What Is the Risk of Fractional Reserve Stablecoins versus Purely Algorithmic Ones?

Fractional reserve stablecoins hold less than $1 in reserves for every stablecoin issued, relying on user confidence and liquidity. Their risk is a traditional bank run, where mass redemptions exceed the reserves, forcing a de-peg.

Purely algorithmic stablecoins, with zero reserve, face a higher risk of a death spiral because their stabilization mechanism relies on a volatile token that can collapse under pressure, making them inherently more fragile.