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Algorithmic Stablecoin
real-world asset • stablecoin
Non-Collateral Stable Peg Token — Algorithmic Stablecoin
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.
Use Case: Algorithmic stablecoins attempt to maintain a stable price using code and incentives — without backing the token with fiat or crypto reserves.
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.
Examples of Algorithmic Stablecoins:
- $UST (Terra) — Pegged to $1 using a mint/burn relationship with $LUNA.
- $AMPL — Expands and contracts user balances daily to target price peg.
- $FRAX (partially) — Hybrid model that dynamically adjusts its collateral ratio.
Risks:
- No real collateral — relies entirely on incentives and user behavior.
- Vulnerable to death spirals if confidence breaks (as with $UST collapse).
- High technical complexity makes them difficult to audit or predict.
Why They Matter:
- Test the frontier of decentralized finance without needing fiat or centralized custody.
- Offer lessons in design, stability, and risk management for future systems.
- Useful case studies for protocol designers and monetary theorists.