Algorithmic Stablecoin Decay

Algorithmic stablecoin decay describes the process where a stablecoin relying on code-based supply adjustments loses its peg. These systems do not hold full collateral but instead use game-theoretic incentives to manage supply and demand.

When confidence wanes, users sell the token, and the algorithm fails to contract supply effectively to restore the price. This leads to a death spiral where the incentive to hold vanishes, causing the price to collapse toward zero.

The failure is often rooted in the inability of the protocol to maintain market equilibrium during panic. Unlike collateralized models, these lack a hard asset backstop, making them highly susceptible to bank runs.

Such decay demonstrates the limitations of purely incentive-based stabilization in adversarial environments.