# How Do Algorithmic Stablecoins Initiate a Death Spiral? ⎊ Path

**Published:** 2025-12-05
**Author:** Greeks.live
**Categories:** Path

---

## 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.

- [How Does a Sudden Loss of Confidence Trigger a De-Pegging Event?](https://learn.greeks.live/path/how-does-a-sudden-loss-of-confidence-trigger-a-de-pegging-event/)

- [What Is the ‘Death Spiral’ Risk Associated with Over-Reliance on a Native Token for Collateral?](https://learn.greeks.live/path/what-is-the-death-spiral-risk-associated-with-over-reliance-on-a-native-token-for-collateral/)

- [What Is a ‘De-Pegging’ Event and What Are Its Consequences?](https://learn.greeks.live/path/what-is-a-de-pegging-event-and-what-are-its-consequences/)

- [What Is a “Bank Run” Scenario for a Decentralized Stablecoin?](https://learn.greeks.live/path/what-is-a-bank-run-scenario-for-a-decentralized-stablecoin/)

- [Define the Term “Rebase” and Its Function in Some Stablecoin Designs.](https://learn.greeks.live/path/define-the-term-rebase-and-its-function-in-some-stablecoin-designs/)

- [What Is a ‘Bank Run’ and How Is It Analogous to a Stablecoin De-Peg Event?](https://learn.greeks.live/path/what-is-a-bank-run-and-how-is-it-analogous-to-a-stablecoin-de-peg-event/)

- [Explain the “Death Spiral” Risk Specific to Algorithmic Stablecoins](https://learn.greeks.live/path/explain-the-death-spiral-risk-specific-to-algorithmic-stablecoins/)

- [What Is Systemic Risk in the Context of a Stablecoin Backed by a Single Volatile Asset?](https://learn.greeks.live/path/what-is-systemic-risk-in-the-context-of-a-stablecoin-backed-by-a-single-volatile-asset/)

## Glossar

### [Collateralization Ratio](https://learn.greeks.live/area/collateralization-ratio/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)

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](https://learn.greeks.live/area/minting-and-burning/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)

Creation ⎊ Minting and burning represent dual processes integral to token economies, fundamentally altering circulating supply and influencing asset valuation within decentralized systems.

### [Confidence Crisis](https://learn.greeks.live/area/confidence-crisis/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)

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](https://learn.greeks.live/area/algorithmic-stablecoins/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)

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.

## Discover More

### [How Is the Collateral Token in an Algorithmic Stablecoin Similar to a Stock Option?](https://learn.greeks.live/path/how-is-the-collateral-token-in-an-algorithmic-stablecoin-similar-to-a-stock-option/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![How Is the Collateral Token in an Algorithmic Stablecoin Similar to a Stock Option?](https://learn.greeks.live/wp-content/uploads/2025/10/Macro-Visualization-of-Decentralized-Finance-Instrument-Execution-Through-Precision-Derivates-Penetration.webp)

It grants holders an incentive-driven right to interact with the protocol at a fixed rate, similar to exercising a call option that is in-the-money.

### [What Is the Difference between an Algorithmic Stablecoin and a Fiat-Backed Stablecoin for Treasury Holdings?](https://learn.greeks.live/path/what-is-the-difference-between-an-algorithmic-stablecoin-and-a-fiat-backed-stablecoin-for-treasury-holdings/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![What Is the Difference between an Algorithmic Stablecoin and a Fiat-Backed Stablecoin for Treasury Holdings?](https://learn.greeks.live/wp-content/uploads/2025/10/Modular-Derivative-Contract-Unwinding-Revealing-Stratified-Liquidity-Pool-Segregation-Mechanisms.webp)

Fiat-backed are 1:1 collateralized and stable; algorithmic rely on volatile token mechanics and carry higher de-pegging risk.

### [What Is the Difference between Fiat-Backed and Algorithmic Stablecoins in Terms of Peg Risk for Derivatives?](https://learn.greeks.live/path/what-is-the-difference-between-fiat-backed-and-algorithmic-stablecoins-in-terms-of-peg-risk-for-derivatives/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![What Is the Difference between Fiat-Backed and Algorithmic Stablecoins in Terms of Peg Risk for Derivatives?](https://learn.greeks.live/wp-content/uploads/2025/10/Asymmetric-Digital-Asset-Structure-Illuminating-Complex-Option-Hedging-Strategies-Across-Market-Quanta.webp)

Fiat-backed risk is tied to reserves and custody; algorithmic risk is tied to complex, market-sensitive on-chain stabilization mechanisms.

### [What Is the Difference between Fiat-Backed and Algorithmic Stablecoins regarding Reserve Requirements?](https://learn.greeks.live/path/what-is-the-difference-between-fiat-backed-and-algorithmic-stablecoins-regarding-reserve-requirements/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![What Is the Difference between Fiat-Backed and Algorithmic Stablecoins regarding Reserve Requirements?](https://learn.greeks.live/wp-content/uploads/2025/10/Crystalline-Geometries-Modeling-Non-Fungible-Token-Volatility-Surface-Dynamics-In-Decentralized-Finance.webp)

Fiat-backed use 1:1 liquid reserves; algorithmic use smart contracts and token supply adjustments without reserves.

### [Explain How a 'Death Spiral' Can Occur in an Algorithmic Stablecoin Model](https://learn.greeks.live/path/explain-how-a-death-spiral-can-occur-in-an-algorithmic-stablecoin-model/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![Explain How a 'Death Spiral' Can Occur in an Algorithmic Stablecoin Model](https://learn.greeks.live/wp-content/uploads/2025/10/Bifurcated-Tokenized-Asset-Mechanism-Revealing-Underlying-Collateralized-Derivatives-Structure.webp)

A catastrophic feedback loop where a de-pegged stablecoin causes its volatile backing token's price to crash, further reducing confidence and the peg.

### [Explain the "Death Spiral" Risk Specific to Algorithmic Stablecoins](https://learn.greeks.live/path/explain-the-death-spiral-risk-specific-to-algorithmic-stablecoins/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![Explain the "Death Spiral" Risk Specific to Algorithmic Stablecoins](https://learn.greeks.live/wp-content/uploads/2025/10/Asymmetric-Portfolio-Hedging-Mechanism-Visualization-via-Orbital-Kinetic-Instruments.webp)

Mass selling causes the algorithm to mint more volatile collateral, driving down its price and reinforcing the stablecoin's collapse.

### [What Is the Concept of 'Reflexivity' in the Collapse of an Algorithmic Stablecoin?](https://learn.greeks.live/path/what-is-the-concept-of-reflexivity-in-the-collapse-of-an-algorithmic-stablecoin/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![What Is the Concept of 'Reflexivity' in the Collapse of an Algorithmic Stablecoin?](https://learn.greeks.live/wp-content/uploads/2025/10/Decentralized-Finance-Protocol-Architecture-Intersecting-Multi-Asset-Volatility-Surface-Structuring.webp)

A self-reinforcing loop where a price drop causes a fundamental change (token sale), which further drives the price down, accelerating the collapse.

### [How Does the Burning and Minting Mechanism Work in a Typical Algorithmic Stablecoin?](https://learn.greeks.live/path/how-does-the-burning-and-minting-mechanism-work-in-a-typical-algorithmic-stablecoin/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![How Does the Burning and Minting Mechanism Work in a Typical Algorithmic Stablecoin?](https://learn.greeks.live/wp-content/uploads/2025/10/Automated-Market-Maker-Mechanism-Interaction-with-Perpetual-Swaps-Settlement-Protocol-Visualization.webp)

Minting increases supply when price is high; burning decreases supply when price is low, using incentives to restore the peg.

### [What Is the Key Regulatory Concern with Algorithmic Stablecoins?](https://learn.greeks.live/path/what-is-the-key-regulatory-concern-with-algorithmic-stablecoins/?utm_source=crypto.greeks.live&utm_medium=referral&utm_campaign=satellite)
![What Is the Key Regulatory Concern with Algorithmic Stablecoins?](https://learn.greeks.live/wp-content/uploads/2025/10/Fragile-Digital-Asset-Governance-Balancing-Precarious-Electronic-Substrates-Within-Decentralized-Finance-Architectures.webp)

Fragility and risk of catastrophic de-pegging due to reliance on complex, unaudited algorithms instead of tangible reserves.

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