Algorithmic Stablecoin
A stablecoin that holds its peg through code and market incentives rather than holding cash reserves — a fragile design.
An algorithmic stablecoin tries to stay at $1 without real reserves behind it. Instead it uses a second token and a set of rules — mint one, burn the other — to push the price back toward the peg when it drifts. The appeal is capital efficiency: no bank, no audited pile of cash.
The flaw is reflexivity. The whole scheme depends on confidence, and confidence can vanish fast. When traders doubt the peg, they flee, the algorithm prints more of the support token, and the price spirals down. TerraUSD did exactly this in May 2022, falling from $1 to near zero in days and wiping out around $40 billion. Treat the category as high-risk.
Related terms
A crypto token designed to hold a steady value, almost always pegged one-to-one with the US dollar.
DepegWhen an asset meant to track a fixed value, like a stablecoin's $1, slips away and won't snap back.
BurnPermanently removing tokens from circulation by sending them to an address no one can spend from, shrinking supply.
TokenomicsThe economic design of a token — its supply, distribution, and incentives — that shapes whether it can hold value.