How Does the Correlation between the Stablecoin and Its Collateral Token Affect Stability?

In a dual-token algorithmic system, a positive correlation between the stablecoin and the volatile governance token is a major risk. If the market crashes, both tokens fall in price.

The drop in the governance token's price weakens the stabilization mechanism, and the drop in the stablecoin's price triggers the mechanism, leading to a procyclical failure where the tokens drag each other down.