Crypto glossary
Algorithmic stablecoin
An algorithmic stablecoin tries to hold a fixed price, usually $1, through code-driven supply changes and incentives rather than full reserves of cash.
Instead of backing every token with dollars or other assets, an algorithmic stablecoin relies on rules that expand or shrink supply. A common design pairs it with a second, volatile token: when the stablecoin trades below $1, users can burn it to mint $1 worth of the other token, and the reverse when it trades above, so arbitrage pulls the price back to the peg.
The best-known case is Terra's UST, which used LUNA in this way. In May 2022 heavy withdrawals pushed UST below its peg, holders rushed to redeem, LUNA was minted in huge quantities and its price collapsed, wiping out tens of billions of dollars and dragging down much of the market.
The weakness is that the peg depends on confidence in the second token; in a panic the mechanism can feed the fall instead of stopping it. Several later designs added partial collateral, and regulations such as MiCA and the GENIUS Act favour fully reserved stablecoins.
Example
Under a UST-style design, a holder whose stablecoin trades at $0.97 can burn one unit and receive $1 worth of the partner token, a 3% gain that in theory pushes the price back toward $1.
Related terms
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