDP's primary risk is oracle manipulation and liquidation mechanics. An algorithmic stablecoin's primary 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]]