What Is the Risk Profile of an Algorithmic Stablecoin versus a Fiat-Backed Stablecoin?

Fiat-backed stablecoins (like USDC) are generally lower risk, as each token is theoretically redeemable for a corresponding fiat currency held in reserve, making their peg relatively stable. Algorithmic stablecoins rely on smart contract mechanisms and incentives to maintain their peg, which introduces significant model risk and potential for a 'death spiral' if the algorithm fails to manage volatility, making them higher risk.