A stablecoin that targets a peg using algorithmic supply rules rather than full collateralization.
An algorithmic stablecoin maintains a target price (often $1) through rules that expand or contract supply, incentivizing market participants to arbitrage the price back to the peg. Unlike fully collateralized models, these rely on mechanisms such as seigniorage shares, bonding/vesting, or mint-and-burn relationships with a volatile asset.
In a mint/burn model, users can burn $1 of a volatile token to mint 1 stablecoin when the stablecoin trades above $1, or redeem 1 stablecoin for $1 of the volatile token when it trades below, theoretically stabilizing price.
Algorithmic designs can be fragile during liquidity shocks. Without sufficient demand for the paired asset, redemption spirals can occur, driving both the stablecoin and the backing asset lower (a "death spiral"). High-profile failures include UST (Terra) in 2022.
All terms and definitions may update as the Cryptionary improves.