How Do Algorithmic Stablecoins Differ from Collateralized Ones, and What Is Their Impact on Systemic Risk?

Collateralized stablecoins are backed by real-world assets like fiat currency or commodities, aiming for a 1:1 reserve ratio. Algorithmic stablecoins, in contrast, use algorithms and smart contracts to manage supply and maintain a price peg, often through a seigniorage model with a paired volatile token.

They are under-collateralized or uncollateralized, making them inherently more fragile. Their impact on systemic risk is high, as they are prone to "death spirals" ▴ a crisis of confidence can cause the peg to break, leading to hyperinflation of the supply and a collapse of the entire system, as seen with Terra/Luna.