Explain the Concept of a “Death Spiral” in Algorithmic Stablecoins

A death spiral occurs when an algorithmic stablecoin begins to de-peg and its stabilizing mechanism fails. As the price falls, the protocol mints and sells more of its volatile governance or seigniorage token to buy back the stablecoin.

This floods the market with the governance token, causing its price to crash. The collateral's falling value further exacerbates the stablecoin's de-peg, leading to a vicious, irreversible downward cycle.