What Is the Role of the Governance Token in an Algorithmic Stablecoin System?

The governance token is a volatile, secondary asset used to help stabilize the algorithmic stablecoin's peg. When the stablecoin trades above $1, the governance token is often burned (removed from circulation) to mint new stablecoins, increasing supply and pushing the price down.

Conversely, when the stablecoin trades below $1, the mechanism incentivizes users to buy the stablecoin and burn it to receive the governance token, reducing stablecoin supply. The governance token's value is essential for the stabilization mechanism's solvency.