Overview
Unlike collateralized stablecoins, algorithmic stablecoins rely on mathematical formulas and market incentives to maintain their price peg. They function like a decentralized central bank, expanding or contracting the token supply based on market demand.
Mechanisms
- Seigniorage: Minting new tokens when the price is above the peg and burning them when it's below.
- Rebase: Automatically adjusting the number of tokens in all user wallets to maintain value.
- Dual-Token System: Using a secondary token to absorb volatility.
Risks
These systems are highly complex and can be vulnerable to 'death spirals' if market confidence is lost, as seen with the collapse of TerraUSD (UST).