The State of Decentralized Stablecoins in 2025
Stablecoin market dominance chart, May 15, 2022. Source: Defillama.
Decentralized stablecoins once represented the future of censorship-resistant finance. By mid-May 2022, they captured nearly 17% of the global stablecoin market, with $31.6B in total market cap. Most of that $31.6 was composed of just five assets, including:
TerraUSD (UST): $18.67B (10.02% of total stablecoin market cap)
DAI: $6.6B (4.39%)
FRAX: $2.09B (1.41%)
Magic Internet Money (MIM): $1.07B (0.57%)
Neutrino USD (USDN): $935M (0.5%)
In the golden era before the TerraUSD (UST) collapse, decentralized stablecoins were considered a credible threat to USDC and USDT. But this golden era was short-lived. Within weeks of UST’s peak, the algorithmic stablecoin catastrophically lost its peg and collapsed from a $18.67 billion market cap to under $220 million, triggering one of the most significant capital destructions in crypto history. This shook investor confidence in decentralized stablecoins and ushered in a long slide in their share of the market.
Though decentralized stablecoins once represented nearly one-sixth of all stablecoins in circulation, by May 2025, that number had collapsed to less than 5%.
Moreover, while the post-Terra collapse left an opening for “better-designed” decentralized alternatives to rise, the opposite happened. Liquidity, integrations, and trust flowed back toward centralized incumbents—especially USDC and USDT, now accounting for nearly 90% of all stablecoin volume and usage.
In this analysis, we’ll review the past and present state of decentralized stablecoins, including the 2022 disaster that shook the market, and the current condition of the two largest decentralized stablecoin protocols that have survived multiple market cycles: MakerDAO (now Sky) and Frax. We’ll also lightly touch on a few other protocols and ask whether decentralized stablecoins will ever recover the popularity, trust, and market share they once had.
TerraUSD (UST): The Black Swan
Total value locked (TVL) in Terra (now Terra Classic), May 6, 2025, directly before UST de-peg event. Source: Defillama.
First, look at the algorithmic stablecoin that ruined it for everyone else. No stablecoin collapse was more dramatic than that of TerraUSD (UST):
Peaked at $18.67B market cap and 10% market share
Depegged in May 2022 and fell to $0.2144 within weeks
Market cap eventually collapsed to under $220M — a 99% drop
Though now rebranded as TerraClassicUSD (USTC), the market never recovered. The Terra (LUNA) token (now known as Terra Classic, or LUNC) peaked at $105.82 with a $37.4B market cap, and now trades for less than a cent.
The Terra collapse triggered well-deserved regulatory crackdowns, investor skepticism, and existential questions about the inherent stability of algorithmic stablecoins during times of market distress-- and created a shift in perception that changed the industry’s perception of fully algorithmic stablecoins from magic crypto money machines to cruel Ponzi schemes.
How UST Collapsed
Backed algorithmically by its sister token LUNA, UST was designed to maintain its peg through an arbitrage mechanism: users could swap $1 of LUNA for 1 UST and vice versa, regardless of market price. However, this system relied heavily on continued market confidence and utility, which proved unsustainable.
Total value locked (TVL) and cumulative USD inflows on Anchor, the most popular DeFi protocol on the Terra blockchain, before the UST depeg in early May 2022. Source: Defillama.
A liquidity pool attack on Curve’s 3pool in May 2022 initiated a cascade: UST lost its peg, triggering redemptions that required minting massive amounts of LUNA. This hyperinflation crashed both tokens’ value in a textbook death spiral, wiping out over $40 billion in investor wealth within days. Anchor Protocol, which offered unsustainably high 20% yields to UST depositors, exacerbated the fragility by concentrating over 75% of UST’s demand in a single speculative use case.
While the Luna Foundation Guard (LFG) attempted to deploy over $1.5 billion in BTC reserves to defend the peg, the effort failed. Arbitrage incentives collapsed, confidence evaporated, and by mid-May 2022, both UST and LUNA were trading near zero.
MakerDAO (now Sky): No Longer an Industry Darling
Total value locked (TVL) in the broader MakerDAO ecosystem peaked in early November 2021, at more than $19.2B. Source: Defillama.
MakerDAO was once the world’s largest decentralized stablecoin, and its governance token, MKR, was a top #25 crypto asset by market cap. Today, however, things aren’t nearly as frothy.
DAI peaked in September 2021 with a 5.08% market share and $6.6B in supply, stabilizing at around $6.8B by September 2022 but with a reduced 4.23% share.
By September 2023, DAI’s market cap had fallen to $5.3B, with a 4.35% share. One year later, it dropped to 2.93% market share (~$5.4B).
The introduction of Sky Dollar (USDS)—DAI’s opt-in successor under MakerDAO’s rebrand—has since brought Sky’s combined market share back up to ~3.51% as of May 2025, with $5.36B in DAI and $7.99B in USDS.
However, both DAI and USDS rely heavily on RWAs and centralized collateral like USDC, which may be partially why S&P Global rated USDS’ stability level as a 4, or “constrained,” the second-lowest possible stability rating. S&P cited governance centralization, undercollateralization risk in long-tail vaults, and dependence on custodians for RWA liquidation as significant risk factors.
S&P also ranked Tether (UDST) as “constrained”, citing a lack of information on custodians and bank account providers, in stark contrast to the 2, or “strong” rating S&P gave Circle’s USDC stablecoin.
Sky’s Shift Towards Centralization (and Loss of Utility)
Outside concerns from TradFi institutions, DeFi natives have also critiqued USDS due to Sky’s introduction of a freeze function, prompting debates about its censorship resistance.
Additionally, the financial and community incentives and unique positioning of MakerDAO as a “decentralized bank” that went as far as to help finance real-world businesses, like a Tesla dealership, has become another DeFi protocol with limited value-added incentives for users.
A 2025 report from Delphi Digital highlighted a key differentiator that once set DAI apart: it had escaped the “subsidy trap.” According to analyst Facundo Indabera: “$DAI had successfully escaped the decentralized stablecoin flywheel, where it didn’t need to subsidize demand (as $USDS is doing) because users wanted to hold it and use it...”
The Stablecoin Flywheel (utility, cost-of-capital, protocol financial health, and risk). Source: Delphi Digital.
The “flywheel” Indabera describes operates as follows:
→ Users hold stablecoin for its utility, not yield
→ Lowers the cost of capital
→ Improves protocol financial health
→ Reduces the risk of holding the stablecoin
→ Encourages more users to hold
But with DAI shifting to USDS, subsidized yield through Spark, and reliance on RWAs and USDC, this flywheel may be spinning in reverse.
DAI and USDS: Collateral and Collateralization Ratio
Decentralized stablecoins have made progress regarding collateral transparency, but things are far from perfect.
According to the Sky Ecosystem dashboard, as of May 11, 2025, there was approximately $8.19B of combined DAI and USDS in circulation and $10.59B in collateral, leading to a collateralization ratio of 129.3%.
As of May 2025, USDS and DAI’s collateral was comprised roughly of:
Stablecoins: 34%, mainly in USDC reserves, via the Peg Stability Module, or PSM
Crypto Assets: 25.9%, crypto, including variations of wrapped and staked ETH and wrapped BTC
DeFi Yield Vaults: 36.4% is deployed through SparkLend D3M modules, which deploy DAI/USDS into various yield-earning integrations with DeFi platforms, spread across isolated vaults, each with its own liquidation rules.
1% in legacy RWAs
2.6% in Seal Engine, a component of Sky that allows anyone to lock MKR tokens as collateral to borrow USDS
However, it appears that Sky has shifted approximately 25% of the collateral it had in a money market RWA vault (the Blocktower Andromeda vault) in December 2024 into the other collateral types mentioned above.
In short, even with a reduced reliance on RWAs in recent months, even if the Sky’s contracts are decentralized, the collateral is not.
While the DAI/USDS system includes a surplus fund (currently ~$49M) to cover shortfalls, Sky will resort to backstopping via minting of SKY tokens if that doesn't maintain the dollar peg. This dynamic introduces additional risk during market stress, and reminds some of the fully algorithmic stablecoin model that sank UST. As the aforementioned S&P report notes, reliance on minting governance tokens to patch collateral gaps is a potential red flag-- not a reasonable fail-safe.
Governance: MakerDAO’s MKR (Now SKY)
MakerDAO’s governance token, MKR, now rebranded as SKY, was initially conceived as the decentralized mechanism through which the community managed DAI’s risk parameters. But in practice, MKR governance has long been criticized for its low voter turnout, opaque decision-making, and founder dominance.
The recent rebranding to Sky as part of Founder Rune Christensen’s “Endgame” strategy only reinforced these concerns:
Nearly 80% of the vote share to keep the Sky brand came from just four entities.
Founder Rune Christensen still exercises substantial influence over roadmap decisions.
SubDAOs and the SKY token introduce new governance complexity but do not necessarily increase decentralization.
MKR launched at just $24.45 in 2017, peaking at $5,280 in May 2021, meaning that early investors would have seen a gain of more than 21,400% had they bought at launch and sold at MKR’s all-time high.
Unfortunately for recent investors, MKR’s price action over the last few years has reflected today’s more cautious narratives around decentralized stablecoins. Despite its incredible runup from 2017 to mid-2021, by January 2023, MKR had collapsed to $513. A spurt of market enthusiasm did see MRK recover to $3,924 in March 2024, but the token has again fallen rather sharply, with the token sitting at $1,854 as of mid-May 2025, suggesting wavering faith in Sky’s governance model and long-term product-market fit.
Frax: An Ecosystem Trying To Find Its Place
Frax ecosystem total value locked (TVL) before UST depeg in early May 2022. Source: Defillama.
While Sky’s DAI and USDS stablecoins have lost noticeable market share. Frax’s original dollar stablecoin, Frax (FRAX), now called Legacy FRAX, followed a steeper decline:
FRAX peaked at a 1.58% stablecoin market share on March 6, 2022, and reached an all-time-high market cap of $2.09B a few days later.
By May 2022, FRAX’s market cap had fallen almost 40% to $1.41B, and had dropped below $670M by late 2023.
As of May 10, 2025, Legacy FRAX holds just $315M and 0.136% of the market. Frax’s new stablecoin, frxUSD, launched in February 2025, has only $77.8M in market cap. Combined, the ecosystem now holds just 0.169% of the stablecoin market.
Frax’s Hybrid Approach: From FRAX to frxUSD
Frax began as a partially algorithmic stablecoin, using a dynamic collateral ratio based on market demand. This design, hailed as a breakthrough in capital efficiency, ultimately proved too fragile. Following its collapse in adoption, Frax now takes a fully collateralized route with:
Legacy FRAX, primarily crypto-collateralized, is gradually being phased out by frxUSD
frxUSD is backed mainly by RWAs, including BlackRock’s tokenized BUIDL fund
Frax Price Index (FPI) remains a second, CPI-pegged stablecoin with adaptive yield mechanics.
While frxUSD aims to ensure solvency by tapping institutional-grade assets, it raises philosophical concerns. Its dependency on BlackRock, one of the world’s largest financial institutions, introduces a centralized point of failure, undermining the stablecoin’s decentralization premise.
If regulators or custodians halt access to the BUIDL fund, frxUSD could face liquidity and redemption issues, despite being “technically decentralized.”
The Frax ecosystem’s assets are significantly less collateralized. As of May 11, 2025, Frax’s core stablecoin had assets of $357.5M and liabilities of $370.6M, giving it a collateralization ratio of just 96.5%. In contrast, FPI had assets of $100.2M and liabilities of $96.7M, giving it a collateralization ratio of 103.6%.
Governance: Frax’s FXS and FPIS
Frax takes a more modular approach. Its ecosystem relies on FXS (Frax Shares) as the primary value accrual token and previously launched FPIS (Frax Price Index Share) as the governance and seigniorage token for the CPI-pegged FPI stablecoin.
FXS acts as the governance token for the Frax ecosystem—its value reflects overall usage and fee generation across all Frax products.
FPIS, in contrast, captures only the excess yield generated by FPI, above CPI inflation.
Frax believes this model added unnecessary complexity, which is why Frax will be phasing out FPIS will be phased out by March 2028. FPIS can be converted to FXS at a 2.5:1 ratio, consolidating Frax governance around a single token.
Despite major protocol upgrades, like MKR, Frax’s governance token has also suffered declining sentiment around decentralized stablecoin protocols:
FXS peaked at $38.15 in May 2022
Reached a high of $842M market cap in Feb 2023
Trades at just $2.65 with a $239M market cap as of May 2025
Frax Price Index (FPI): Inflation-Pegged Stability
While much of Frax’s recent story has been a tale of a slow decline, they have had a small degree of success with one product, Frax Price Index (FPI). FPI is the first stablecoin pegged not to the U.S. dollar but to a basket of real-world consumer goods, tracking the U.S. CPI-U index via a specialized Chainlink oracle. Designed to preserve purchasing power over time, FPI:
Maintains a soft peg to CPI-adjusted value since Dec. 2021
Grew ~13% in value as of May 2025 — outpacing the official ~7.7% cumulative CPI inflation (despite real inflation likely being higher)
Is backed by 100% collateral, primarily FRAX, and governed by AMO contracts
Uses its own governance token, FPIS, now being phased out in favor of FXS
FPI has seen limited adoption despite strong on-chain mechanics, with a market cap of just $96.51M — roughly 0.041% of the total stablecoin market. While theoretically successful, it remains niche and underutilized outside DeFi-native circles.
MIM: A Curious Survivor
Total value locked (TVL) of Abracadabra before the reveal of 0xSifu as ex-con and QuadrangleCX founder Michael Patryn in January 2022. Source: Defillama.
At its peak in early 2022, Magic Internet Money (MIM) represented nearly 0.5% of the global stablecoin market with a market cap of $4.67 billion. Issued by the Abracadabra.money protocol, MIM stood out by allowing users to borrow against interest-bearing and yield-generating tokens like yvUSDC, xSUSHI, and yvWETH—collateral types that many other protocols avoided due to complexity.
However, after revelations that one of Abracadabra’s semi-anonymous co-founders, Michael Patryn (a.k.a. 0xSifu), was a convicted felon involved in the fraudulent collapse of Canadian crypto exchange-cum-ponzi scheme QuadrigaCX, public trust evaporated. Within six months, the protocol’s TVL plummeted from over $6.3 billion to just a few hundred million. Today, it sits below $41 million, while the MIM stablecoin’s market cap sits around $104 million.
Yet despite the reputational collapse, MIM quietly continues to operate and has remarkably maintained its peg to the dollar. It does this through overcollateralized lending—users deposit volatile or yield-bearing assets and mint MIM against them, with liquidation mechanisms ensuring peg support.
When MIM trades below $1, arbitrageurs buy and repay debt for profit; when above $1, new MIM is minted and sold, pushing the price down. While this design has proven resilient in narrow technical terms, it came at the cost of scale and credibility. Once an ambitious player in the decentralized stablecoin space, MIM now survives more as a curiosity—stable, yes, but largely forgotten.
Do We Even Need Decentralized Stablecoins?
All of this brings us to a broader question: do we need decentralized stablecoins? While crypto may have been born due to the desire to decentralize our financial system, it doesn’t mean that every aspect of the industry benefits from decentralization.
Decentralized proponents argue yes to our question, pointing to:
Censorship resistance (no freezing or blacklists)
Programmatic monetary policy (e.g., DAI's Target Rate Feedback Mechanism)
Global accessibility (DeFi composability without KYC)
However, detractors counter that stable collateral is often centralized (USDC, RWAs) and that most users care more about stability, liquidity, and fiat off-ramps than ideology.
As the aforementioned report from Delphi Digital observed, DAI once escaped the "decentralized stablecoin flywheel" by becoming genuinely helpful, but projects like its successor, USDS, have reverted to subsidizing usage, a financially unsustainable approach.
Institutional Adoption and Use-Cases
Decentralized stablecoins were once envisioned as censorship-resistant alternatives to fiat, but by 2025, compliance-first, RWA-backed models have gained dominance. The most significant growth comes from traditional financial players rather than crypto-native DAOs.
In just the past month:
Visa partnered with Bridge to deploy stablecoin infrastructure
Fidelity revealed plans to launch its own stablecoin
Stripe unveiled stablecoin-based business accounts
Meta is reportedly revisiting stablecoin ambitions post-Diem
These moves signal that the technology behind stablecoins is winning, but not necessarily in its decentralized form. Instead, large institutions are building regulated, closed-loop systems with fiat off-ramps and custodial control.
Even some DeFi-native protocols are gravitating toward real-world assets (RWAs), centralized oracles, and governance dominated by a handful of whales. For example, MakerDAO’s “Endgame” plan now features the aforementioned freeze function, a significant USDC dependency, and off-chain Treasury bill exposure via custodians like Wedbush Securities.
What Comes Next?
Sky vs. Ethena monthly protocol fees, May 2024 to May 2025. Source: Token Terminal.
Decentralized stablecoins have struggled to scale without compromising on either decentralization or stability. While early leaders like DAI and FRAX innovated new models and earnestly tried to reinvent the global financial system, both now rely heavily on off-chain collateral and governance structures that few would call trustless.
In contrast to early projects, which may have had more ambition than product-market fit, newer decentralized stablecoin protocols are more niche, like Ethena’s USDe and M0. USDe, which mainly functions as a DeFi investment product, is a synthetic, yield-bearing stablecoin backed by delta-neutral strategies using ETH staking rewards and perpetual futures, rather than traditional fiat or crypto collateral. In contrast, M0, an a16z-backed protocol that provides a composable infrastructure layer where developers can launch their branded stablecoins using the $M base asset and modular “extensions,” seems to be designed for smaller-cap stablecoins with unique features.
These trends hint at a future shaped not by ideology but by profit, utility, and institutional adoption. Whether truly decentralized money ever returns to the center of crypto remains uncertain, but the dream of reliable, censorship-resistant digital dollars hasn’t fully died-- at least not yet.
