How Does an Algorithmic Stablecoin’s Design Differ from a Collateralized One in a Death Spiral?

Algorithmic stablecoins rely on code and incentives (like seigniorage or dual-token systems) rather than external collateral to maintain their peg. In a death spiral, their reliance on investor confidence and arbitrage breaks down, leading to hyperinflation of the stabilizing token.

Collateralized stablecoins, while backed by assets, suffer a death spiral if the value of their collateral drops below the stablecoin's outstanding supply or if the collateral is illiquid. The algorithmic design fails faster due to pure confidence loss.