What Is the Concept of a ‘Death Spiral’ in the Context of Algorithmic Stablecoins?
A 'death spiral' is a catastrophic feedback loop where the stablecoin's price drops below its peg, triggering the algorithmic mechanism to issue or burn the paired volatile asset (the governance token). This action floods the market with the volatile asset, driving its price down further.
The lower value of the governance token then makes the stablecoin's stabilization mechanism less effective, leading to further stablecoin selling and a continuous downward price spiral for both tokens. This event can lead to a total collapse of the system.
