Algorithmic Stablecoins

Algorithmic stablecoins are a type of cryptocurrency that maintains stability relative to other assets (such as the US dollar) without using real reserves. Instead, they rely on algorithms that automatically adjust the supply of coins based on market conditions. When the price of the stablecoin rises above the target price, the algorithm increases the supply to lower the price, and vice versa, reducing the supply when the price falls.

Key features:

1. No Real Reserves: Unlike asset-backed stablecoins, algorithmic stablecoins rely on code and economic incentives to maintain their price.
2. Supply Management Mechanism: The algorithm automatically “burns” or issues new tokens to stabilize the price.
3. Volatility and Risks: Algorithmic stablecoins often face high volatility and can be at risk of collapse if their mechanisms fail to effectively manage market supply.

Examples:

• TerraUSD (UST) — a popular example that collapsed in 2022.

Algorithmic stablecoins remain a controversial topic within the cryptocurrency community due to their vulnerability to market risks.