What Is a Stablecoin “Death Spiral” and What Causes It?
A death spiral is a catastrophic feedback loop in an algorithmic stablecoin system. It begins when the stablecoin loses its peg, causing users to panic-sell.
The algorithm attempts to restore the peg by issuing a secondary, volatile token, but the increased supply of this secondary token causes its price to plummet. This further erodes confidence, leading to more stablecoin selling and accelerating the spiral until the system collapses.
