Algorithmic Stablecoins

Algorithmic stablecoins are digital assets designed to maintain a stable value relative to a fiat currency or other asset without being fully backed by traditional collateral. Instead, they utilize smart contracts to manage the supply of tokens in response to market demand.

When the price rises above the peg, the protocol may issue more tokens; when it falls, it may burn tokens or issue debt to reduce supply. This process is often managed through a dual-token system where a volatile secondary token absorbs the volatility of the stablecoin.

These systems rely heavily on market participants acting in their own interest to arbitrage price discrepancies back to the target. However, they are susceptible to death spirals if confidence in the protocol collapses.

Their stability is entirely dependent on the robustness of the underlying game-theoretic incentives.