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Algorithmic Stablecoin
DeFi Strategies • Yield Models • Token Income
non-collateral stable peg token
An Algorithmic Stablecoin uses smart contracts and on-chain supply control to maintain a price peg (usually to $1) without holding collateral. These tokens expand and contract their own supply based on market demand using mint-and-burn mechanisms, seigniorage, or bonding curves. While innovative, they are highly experimental and historically prone to failure under stress. The 2022 UST collapse demonstrated the catastrophic risk — $40B+ wiped out in days when confidence broke.
Use Case: Algorithmic stablecoins attempt to maintain a stable price using code and incentives — without backing the token with fiat or crypto reserves. In contrast, institutional-grade stablecoins like $RLUSD use US Treasuries and cash reserves with BNY Mellon custody, while asset-backed tokens use physical metal — proving that real collateral beats algorithmic promises.
Key Concepts:
- Supply Expansion — Adjustment of circulating tokens to influence peg stability
- Seigniorage — Profit mechanism tied to token issuance and redemption cycles
- Peg Mechanism — The system maintaining the $1 parity through incentives or burns
- Smart Contract Logic — Automated code enforcing supply and peg rules
- Market Incentives — User-driven behaviors that stabilize or destabilize the peg
- Depegging — When the token loses its intended price peg
- Stablecoins — Digital assets designed to maintain steady value
- Tokenomics — Economic design including supply mechanics and incentives
- Asset-Backed Supply Model — Contrasting model that uses physical collateral instead of algorithms
- Death Spiral — Self-reinforcing collapse when confidence breaks
Summary: Algorithmic stablecoins represent crypto’s boldest experiment in decentralized monetary policy — and its most spectacular failures. Without real collateral, these systems rely entirely on game theory and user confidence. When that confidence breaks, the results are catastrophic. For stable value with real backing, $RLUSD (US Treasuries + BNY custody) and $KAG/$KAU (physical metal) remain the battle-tested alternatives.
| Stablecoin Type |
Backing |
Peg Mechanism |
Risk Level |
| Algorithmic (UST) |
None — Code only |
Mint/burn incentives |
🔴 Critical — Death spiral risk |
| Crypto-Collateralized (DAI) |
Over-collateralized crypto |
Liquidation mechanisms |
🟡 Medium — Liquidation cascades |
| Fiat-Backed (USDC) |
1:1 USD reserves |
Redemption rights |
🟢 Lower — Counterparty risk |
| Fiat-Backed ($RLUSD) |
1:1 USD + US Treasuries (BNY custody) |
NYDFS regulated redemption |
🟢 Lower — Institutional-grade |
| Asset-Backed (KAG/KAU) |
1:1 physical metal |
Physical redemption |
🟢 Lowest — Full collateral |
Algorithmic Stablecoin Mechanics
how they attempt to maintain peg without collateral
When Price > $1 (Expansion)
Protocol mints new tokens
Increases circulating supply
Arbitrageurs sell for profit
Selling pressure pushes price down
Peg restored (in theory)
Works during confidence
When Price < $1 (Contraction)
Protocol burns tokens or issues bonds
Decreases circulating supply
Arbitrageurs buy cheap tokens
Buying pressure pushes price up
Peg restored (in theory)
Fails when confidence breaks
The Death Spiral
Price drops below peg
Users lose confidence, sell more
Protocol can’t contract fast enough
Companion token collapses
Entire system implodes
UST: $40B → $0 in days
The Alternative$RLUSD: US Treasuries + BNY custody
$KAG/$KAU: Physical metal in vaults
Real collateral enforces peg
No algorithm needed
Survives panic selling
Proven across market cycles
Critical Flaw: Algorithmic stablecoins work great until they don’t. The same mechanisms that expand supply in good times accelerate collapse in bad times. There is no floor without collateral.
Algorithmic Stablecoin Graveyard
lessons from failed experiments
| Project |
Peak TVL |
Collapse Date |
What Went Wrong |
| UST/LUNA |
$40B+ |
May 2022 |
Death spiral — lost peg, LUNA hyperinflated |
| Iron Finance (TITAN) |
$2B |
June 2021 |
Bank run — TITAN went to near-zero |
| Basis Cash |
$170M |
2021 |
Couldn’t maintain peg, abandoned |
| Empty Set Dollar |
$500M |
2021 |
Peg failed, token collapsed |
| Neutrino (USDN) |
$800M |
2022 |
Chronic depeg, confidence lost |
Pattern Recognition: Every algorithmic stablecoin follows the same arc — initial excitement, TVL growth, stress event, confidence break, death spiral. The model is fundamentally flawed. Stability requires backing, not algorithms.
RLUSD vs Algorithmic Stablecoins
why Ripple chose collateral over code
| Factor |
$RLUSD |
Algorithmic (UST) |
| Backing |
USD + US Treasuries + cash equivalents |
None — code and incentives only |
| Custody |
BNY Mellon (oldest US bank) |
No custodian — protocol-managed |
| Regulation |
NYDFS chartered, 75+ licenses |
Unregulated, offshore |
| Audits |
Monthly third-party attestations |
None required |
| Stress Performance |
Reserves remain regardless of panic |
Death spiral under pressure |
| Redemption |
1:1 for USD guaranteed |
Dependent on market confidence |
| Track Record |
$1B+ market cap, peg maintained |
$40B wiped out in May 2022 |
Ripple’s Lesson: When Ripple designed
$RLUSD, they studied the algorithmic failures. Their choice was clear — full collateral, institutional custody, regulatory compliance. No algorithm can replace real reserves.
Stablecoin Trust Ladder
from code promises to real collateral
Level 1: Pure Algorithmic (Highest Risk) — No collateral, code only — UST, AMPL, ESD — Death spiral risk — Trust the math (until it fails)
Level 2: Hybrid/Partial Collateral — Some backing, some algorithm — FRAX (adjustable ratio) — Reduced but not eliminated risk — Better than pure algo
Level 3: Crypto-Collateralized — Over-collateralized crypto backing — DAI, LUSD — Liquidation risk in crashes — Decentralized but volatile backing
Level 4: Fiat-Backed (Regulated) — 1:1 USD + Treasuries, audited — USDC,
$RLUSD (NYDFS + BNY custody) — Counterparty/regulatory risk — Institutional-grade stability
Level 5: Asset-Backed (Lowest Risk) —
1:1 physical metal — $KAG, $KAU, PaxG — Redeemable for real assets — Maximum trust anchor
Strategic Positioning: The further down the ladder, the more real the backing. Algorithmic stablecoins sit at the top — maximum risk, zero collateral.
$RLUSD brings institutional-grade fiat backing with US Treasuries and BNY Mellon custody.
$KAG/$KAU sit at the bottom — minimum risk, physical metal you can redeem and hold in your hands.
Why Collateral Wins
the case against algorithmic stability
Algorithmic Problems
✗ No floor when confidence breaks
✗ Reflexive death spirals
✗ Relies on game theory
✗ Unproven in stress
✗ No redemption rights
✗ Regulatory uncertainty
Collateral Solutions✓ Real assets enforce peg
✓ Survives panic selling
✓ Proven across cycles
✓
$RLUSD: Treasuries + BNY
✓
$KAG/$KAU: Physical metal
✓ Regulatory clarity
Bottom Line: Algorithmic stablecoins are experiments. Collateralized stablecoins are infrastructure. For serious capital preservation, choose assets with real backing — whether that’s US Treasuries (
$RLUSD) or physical bullion (
Kinesis).
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