Algorithmic Stablecoin
Last updated 17 October 2026Last verified 17 October 2026
What is an algorithmic stablecoin?
TradFi equivalentA currency peg defended by incentives rather than reserves. Like any thinly reserved peg it holds until confidence goes, at which point the defending mechanism accelerates the run instead of absorbing it.
The definition above names the failure; the mechanism behind it is a two token arbitrage loop. The system pairs the stablecoin with a volatile governance asset and lets holders convert one into a dollar of the other at will. A discount pays arbitrageurs to buy the stable unit and redeem it, which removes supply and restores the peg. The loop works only while the volatile asset has depth to absorb that redemption.
Under stress it runs backwards. Redemptions issue new units of the volatile asset, its price falls, and each subsequent redemption issues more of it, so the defense consumes the thing defending the peg. The label also covers milder designs that hold exogenous collateral and algorithmically adjust rates to steer demand, which is a different risk entirely.
A central bank defending a currency peg is the closest analogy, and it holds until the reserve question. A central bank sells foreign currency it does not issue. An endogenous design sells its own liability, which is closer to defending a peg with bonds denominated in the currency under attack.
The question worth asking of any such design is what stands behind redemption at the worst moment, and whether that asset falls in value for the same reason the depeg started.