Why Polaris?

“Stablecoins are either scalable, yield-bearing, or trustless.” The situation is now commonly accepted and often presented as a pick-two trilemma between decentralization, scalability, and yield capacity. So far, empirical observation confirms the assessment: the few available trustless stablecoins do not scale leading to the vast majority of the stablecoins in circulation (~98%) being centralized and/or censorable.

To reach mass scale, the next step is to harness the best of what DeFi can offer and deliver it in a package that TradFi can trust. The goal is a trustless, counterparty-free stablecoin that leverages diversified yield sources that scale with volume and can autonomously respond to market conditions through interest rate management automation.

While their unprecedented growth receives attention, their shortcomings are less discussed. Across projects, despite their varied natures, similar flaws emerge as time tests the models: counterparty risk, capture of growth potential, yield risk/reward mismatch, and antisynergistic token models. This article analyses where major stablecoins fall short and clarifies how pUSD avoids these pitfalls.

USDC: Privatized Crypto Dollar

USDC is still the go-to DeFi stablecoin, used in all the major protocols. DEXs, lending protocols, perp protocols, prediction markets, and more leverage USDC, effectively creating diversified sources of yield for their liquidity providers. Yet USDC holders get no exposure to the yield realized with the underlying collateral, the t-bills, fully captured by Circle, as usual, and also observed with USDT/Tether.

USDC’s ownership remains centralized, as a proxy exposure to its growth can only be realized by the ownership of a stock (CRCL), and the counterparty risks are real, as they already manifested with the SVB fallout in March 2023, which led to a USDC depeg sustained for a weekend.

Like other centralized stablecoins such as USDT, Circle implements both freezing and blacklist features and gate their redemption mechanism behind KYC. Both issuers also remain the only ones exposed to the sizable yield generated by the collateral.

USDS: Compromised Decentralization

Maker’s original DAI proved that decentralized infrastructure can scale a stablecoin to billions. However, collateral and trust assumptions shifted with RWAs and sUSDe as collateral.

The lack of agility of the design, still using governance-defined interest rates forced the team to introduce the USDC Peg Stability Module to strengthen the DAI peg, further increasing the counterparty risk. The migration to USDS introduced a built-in freeze function, effectively ending the remaining pretense of trustlessness this stablecoin could claim.

The project was burdened throughout its life by its heavy reliance on governance, which proved bloated, unclear, and under-delivering. In December, Aave removed USDS as collateral and increased reserve factors, citing low revenues and “issuance model asymmetric risks”.

USDe: A Wild Bet

Ethena implemented a novel design allowing the average DeFi participant to access a new source of yield, leading to USDe quickly scaling. Similarly to Maker, as the design aged, the number of counterparties involved increased and collateral diversified: from the initial ETH staking/hedging strategy, involving both staking providers and CEX’s now to exposure to various assets including SOL, HYPE, BNB and XRP via delta neutral trades, as well as T-Bills.

Ethena has a bit of a self-fulfilling curse: as growth accelerates, open interest is absorbed by core and safe assets, driving the addition of more long tails and riskier assets to sustain yield. As the model scaled, it experienced yield compression on its main source, forcing it to rely on limited, riskier alternatives.

Live for two years, USDe has demonstrated the agility of its design with a ~50% supply downsize in the month following October 10. Still, the design is a trusted setup requiring the team’s involvement, which maintains a target balance of 5% of the total USDe supply in USDT to be able to honor redemptions.

LUSD/BOLD: Niche Decentralized & Yield-Bearing Stables

Liquity rose where Maker failed, delivering a pure ETH-backed stablecoin emitted by an opinionated infrastructure maximizing for resilience and trustlessness. Powered by immutable code and devoid of any admin keys or functions, Liquity delivered unprecedented guarantees to stablecoin users, free of dependence on counterparties.

Yet both v1 and v2 designs have limited yield sources and suffer from capital inefficiencies. LUSD & BOLD are great stablecoins to hold, but not the most attractive to borrow/mint. The growth is limited to a trustless-focused niche, as more centralized but also lucrative alternatives are favored by regular users.

pUSD: Yields That Scale with DeFi

The examples above show why the market believes stablecoins must choose between scalability, yield, or trustlessness. This is primarily because high offchain rates in recent years have allowed centralized stablecoins to tap into offchain yield sources and bring them onchain.

Yet, this was the easy path, not the innovative one. The future of DeFi isn't just wrapping TradFi, adding extra steps, and calling it innovation. For DeFi to reach its full potential and attract TradFi investors and users, the only counterparty they should trust is immutable code and Ethereum, making the stablecoin truly decentralized.

Designing a scalable, yield-bearing, and trustless stablecoin isn’t an easy feat. It requires the full autonomization of the interest rate management, and a sensible economic model to ensure the stablecoin remains at peg in all market situations. Finally, to stand the test of time, a stablecoin must be able to harness diversified yield sources, to avoid scenarios where one becomes too prominent and turn into a risk vector (ex: USDe for USDS).

pUSD uses pure ETH collateral and an infrastructure powered by immutable contracts to issue capital-efficient, trustless stablecoins. While remaining counterparty-free, it delivers yields that grow with scale, turning onchain trading volume into a stablecoin yield source thanks to its bonding curve.

The protocol is designed for maximal scalability without compromises. It uses several yield sources to maximize pUSD minting, including interest, bonding curve swap fees, conversion gains, and PolarEX swap fees, all of which grow with activity.

Why This Matters

Beyond scalability and censorship-related concerns, the massive dominance of centralized stablecoin models has profound consequences for the whole DeFi ecosystem. With their current weight, both Circle and Tether pose a potential threat to the future of Ethereum as they would play an outsized part in a fork choice discussion. There are also growing concerns about a TVL exodus, with the launch of stable-focused L1 alternatives supported by these teams (such as Plasma).

The capture of the stablecoin landscape by centralized actors poses a long-term sustainability risk that Polaris is designed to resolve. Large asset issuers are prompt to become kingmakers on the chain they sit on, as we’ve seen with Lido/stETH in the past; and Polaris acts like a double-edged sword in this fight: it captures raw ETH, and use it to output trustless stablecoins that scale.

DeFi has known only uncensorable but low-scale stablecoins, or censorable and scalable stablecoins; it’s time for it to meet an uncensorable, scalable stablecoin. For DeFi to truly scale and reach its potential it must not just bring what we already have onchain, but build something entirely new with all the great properties DeFi enables: trustlessness, absence of counterparty, censorship resistance, and nuclear grade security ETH can deliver. Making this accessible to TradFi is the future of DeFi, and this is how we scale to trillions.