The Liquidity Death Spiral is the primary failure mode. A new stablecoin requires deep on-chain liquidity to be useful, but liquidity providers demand high yields that new issuers cannot pay without a large, established user base. This creates a chicken-and-egg problem that projects like Fei Protocol and Empty Set Dollar could not solve.
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Blog
Why Most New Stablecoin Projects Are Doomed to Fail
An analysis of the non-negotiable scale requirements—liquidity depth, regulatory clarity, and institutional trust—that form an insurmountable moat for incumbents like Tether and Circle, rendering most new entrants non-viable.
introduction
THE DATA
Introduction: The Stablecoin Graveyard
Most new stablecoin projects fail because they ignore the network effects, regulatory moats, and technical liquidity that define the space.
Regulatory Asymmetry creates an insurmountable moat. New entrants face the SEC's Howey Test and BSA compliance, while incumbents like Tether (USDT) and Circle (USDC) operate with established, albeit contentious, banking relationships and regulatory frameworks. The legal overhead for a new fiat-backed stablecoin is prohibitive.
The Oracle Problem for algorithmic designs is fatal. Projects like Terra's UST relied on a single, manipulatable price feed and reflexive mint/burn logic. This is architecturally inferior to MakerDAO's multi-collateral DAI system, which uses decentralized price oracles and overcollateralization to absorb volatility.
Evidence: Over 50% of the top 20 stablecoins by market cap in 2020 are now defunct. The combined market share of USDT and USDC exceeds 90%, demonstrating extreme winner-take-all dynamics driven by liquidity and trust.
key-trends
WHY NEW STABLECOINS FAIL
The Scale Trinity: Three Non-Negotiable Moats
Launching a stablecoin is not a feature; it's a war of attrition won by scale across three critical vectors.
01
The Liquidity Death Spiral
New stablecoins fail to achieve the liquidity depth required for utility. Without deep, multi-chain liquidity, slippage kills adoption.
- MakerDAO's DAI and Circle's USDC dominate with $5B+ and $30B+ in on-chain liquidity.
- New entrants face a cold start: no liquidity → high slippage → no users → no liquidity.
- This is why protocols like Aave and Compound primarily whitelist established assets.
100-1000x
Liquidity Gap
$5B+
Minimum Viable TVL
02
The Trust S-Curve
Trust is non-linear and accrues exponentially with time and volume. Regulatory clarity and proven resilience are prerequisites.
- USDC and USDT have survived multiple bank runs and regulatory actions, hardening their trust.
- New algorithmic or crypto-backed coins must prove stability across multiple market cycles.
- The market has zero tolerance for de-pegs; one failure is terminal (see Terra's UST).
5-10 Years
Trust Horizon
0
De-Pegs Allowed
03
The Integration Tax
Every new stablecoin pays a massive integration tax to onboard to exchanges, wallets, and DeFi protocols. Network effects are brutal.
- Centralized exchanges (CEXs) like Binance and Coinbase list only assets with proven demand.
- DeFi bluechips (Uniswap, Aave) require governance votes and security audits for each new asset.
- The cost in time, capital, and political capital is prohibitive for all but the best-funded.
$1M+
Integration Cost
12-24 Months
Time to Ecosystem
deep-dive
THE TRINITY OF FAILURE
Deep Dive: The Liquidity-Trust-Regulation Flywheel
New stablecoins fail because they cannot simultaneously solve the interdependent problems of liquidity, trust, and regulatory compliance.
Liquidity is the first barrier. A stablecoin without deep on-chain liquidity is a ghost chain asset. Projects must bootstrap liquidity on Uniswap and Curve against major pairs, which requires massive capital incentives that new issuers lack.
Trust is non-negotiable and non-transferable. Users trust USDC and USDT because of their multi-year operational history and transparent attestations. A new algorithmic or collateralized coin must build this trust from zero, a process measured in years, not months.
Regulatory arbitrage is a trap. Projects launching in permissive jurisdictions to avoid SEC or MiCA scrutiny create a permanent trust deficit with institutional capital. This limits their total addressable market to degen niches.
The flywheel spins against newcomers. Liquidity begets trust, trust begets adoption, adoption attracts regulatory scrutiny. Terra's UST demonstrated that breaking one link collapses the entire system. New projects attempt to solve one problem while ignoring the other two.
WHY NEW STABLECOINS FAIL
The Incumbent Moat: Market Share & Liquidity Analysis
A comparison of the critical, defensible advantages held by incumbents versus the typical profile of a new stablecoin project.
| Critical Moat Feature | USDC / USDT (Incumbents) | New Algorithmic Stablecoin | New Collateralized Stablecoin |
|---|---|---|---|
Market Share Dominance |
| < 0.1% | < 0.5% |
On-Chain Liquidity Depth (TVL) | $70B+ | $5-50M | $100-500M |
CEX Listing Penetration | Top 100 exchanges | 1-5 Tier 2/3 exchanges | 10-20 exchanges |
DeFi Integrations (Pools, Money Markets) |
| < 20 protocols | 50-100 protocols |
Daily Transfer Volume (30d Avg) | $50B+ | $1-10M | $100-500M |
Audit & Legal Clarity (Regulatory Moat) | Circle NYDFS, USDT opaque but entrenched | Novel, unproven legal model | Jurisdictional arbitrage, ongoing risk |
Liquidity Provider Incentives (APY) | 0-2% (organic demand driven) | 10-50% (inflation-driven) | 5-15% (subsidy-driven) |
Survived a Bear Market / Bank Run |
counter-argument
THE INNOVATION TRAP
Counter-Argument: "But What About Innovation?"
Most stablecoin 'innovation' is a distraction from the core problems of liquidity and trust.
Innovation is a commodity. The core mechanics of minting and redeeming a stablecoin are solved. The real barriers are distribution and liquidity, which are won by network effects, not novel code. Projects like MakerDAO's DAI and Circle's USDC dominate because they solved these problems first.
Novelty creates fragmentation. A new stablecoin on a new L2 or with a new yield mechanism fragments liquidity across Uniswap V3 pools and Curve gauges. This increases slippage for users and reduces the utility of the stablecoin itself, creating a death spiral.
The market rewards standardization. The ERC-20 standard won because it reduced integration friction. The LayerZero OFT and Circle's CCTP are becoming the new standards for cross-chain value. A new stablecoin that ignores these standards adds technical debt for every protocol that integrates it.
Evidence: Look at the UST collapse. It was the most 'innovative' algorithmic stablecoin. Its failure proved that complex monetary policy is a bug, not a feature, when it decouples from real demand and liquidity depth.
risk-analysis
THE ARCHITECTURAL TRAP
Failure Modes: How New Stablecoins Collapse
Most new stablecoins fail not from a lack of ambition, but from predictable, fundamental design flaws that ignore the lessons of USDC, DAI, and UST.
01
The Oracle Attack Surface
Collateral value is a fiction until an oracle attests to it. New projects often rely on a single, untested price feed or a small committee, creating a single point of failure. The ~$100M+ exploit history of oracle manipulation (e.g., Mango Markets) proves this is not theoretical.
- Single Point of Failure: A compromised oracle drains the entire reserve.
- Latency Arbitrage: Slow updates enable attackers to mint against stale prices.
- Liquidity Mismatch: On-chain price != realizable off-chain asset value.
1
Critical Failure Point
~$100M+
Historical Losses
02
The Liquidity Death Spiral
A stablecoin is only as strong as its exit liquidity. New entrants mistake on-chain DEX pools for real liquidity, which evaporates under stress. Without deep, resilient off-ramps (like Circle's banking partners), a minor depeg triggers a reflexive sell-off.
- TVL Illusion: $50M in a Curve pool ≠$50M redeemable for cash.
- Reflexivity: Selling pressure lowers price, triggering more redemptions and liquidations.
- Bridge Dependency: Cross-chain assets add LayerZero or Wormhole risk to the redemption chain.
>5%
Depeg Triggers Run
Minutes
Liquidity Evaporation
03
The Governance Capture Inevitability
Decentralized governance for a stablecoin is a slow-motion bug bounty. Projects like MakerDAO have spent years hardening processes, yet new forks launch with naive token voting, inviting whale manipulation and protocol sabotage. The attacker's cost-benefit is clear.
- Vote Buying: An attacker can acquire governance tokens cheaper than stealing reserves.
- Proposal Fatigue: Low voter turnout cedes control to large holders.
- Upgrade Risk: A malicious proposal can mint unlimited stablecoins or alter critical parameters.
51%
Attack Threshold
Weeks
Time to Capture
04
The Regulatory Singleton
Stablecoins are monetary transmission vehicles, not just code. New projects ignore the binary risk of a BUSD-style enforcement action by a single jurisdiction. Operating without licensed, audited, and compliant fiat rails is a time-bomb.
- Banking Partner Risk: One service termination collapses the mint/redeem engine.
- Jurisdictional Arbitrage: Targeting unregulated markets limits scale and invites later crackdowns.
- Asset Segregation: Proving reserves are not commingled and are bankruptcy-remote is a legal, not technical, challenge.
1
Cease & Desist Order
0
Recovery Path
05
The Composability Curse
Integration into DeFi (Aave, Compound) is a necessity that becomes a vulnerability. New stablecoins rush to get listed, but their collateral becomes systemic risk during a depeg, causing cascading liquidations across the ecosystem. The protocol becomes too big to fail before it's robust enough to survive.
- Cascading Liquidations: Depeg triggers mass liquidations in money markets, exacerbating the crash.
- Oracle Dependency Amplified: Now every integrated protocol's security depends on your feed.
- Speed vs. Security: Rapid listing incentives skip rigorous risk assessments from DAOs like Gauntlet.
10x
Contagion Multiplier
Hours
To Systemic Crisis
06
The Incentive Misalignment
Tokenomics designed for speculation, not stability. High yields to bootstrap demand create unsustainable flywheels that collapse when growth stalls (see UST). The stablecoin's utility is secondary to farming and dumping the governance token.
- Ponzi Dynamics: New deposits fund yields for earlier users.
- Hyperinflationary Emissions: Governance token supply dilutes holders, killing long-term alignment.
- Real Yield Gap: Protocol revenue (if any) never matches promised APY, leading to reserve depletion.
>20% APY
Unsustainable Yield
Months
Until Collapse
investment-thesis
THE STABLECOIN TRAP
Investment Thesis: Where Capital Should Actually Flow
Most new stablecoin projects fail because they misallocate capital towards redundant monetary policy instead of defensible infrastructure.
The moat is distribution, not design. New algorithmic or collateralized stablecoins compete with USDC and USDT's liquidity dominance. Building a novel token is trivial; bootstrapping deep on-chain liquidity across Ethereum, Arbitrum, and Solana is the billion-dollar problem.
Capital should fund primitives, not policies. Investment flows to LayerZero's OFT or Circle's CCTP create durable value. These are the rails for all stablecoins, making them agnostic to which specific token wins the monetary policy war.
The real failure is misaligned incentives. Projects like Frax Finance succeed by layering utility (FRAX as LP collateral) atop the stable asset. A pure stablecoin is a commodity; its value accrual requires integration into DeFi legos like Curve pools or Aave markets.
Evidence: Look at survivorship. Hundreds of algorithmic stablecoins have died. The survivors, like DAI and FRAX, evolved into complex DeFi systems with multiple revenue streams, not just peg maintenance.
takeaways
WHY MOST NEW STABLECOINS ARE DOOMED
TL;DR: The Builder's Reality Check
The stablecoin market is a winner-take-most arena where network effects and regulatory moats dominate. Here's what new entrants are missing.
01
The Liquidity Death Spiral
New stablecoins fail to bootstrap deep liquidity pools, leading to high slippage and user abandonment. Without a native yield mechanism or major CEX listings, they can't compete with USDC's $30B+ on-chain liquidity.
- Problem: Users won't trade with high slippage.
- Reality: Liquidity begets liquidity; new entrants start with none.
<0.01%
Slippage Needed
$100M+
TVL to Start
02
Regulatory Arbitrage is a Trap
Builders chase 'regulation-lite' jurisdictions, ignoring the real barrier: banking partners and fiat rails. Projects like TerraUSD collapsed from this oversight. Real stability requires licensed custodians and compliant on/off-ramps, which are gatekept.
- Problem: You can't mint a dollar without a bank account.
- Reality: The moat is legal, not technical.
12-24 mo.
License Timeline
0
Major Bank Partners
03
The Over-Engineering Fallacy
Exotic algorithmic or multi-collateral designs (Frax, DAI) add complexity but don't solve the core user need: a trusted, liquid dollar proxy. Most users don't care about the underlying mechanism if it introduces smart contract risk or oracle dependency.
- Problem: Complexity is a bug, not a feature.
- Reality: USDT and USDC win on simplicity and trust.
99%+
Market Share (Top 2)
1
Oracle Failure to Fail
04
Missing the Real Use Case: Yield
Stablecoins are not just a payment rail; they are a yield-bearing base layer. New projects without a native yield strategy (like Ethena's USDe with stETH backing) cannot compete in DeFi. MakerDAO's DSR and Aave's GHO integrations show yield is non-negotiable.
- Problem: A zero-yield stablecoin is a leaking vessel.
- Solution: Embed yield at the protocol level or perish.
5%+ APY
Yield Expectation
Essential
DeFi Integration
05
Distribution is Everything
You can't 'build it and they will come.' Circle and Tether have years of bizdev with exchanges and fintech apps. New projects lack the partnerships for mass distribution, confining them to niche DeFi pools. Without a killer app like Curve wars was for CRV, adoption stalls.
- Problem: No one knows your token exists.
- Reality: Distribution is a harder problem than issuance.
100+
CEX Listings Needed
$0
Partnership Budget
06
The Trust Asymmetry
Stablecoins are a trust business. New projects ask users to trust unaudited code, anonymous teams, and unproven collateral. USDC's monthly attestations and transparent reserves set the standard. In a crisis, users flee to the most trusted asset, creating a run dynamic that kills newcomers.
- Problem: Trust is earned over years, not marketed.
- Solution: Over-collateralize, over-communicate, and over-audit.
Monthly
Attestations Expected
100%+
Collateralization
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