How Does an Algorithmic Stablecoin Maintain Its Peg without Collateral?

Algorithmic stablecoins typically use a dual-token system involving a stablecoin and a volatile governance or collateral token. The peg is maintained through on-chain mechanisms like seigniorage, arbitrage incentives, and burning/minting operations.

When the stablecoin price is above $1, users are incentivized to mint it by burning the volatile token. When below $1, users are incentivized to buy and burn the stablecoin for the volatile token, reducing supply and theoretically restoring the peg.