Algorithmic Stablecoin
A stablecoin that maintains its peg through automated smart contract mechanisms rather than holding real-world reserves.
Algorithmic stablecoins use code instead of collateral to stay at $1. They typically work by expanding supply when the price is above $1 and contracting supply when it's below. The idea is that market incentives will keep the price stable.
The most famous example is Terra's UST, which collapsed in May 2022, losing over $40 billion in value. The algorithm couldn't maintain the peg during a bank run scenario, and UST spiraled to near zero.
After Terra's collapse, confidence in algorithmic stablecoins dropped significantly. Most new stablecoin adoption has shifted toward fiat-backed options like USDC, which have transparent, verifiable reserves. The lesson: algorithms can fail under stress, but real reserves provide a hard floor.
Related Terms
Stablecoin
A cryptocurrency designed to maintain a stable value, usually pegged 1:1 to a fiat currency like the U.S. dollar.
Fiat-Backed Stablecoin
A stablecoin backed by real-world assets like cash and government bonds, held in reserve by the issuer.
Depeg
When a stablecoin's market price drops significantly below (or rises above) its target peg, typically $1.00.
Peg
The target price a stablecoin is designed to maintain, typically $1.00 for dollar-pegged stablecoins.
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