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

A death spiral occurs when the stablecoin starts to de-peg significantly below $1, triggering a crisis of confidence. To restore the peg, the protocol attempts to reduce stablecoin supply by issuing its volatile governance token.

However, if the market selling pressure on the stablecoin is too high, the massive issuance of the volatile token drives its price down sharply. This makes the peg-restoration mechanism ineffective and accelerates the stablecoin's collapse.