What Is the Difference between an Algorithmic Stablecoin and a Collateralized Stablecoin?
A collateralized stablecoin maintains its peg by being backed 1:1 with off-chain assets (fiat, bonds) or over-collateralized with on-chain crypto assets. Its intrinsic value is the value of its reserves.
An algorithmic stablecoin maintains its peg through smart contract-driven supply and demand mechanisms (minting/burning) often involving a secondary token, with no direct collateral. Algorithmic stablecoins have higher systemic risk and their intrinsic value is based on the sustainability of the algorithm.
Glossar
Algorithmic Stablecoins
Architecture ⎊ Algorithmic stablecoins represent a class of cryptocurrencies designed to maintain a stable value, typically pegged to a fiat currency like the US dollar, through algorithmic mechanisms rather than relying on collateralization by traditional assets.
Stablecoin
Instrument ⎊ Stablecoin refers to a class of cryptocurrency designed to maintain a stable market value, typically pegged to a fiat currency, which is essential for collateralizing margin accounts and settling cash-settled options in the derivatives market.
Collateralized Stablecoin
Collateral ⎊ A collateralized stablecoin derives its price stability from holding a reserve of assets, typically cryptocurrencies or fiat currencies, backing each token.
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.