What Is an Algorithmic Stablecoin?
An algorithmic stablecoin is a type of cryptocurrency designed to maintain price stability and regulate the circulating supply of the asset.
Unlike traditional stablecoins fully backed by reserve assets like fiat currencies or commodities, algorithmic stablecoins utilize algorithms to control the supply and demand dynamics.
Dynamic Stability
The critical characteristic of an algorithmic stablecoin is its ability to adjust the circulating supply based on market conditions dynamically.
When the stablecoin price rises above its target value, the algorithm triggers the issuance of additional coins to increase the supply and bring the price back down.
Conversely, if the price falls below the target, the algorithm can buy back and burn coins to reduce the supply and raise the price.
This automatic supply adjustment mechanism allows algorithmic stablecoins to achieve price stability without relying on a fixed collateral reserve.
Instead, stability is maintained through algorithmic operations that respond to market fluctuations.
Using algorithms, these stablecoins aim to provide the benefits of cryptocurrencies, such as decentralization and efficiency, while minimizing price volatility.