Stablecoins Dominate 70% of DeFi Trading Pairs, Raising Decentralization Concerns

Stablecoins have evolved significantly within the decentralized finance (DeFi) ecosystem. In 2020, decentralized exchange (DEX) liquidity was predominantly in ETH and wrapped BTC. Today, over 70% of trading pairs and lending pool deposits are denominated in fiat-pegged stablecoins, with USDC and USDT leading the way. Stablecoins offer price stability, efficient trading, and serve as collateral across nearly every DeFi protocol.

The stability of stablecoins, however, introduces a paradox: if DeFi relies on centralized money, how decentralized can it truly be? This is not a theoretical debate. When stablecoins can be frozen in wallets unilaterally, whether due to regulatory requests or internal operational decisions, the risks of centralized issuers become apparent. Decentralized protocols must account for off-chain decisions they cannot control, and as stablecoins become more embedded, these risks multiply.

This contradiction highlights a critical question: DeFi was created to bypass reliance on intermediaries, but now it depends on centrally issued stablecoins for its most essential functions. The ecosystem's architectural evolution was driven by practical necessity, raising questions about control, resilience, and the direction of financial innovation.

Andre Cronje, co-founder of Sonic Labs, acknowledges the dual nature of stablecoins. “It’s both,” he says, referring to whether stablecoins are a healthy evolution or a centralization risk. “Liquidity needs a unit of account, and users want stability. But by integrating permissioned assets, we’ve introduced external control points. It’s not hidden, it’s structural.” Cronje sees this as a reality check rather than a failure. The early DeFi ideal of everything being trustless and permissionless was appealing, but users care more about trust and user experience (UX) than ideology.

The path forward is not binary. Instead of choosing between fully centralized or fully decentralized money, DeFi may benefit from a tiered stack. Cronje envisions centralized stables for scale and user experience, and decentralized stables as a form of censorship insurance or monetary hedge. This strategy is pragmatic rather than idealistic, giving users a choice between approaches.

Varun Kabra, Chief Growth Officer of Concordium, shares this view but with a global perspective. “Beyond the U.S. and EU, frameworks like Abu Dhabi’s FSRA and Hong Kong’s stablecoin bill will help build local stablecoin ecosystems,” he explains. These regionally anchored stablecoins could power decentralized liquidity without relying entirely on U.S. monetary policy. In trade corridors from Latin America to Southeast Asia, euro, peso, naira, or baht-denominated stablecoins could reduce FX friction and improve real-time settlement.

Kabra emphasizes the importance of interoperability. He envisions a world where banks hold local stablecoins in treasury wallets, using them for tokenized FX swaps or trade finance without touching SWIFT rails. “Eventually, stablecoins have the potential to disrupt traditional banking altogether, eliminating multi-hop intermediaries and enabling programmable clearing across borders.”

Stablecoins are not just technical instruments; they are policy vectors that encode jurisdictional control, regulatory assumptions, and even geopolitical influence. As their role in DeFi deepens, protocols must decide whether they want to optimize for liquidity or longevity. Ideally, they design for both.

Liran Markin, CEO of Edwin, believes that balance is possible eventually. “Decentralized stables will get there, but in stages,” he says. “Overcollateralized and RWA-backed designs already prove censorship resistance, though at a capital cost. Algorithmic models keep improving peg mechanics.”

Markin’s vision is architectural. “Use permissioned dollars for throughput, permissionless stables for decentralization, with smart contracts routing between them. Users get seamless UX while the system quietly optimizes for security.” This solution requires careful infrastructure planning, something DeFi isn’t always known for.

Recent history underscores the importance of planning. The USDC depeg in March 2023 triggered a market-wide liquidity crunch. MakerDAO subsequently diversified its collateral reserves to reduce dependence on centralized issuers. These episodes reveal just how interconnected DeFi protocols have become with fiat on-chain instruments.

The core challenge isn’t whether stablecoins belong in DeFi. It’s whether DeFi protocols can build around their limitations while preserving resilience. That means diversifying issuers, integrating algorithmic and crypto-backed stables, and embedding circuit-breakers and fallback mechanisms directly into protocol design.

Decentralization isn’t a purist ideal; it’s a resilience strategy. If DeFi is to offer an alternative to the legacy financial system, it must remain independently operable, even if key counterparties freeze, fail, or fall out of favor. Stablecoins can be the fuel, but the engine must be robust enough to run without them.