Vitalik issues a "soul-searching" question: The three major problems of decentralized stablecoins remain unsolved. Where is the $291 billion market headed?

Ethereum co-founder Vitalik Buterin recently publicly pointed out that decentralized stablecoins still face three fundamental structural challenges: finding an anchor better than the US dollar, building attack-resistant oracles, and resolving competition with staking yields. He warned that in the long term, reliance on the US dollar as an anchor may face currency devaluation risks; true sustainability requires “independence from USD price benchmarks.”

Currently, the total market cap of USD-pegged stablecoins has approached $291 billion, but centralized issuers like Tether and Circle dominate, with decentralized stablecoins accounting for less than 10% of the market share. This discussion not only reveals deep contradictions in the core infrastructure design of DeFi but also delineates a clear and challenging track for industry innovation in the next phase.

Vitalik’s Three Major Challenges: Dissecting the Achilles’ Heel of Decentralized Stablecoins

In an industry known for rapid innovation, Vitalik Buterin personally highlighting a “fundamental unresolved problem” in a key area underscores its importance. Recently, Vitalik expressed his views on social media, directly pointing out three structural challenges faced by decentralized stablecoins. This serves as a wake-up call to the currently booming stablecoin market. His analysis goes beyond technical surface issues, delving into mechanism design, economic models, and even geopolitical assumptions, providing a high-level perspective on bottlenecks in this field.

First, Vitalik questions the reasonableness of nearly all current stablecoins being anchored to the USD. He believes that tracking the USD price is acceptable in the short term, but from a long-term vision—especially from the perspective of “national resilience”—the ideal state should be independence from the USD as a price benchmark. He raises a thought-provoking long-term risk: “Over a 20-year span, what if the USD experiences hyperinflation, or even moderate inflation?” This elevates stablecoin design from mere technical imitation to a philosophical level of building an alternative financial system. It implies that a truly robust decentralized financial system’s value foundation should not rely entirely on any fiat currency that could depreciate due to policy errors.

Second, he highlights the inherent dilemma in oracle design. Decentralized stablecoins require reliable external data to maintain their peg, but most current oracle systems face risks of being “captured” or manipulated by large capital flows. Vitalik warns that to resist such attacks, protocols must make a painful trade-off: ensure “capture cost > protocol token market cap,” which in turn implies “protocol value extraction > discount rate,” ultimately leading users to bear high costs. He sharply points out that this is a key reason for his ongoing opposition to “financialized governance”—such models lack asymmetric attack and defense, and can only maintain stability through high-value extraction, fundamentally harming user interests.

Finally, he mentions an increasingly prominent practical problem: staking yield competition. When users can stake underlying assets (like ETH) used for minting stablecoins and earn substantial yields, why would they lock assets into stablecoin protocols, bearing additional smart contract risks and lower returns? Vitalik lists some potential solutions, such as reducing staking yields to near-zero “hobbyist levels,” or creating new staking categories without reduction risks, but cautiously notes these are merely “enumerations of possible solutions, not endorsements.” This issue strikes at the core of profit distribution in the DeFi Lego ecosystem—competition among protocols for capital and yields.

From Terra Collapse to RAI Experiment: The Harsh Gap Between Ideals and Reality

The challenges described by Vitalik are not just theoretical; they have been repeatedly validated through brutal market practice. The most iconic case is the collapse of TerraUSD (UST). Once hailed as a “model of algorithmic stablecoins,” it offered nearly 20% yields via the Anchor protocol, rapidly attracting hundreds of billions of dollars. However, this high-yield model was inherently unsustainable; once market confidence reversed, the “arbitrage-burn” mechanism failed instantly, causing a $40 billion market cap to evaporate within days. Its founder Do Kwon was also sentenced to 15 years in prison last month for fraud, bringing a legal conclusion to this tragedy.

UST’s failure exposed multiple aspects of the issues Vitalik raised: blind reliance on a single anchor (USD), fragile economic models (unsustainable high yields), and oracle and liquidation failures under extreme conditions. It proved that “innovation” lacking solid value backing and robust risk design—no matter how glamorous—may ultimately turn to dust. This event not only devastated investors but also cast a long shadow of distrust over the term “algorithmic stablecoin.”

Are there more practical examples closer to Vitalik’s ideals? Reflexer Finance’s RAI is a case worth deep exploration. RAI is a stablecoin collateralized by ETH but not anchored to any fiat currency; its price is dynamically adjusted by a PID controller based on market demand, called a “floating stablecoin.” Vitalik himself praised it as “the pure ideal of collateralized automated stablecoins.” Ironically, Vitalik later engaged in a seven-month short position against RAI, earning $92,000. This behavior was used by Reflexer co-founder Ameen Soleimani to argue that RAI’s design has flaws: relying solely on ETH as collateral causes holders to miss out on staking yields of the underlying asset, which is the third core issue Vitalik now highlights. Soleimani summarized: “Pure ETH RAI is a mistake.” This case vividly demonstrates that even the most idealistic designs are still struggling with real-world economic incentives.

Current Stablecoin Market Landscape and Key Data on Decentralized Projects

Total Market Size: The total market cap of USD-pegged stablecoins exceeds $291 billion.

Market Leaders: Tether (USDT) holds about 56% market share, making it the dominant player; Circle (USDC) follows closely.

Decentralized Sector Share: Including MakerDAO’s DAI and Ethena’s USDe, decentralized stablecoins account for less than 10% of the market.

Top Decentralized Projects:

• DAI / USDS (MakerDAO upgrade): Market share around 3%-4%.
• USDe (Ethena): Market share around 3%-4%, employing an “instant futures hedge” innovative model.
• RAI (Reflexer): Smaller market cap, representing a “non-anchored” experimental stablecoin.

Funding Dynamics: Despite small market share, innovation continues, e.g., Usual project raised $10 million from major CEXs by the end of 2024.

Zero-Knowledge Proofs: Ethereum’s “Mid-term Revolution” and the Future Infrastructure of Stablecoins

While Vitalik raises serious challenges for the stablecoin field, the Ethereum network itself is brewing a technological revolution that could reshape all layer 1 applications, including stablecoins. Hsiao-Wei Wang, co-Executive Director of the Ethereum Foundation, explicitly stated in a recent interview that zero-knowledge (ZK) proofs have become a core part of Ethereum’s mid-term roadmap. She pointed out that many breakthroughs have occurred in the past one or two years, integrating years of research with real-world progress. This means that in the future, zero-knowledge cryptography will not only be used by Layer 2 solutions but will become an intrinsic part of the Ethereum protocol layer.

This evolution could be even more impactful for stablecoins, especially decentralized ones. Currently, zero-knowledge rollups, as Layer 2 solutions, improve scalability by batching transactions and generating succinct proofs off-chain. Integrating them directly into Ethereum’s core would enable the network to verify the correct execution of blocks with minimal computational cost. This would fundamentally alter the balance between network security and efficiency, providing a more powerful, scalable, and cost-effective foundation for stablecoin protocols requiring high security and complex logic.

Wang’s remarks reaffirm Ethereum’s long-term priorities: “I believe resilience remains Ethereum’s soul.” She emphasizes that even as the network evolves, core principles like security, censorship resistance, and neutrality will not waver. For stablecoin issuers and users, this is a crucial signal. A more resilient, efficient, and decentralized Ethereum mainnet will be the best environment for truly reliable, censorship-resistant decentralized stablecoins that are not controlled by any single entity and can withstand various attacks. From this perspective, solving oracle capture, economic model issues, and other challenges may benefit from breakthroughs in verification capabilities and privacy protection at the protocol layer.

Regulatory Watershed Approaching: Can Decentralized Protocols Win the “Legal Wilderness”?

As technological exploration accelerates, regulatory contours are gradually becoming clearer worldwide, adding another layer of uncertainty for stablecoin futures. Last year, the US passed the “GENIUS Act,” establishing the first federal regulatory framework for payment stablecoins. This legislation mainly targets centralized stablecoins with clear issuers like Tether and Circle, focusing on ensuring sufficient reserves and strict compliance. However, a key unresolved question is: how will stablecoins issued by decentralized autonomous organizations (DAOs) via smart contracts, like MakerDAO’s DAI, be treated?

Venture capital firm a16z crypto has actively lobbied US Treasury officials to clarify that the law should not cover decentralized stablecoins issued through autonomous smart contracts. Their core argument is that such protocols lack a traditional “issuer,” and are driven by code and community governance, making them unsuitable for regulation designed for entities. The outcome of this debate will directly determine the survival space for decentralized stablecoins in the US and globally. If regulators explicitly exclude them, it could provide a valuable “regulatory sandbox” for innovation; if they require compliance similar to centralized issuers, it could stifle development due to fundamental technical and social challenges in meeting KYC/AML requirements.

This creates an interesting game: on one side, developers and thinkers like Vitalik striving to overcome purely technical and economic hurdles for more autonomous, censorship-resistant stablecoins; on the other, global regulators aiming to include all value tools pegged to fiat for financial stability, consumer protection, and anti-fraud efforts. The future of decentralized stablecoins will be a dual contest of technological feasibility and political legitimacy. Its ultimate form may not be purely anarchic crypto, nor a simple blockchain copy of traditional finance, but a third path carved out in the interstices of both.

In-Depth Analysis: What is MakerDAO and DAI?

MakerDAO is one of the earliest and most influential decentralized finance protocols on Ethereum, with its core product being the stablecoin DAI (now undergoing upgrades and rebranding as USDS). DAI is not issued by a company but managed by an autonomous organization governed by MKR token holders. Its creation involves users depositing approved crypto assets (like ETH, WBTC, and real-world assets RWA) as collateral into smart contracts “treasuries,” then borrowing DAI against a collateralization ratio. This process is entirely contract-to-contract, without intermediaries.

DAI’s operation and economic model: DAI maintains its peg through a complex set of dynamic parameters and liquidation mechanisms. Its stability depends on key elements: first, over-collateralization—typically around 150%—to buffer against price volatility; second, a liquidation system that automatically auctions off collateral when its value falls below a threshold, protecting DAI holders; third, governance-adjusted “stability fees” and “DAI savings rates” to influence supply and demand, thus stabilizing the market price.

Challenges and evolution: As Vitalik pointed out, DAI also faces competition from staking yields. To improve capital efficiency and yields, MakerDAO has recently shifted significantly toward investing in real-world assets (RWA) and US Treasuries, which brings stable income but also increases centralization and regulatory risks. The ongoing “Endgame” upgrade aims to introduce new governance tokens, create independent sub-DAOs, and enhance resilience, efficiency, and decentralization, ultimately evolving DAI into a more unified brand—USDS. The history of MakerDAO itself is a micro-epic of how decentralized stablecoins respond to market, competition, and regulatory challenges.

Future Outlook for Stablecoin Tracks: Diversified Pegs, Hybrid Models, and Long-termism

Looking ahead, the development of stablecoins may trend toward diversification and integration. First, in terms of collateral exploration, we may see more experiments beyond USD, such as baskets of currencies, commodity indices, or CPI-linked stablecoins. These aim to realize Vitalik’s vision of “independent price benchmarks,” though initial liquidity challenges are significant. In the context of geopolitical shifts and diverging fiat trust, their long-term strategic value is notable.

Second, pure algorithmic stablecoins (like the failed UST) or purely collateralized ones (like early DAI) may no longer dominate. Instead, “hybrid models” could prevail. For example, Ethena’s USDe combines crypto collateral with derivatives hedging, creating what some call “internet bonds”; others explore combining real-world assets (RWA) with on-chain crypto as collateral to balance yield and stability. The future winners are likely those protocols that find the best balance among capital efficiency, risk diversification, yield sources, and decentralization.

Finally, the industry needs to embrace long-termism. The collapse of UST and recent security incidents highlight that short-term high-yield strategies are unsustainable. Addressing oracle issues, designing attack-resistant governance, and building more robust economic models require deep cryptography, mechanism design, and game theory research. Stablecoins, as the foundation of DeFi and the broader crypto economy, must be resilient. Vitalik’s “soul-searching” is timely, reminding builders that the most fundamental and difficult problems—those that truly matter—are still waiting for wise solutions on the path toward hundreds of billions of dollars in market value.