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What is an algorithmic stablecoin?
An algorithmic stablecoin is a token that tries to hold a steady value, usually one dollar, mainly through rules in code that expand or shrink its supply, rather than by holding reserves that cover every coin. Many are backed only partly, or not at all.
What it means for you
Without full backing, the peg rests on people continuing to want the coin. Several have collapsed in so-called death spirals, one losing its peg within hours. If you hold one, the question to check is what, if anything, you could claim if every holder wanted out at once.
A common mistake: “An algorithmic stablecoin is held at one dollar by code, so it cannot break.”
In fact: Code can change supply and incentives; it cannot make people want the coin. When confidence goes, the same rules can speed the fall, as collapses studied by the Federal Reserve showed.
How it works
In a rebase model, the supply in every holder's wallet is raised or cut at intervals in proportion to how far the price is from the peg. In a coupon or two-token model, the system issues new coins when the price is above the peg and sells bonds or a partner token when it is below, relying on arbitrage traders. Both depend on demand: if holders expect the coin to fall, each sells before the others, the partner token loses value, and the price can be driven near zero. A Federal Reserve study traced one run to a lagging price feed and a collateral ratio that adjusted too slowly.
Sources: Federal Reserve FEDS Notes: The stable in stablecoins, Federal Reserve FEDS Notes: Runs on Algorithmic Stablecoins · checked 4 October 2026
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Educational content, not financial advice. Written by hand and checked against the source named above. Something wrong? Tell us and we reply within two business days.