Algorithmic Stablecoin
A stablecoin that tries to hold its peg through code and incentives rather than held reserves — a design with a graveyard behind it.
An algorithmic stablecoin aims to stay at $1 using mechanisms — supply expansion and contraction, arbitrage incentives, a paired volatile token — instead of holding a dollar of reserves per coin. The appeal is capital efficiency and decentralization: no bank account full of collateral to trust.
The track record is grim. TerraUSD’s 2022 collapse erased roughly $40 billion when its mechanism entered a death spiral, and earlier purely-algorithmic designs failed similarly. The failure mode is reflexivity: the peg depends on confidence, and once confidence breaks the mechanism accelerates the collapse instead of arresting it. 2026’s regulation (the GENIUS Act) effectively pushes the market toward reserve-backed designs.