What Are Algorithmic Stablecoins?

What are Algorithmic Stablecoins?

Algorithmic Stablecoins are stable digital currencies that are designed to stay tied (or ‘pegged’) to those of real-word assets, like the U.S. dollar.

What makes them different from other stablecoins is that they aren’t backed by real-world assets and instead use othe digital currencies as their reserves.

E.g.: For an algorithmic stablecoin that is tied to the US dollar, issuers of the coin won’t have a reserve of fiat U.S. dollars that users can trade the algorithmic stablecoin for. Instead, they might use Ethereum, Bitcoin, or their own crypto token as a reserve asset.

Potential issues can arise in the event of a cryptocurrency market crash, which can see the value of the algorithmic stablecoin’s digital currency reserves diminish in value.

The problem is that if everyone tries to sell their algorithmic stablecoins at once, the issuers of the algorithmic stablecoin might not have enough value in their reserves to pay out all of the sell requests, which can de-peg the algorithmic stablecoin and even collapse it.