What is an algorithmic stablecoin?
An algorithmic (algo) stablecoin is governed by computer code that initiates an action based on a set trigger, an algorithm in other words. In most cases, the peg of an algo-stablecoin is managed by this algorithm that burns or mints coins, thereby inflating or deflating supply and demand for the coin. In broad strokes, the more of the coin in circulation, the lower the price and vice versa. Whereas other stablecoins are collateralised, backed, in other words, by a mature asset such as the US Dollar or gold, there is usually nothing underpinning the value of an algo-stablecoin other than its algorithm. It’s why these stablecoins are also referred to as non-collateralised stablecoins.
Algo-stablecoin projects are mired in controversy, but it continues to be the holy grail of DeFi as it requires very little capital to maintain, seeing that it requires no collateral. But, when things go wrong they go very, very wrong. The collapse of Terra is a case in point.