What is an Algorithmic Stablecoin?
Algorithmic stablecoins aim to achieve price stability (typically pegged to $1 USD) by automatically adjusting the token's supply based on market demand. Unlike collateralized stablecoins (backed by fiat or crypto), their stability relies entirely on algorithms and smart contracts managing supply and demand dynamics.
How They Work (Common Mechanisms)
- Rebase: The total supply of the stablecoin automatically increases or decreases across all wallets based on the price. If the price is above the peg, supply increases (rebases positively). If below, supply decreases (rebases negatively).
- Seigniorage Shares: Often involves a multi-token system. One token is the stablecoin, and another (or others) acts as a 'share' or 'bond' token. When the stablecoin price is above the peg, new stablecoins are minted and distributed to share token holders. When below the peg, users are incentivized (e.g., with discounted share tokens or bonds) to burn stablecoins, reducing supply.
Advantages
- Capital Efficiency: Doesn't require large reserves of collateral.
- Decentralization: Can be more decentralized than fiat-backed stablecoins, reducing reliance on central custodians.
Risks
- De-pegging Risk: Highly susceptible to 'death spirals' during market volatility or loss of confidence. If the price falls significantly below the peg, the mechanisms designed to restore it might fail if incentives aren't strong enough or if trust evaporates.
- Complexity: The underlying mechanisms can be complex and difficult for users to understand.
- Regulatory Scrutiny: Have faced significant regulatory attention due to past failures (e.g., TerraUSD/UST).
Related Terms
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