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.
Glossar
Death Spiral
Cascade ⎊ The "Death Spiral" in cryptocurrency derivatives, options trading, and related financial instruments describes a self-reinforcing negative feedback loop where declining asset prices trigger margin calls, forced liquidations, and further price depreciation, ultimately accelerating the downward trajectory.
Algorithmic Stablecoin
Anchor ⎊ A collateralization scheme or algorithmic feedback loop designed to enforce a stable relationship between the asset's market price and a fiat currency or basket of assets.
Catastrophic Feedback Loop
Dynamic ⎊ A Catastrophic Feedback Loop describes a severe, self-reinforcing market dynamic where an initial price shock triggers a sequence of automated reactions that accelerate the asset's decline.