How Do Algorithmic Stablecoins Initiate a Death Spiral?
Algorithmic stablecoins rely on a mechanism, often minting and burning a volatile asset, to maintain a $1 peg. If the stablecoin significantly de-pegs due to selling pressure, the mechanism can fail.
The confidence crisis leads to mass redemption/selling, requiring the minting of the volatile asset, which crashes its price, further weakening the stablecoin and initiating the spiral.
Glossar
Collateralization Ratio
Margin ⎊ The collateralization ratio, within cryptocurrency and derivatives, represents the proportion of collateral deposited relative to the value of the underlying asset or open position; it functions as a critical risk management parameter, directly influencing systemic stability and counterparty exposure.
Minting and Burning
Creation ⎊ Minting and burning represent dual processes integral to token economies, fundamentally altering circulating supply and influencing asset valuation within decentralized systems.
Confidence Crisis
Catalyst ⎊ A Confidence Crisis in the crypto derivatives space is often triggered by an unexpected, high-magnitude event, such as a major protocol exploit, a significant stablecoin depeg, or the sudden insolvency of a centralized exchange.
Algorithmic Stablecoins
Architecture ⎊ Algorithmic stablecoins represent a class of cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency, through the use of algorithms and smart contracts rather than relying on collateralized reserves.