What Are the Main Risks Associated with the Stability of Algorithmic Stablecoins?

The primary risk is a "death spiral," where a loss of confidence in the peg causes a mass sell-off. This overwhelms the stabilizing mechanism, as the secondary token's value plummets, failing to absorb the volatility.

Another key risk is their dependency on continuous market demand and the willingness of traders to perform stabilizing arbitrage. These systems are also vulnerable to smart contract exploits and failures of the price oracle feeds they rely on to determine the peg.

Market manipulation can also trigger instability.