What Is the Difference between a Collateralized Death Spiral and an Algorithmic One?
A collateralized death spiral is less common and occurs if the collateral's value drops so rapidly that liquidation cannot keep up, leaving the stablecoin under-collateralized. An algorithmic death spiral is a design flaw where the mechanism intended to stabilize the coin (usually involving a volatile governance token) fails catastrophically, leading to an irreversible collapse of both the stablecoin and its backing token.
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.
Collateralized Death Spiral
Architecture ⎊ The Collateralized Death Spiral is a severe systemic risk inherent in leveraged financial architectures, particularly decentralized lending and derivatives platforms.
Algorithmic Death Spiral
Mechanism ⎊ An algorithmic death spiral describes a severe feedback loop in algorithmic stablecoins or decentralized finance protocols where a token's price decline triggers further selling pressure.