What Is an Algorithmic Stablecoin?
An algorithmic stablecoin is designed to achieve price stability as well as balance the circulating supply of an asset by being pegged to a reserve asset such as the U.S. dollar, for example, gold or any foreign currency.
In other words, an algorithmic stablecoin actually uses an algorithm underneath, which can issue more coins when its price increases and buy them off the market when the price falls.
These coins grant traders the comfort of receiving many of the benefits of crypto assets such as ETH and BTC, without the risk of too much price volatility.
When we look at the history of algorithmic stablecoins, 2013 was the first instance where they were launched on the Bitshare blockchains.
The longest-running algorithmic stablecoin is currently Ampleforth (AMPL).
An algorithmic stablecoin is a representation of what true decentralization looks like, without any regulatory bodies to maintain or watch over the proceedings, as the code is what is responsible for both the supply as well as the demand, alongside the target price.
These foundational benefits offer a scalable solution that is not actually offered by any other set on the market as of now, and the absence of the tangible asset requirement behind algorithmic stablecoin eliminates the possibility of errors from the user's end.
Algorithmic stablecoins fills a need in the crypto ecosystem by bridging the seigniorage back into the coin ecosystem where users can share it.
The biggest algorithmic stablecoin in history was Terra USD (UST), which is backed by Terra (LUNA). LUNA acts as collateral for UST, so 1 UST can be minted by burning the equivalent amount of LUNA, and burning 1 UST mints one dollar worth of LUNA.
On May 9, 2022, a bank run on UST led to a depegging, causing the price of UST to fall. As Terra attempted to restore the peg, more LUNA was minted, expanding the supply of LUNA and crashing its price by over 90% in the process. At the time of writing, the UST dollar peg has not been restored.
Other algorithmic stablecoins include USDD on the Tron blockchain, USDN on Near Protocol, and FRAX. FRAX is partially collateralized, while USDD and USDN follow a similar design to the failed UST stablecoin. It is unclear how the depegging of UST will impact the future of other algorithmic stablecoins, at the time of this writing.
