What Are the Systemic Risks Associated with Unbacked Stablecoins?
Unbacked (algorithmic) stablecoins carry systemic risks, primarily the risk of a "death spiral" or hyperinflationary collapse. This occurs when the stablecoin loses its peg, causing the secondary stabilizing token to plummet in value, making the minting/burning mechanism ineffective.
The entire system can collapse, leading to a permanent loss of the peg and a complete loss of intrinsic value. Their stability relies purely on market confidence and the algorithm's resilience.
Glossar
Systemic Risks
Contagion ⎊ Systemic risks within cryptocurrency, options, and derivatives manifest prominently through contagion, representing the rapid dissemination of shocks across interconnected market participants.
Stablecoins
Peg ⎊ Stablecoins represent a class of cryptocurrencies designed to maintain a stable value relative to an external reference asset, typically a fiat currency like the US dollar.
Market Confidence
Sentiment ⎊ Within cryptocurrency derivatives and options markets, sentiment represents a crucial, albeit often ephemeral, gauge of prevailing investor psychology.
Secondary Stabilizing Token
Token ⎊ A secondary stabilizing token within cryptocurrency derivatives represents a mechanism designed to mitigate volatility and enhance price stability within a specific contract or trading pair.