Reflexive Death Spirals

A reflexive death spiral occurs when the price of a token and the protocol's ability to support its value become mutually destructive. In many algorithmic stablecoins, the protocol issues a secondary token to absorb the volatility of the primary stablecoin.

If the primary token depegs, the value of the secondary token often drops as well, reducing the protocol's ability to stabilize the primary. This creates a cycle where both tokens fall in value, further undermining the peg.

The market sees this weakness and sells more of both tokens, accelerating the collapse. This reflexivity is a fundamental flaw in many experimental economic designs.

It shows how incentive structures can turn against themselves under stress. Such spirals are nearly impossible to stop once they gain momentum.

They serve as a cautionary tale for the limits of algorithmic design.