An algorithmic stablecoin operates on a unique algorithmic framework, generating additional coins during price spikes and withdrawing them from the market when prices fall.

Understanding Algorithmic Stablecoins

Algorithmic stablecoins are designed to stabilize prices and balance asset circulation by pegging reserve assets, such as United States dollars, gold, or other foreign currencies.

Essentially, algorithmic stablecoins rely on an underlying algorithm to print more coins when prices rise and buy them back when prices fall.

These coins offer traders advantages like ETH and BTC assets while reducing the risks associated with excessive price volatility .

History of Algorithmic Stablecoins

It can be traced back to 2013 when they were first introduced on the Bitshare blockchain. Among them is Ampleforth (AMPL) which is the longest algorithmic stablecoin still operating.

Algorithmic stablecoins attempt to be truly decentralized, without regulatory oversight, as the code regulates supply and demand, while maintaining a target price.

These built-in benefits provide a scalable solution that is not currently matched by existing sets on the market. Additionally, the absence of concrete asset requirements reduces the potential for error on the part of the user.

Examples of  Algorithmic Stablecoins

The largest algorithmic stablecoin in history, Terra USD (UST) , backed by Terra (LUNA) , faced challenges on May 9, 2022, resulting in peg unwinding and a drop in UST prices. Efforts to restore the peg resulted in the minting of additional LUNA, expanding supply and causing a drastic price drop of up to 90%.

Other algorithmic stablecoins include USDD on the Tron blockchain, USDN on Near Protocol, and FRAX. Although FRAX is partially collateralized, USDD and USDN follow a similar design to the failed UST stablecoin. It is unclear how the release of the UST peg will affect the future of algorithmic stablecoins, at the time of this writing.

Conclusion

Algorithmic stablecoins represent a breakthrough approach to stability, leveraging algorithms to navigate price fluctuations and create a decentralized financial ecosystem.

Also Read

What are Stablecoins and How Are They Different from Fiat?

What is VNST Stablecoin? Features and Advantages

Circle CEO Predicts Stablecoin Regulation in the US

What is Frax Finance? Read the explanation

DISCLAIMER : This article is informational in nature and is not an offer or invitation to sell or buy any crypto assets. Trading crypto assets is a high-risk activity. Crypto asset prices are volatile, where prices can change significantly from time to time and Bittime is not responsible for changes in fluctuations in crypto asset exchange rates.