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.
Glossar
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.
Secondary Asset
Valuation ⎊ Secondary assets, within cryptocurrency and derivatives markets, represent instruments whose price is derived from an underlying primary asset, often exhibiting a complex relationship influenced by volatility surfaces and implied correlations.
Governance Token
Asset ⎊ A Governance Token grants its holders the right to propose and vote on changes to a decentralized protocol's operational parameters, often including modifications to risk models or fee structures.