What Is a “Death Spiral” in the Context of Algorithmic Stablecoins?

A death spiral occurs when the stablecoin's price drops significantly below its peg, triggering a collapse in confidence. The protocol's stabilization mechanism, which involves minting and selling a governance or seigniorage token to buy back the stablecoin, accelerates the crisis.

The selling pressure on the governance token drives its price down, further eroding confidence and making the stabilization mechanism ineffective, leading to a rapid, irreversible devaluation.