What Is an Algorithmic Stablecoin and Why Are They Risky?

An algorithmic stablecoin uses smart contracts and code to maintain its peg, without being backed by fiat or over-collateralized crypto reserves. They are risky because their stability relies entirely on the effectiveness of their algorithms, which often involve complex mint/burn mechanisms and economic incentives.

If the algorithm fails to maintain the peg during extreme market stress, it can lead to a rapid and irreversible collapse.