How Does the Inflation Rate Affect the Risk of a ‘Death Spiral’ in an Algorithmic Stablecoin?

A high inflation rate of the stabilizing token is a primary factor in the risk of a 'death spiral' for an algorithmic stablecoin. When the stablecoin loses its peg and falls below $1, the protocol must mint and sell the stabilizing token to buy back the stablecoin and restore the peg.

If this stabilizing token is already highly inflationary, the increased supply from the peg defense can trigger a hyperinflationary collapse, where the stabilizing token's value plummets, making the peg defense mechanism ineffective.