Algorithmic Stablecoins: Everything You Need to Know


Algorithmic stablecoins are stablecoins which are rebased using computer algorithms. These stablecoins are in contrast to traditional collateralized stablecoins, such as Tether USDT. Algorithmic stablecoins are most commonly used in DeFi applications, as they are decentralized in nature.

Algorithmic Stablecoins: Everything You Need to Know

Many of us are familiar with traditional collateralized stablecoins; particularly those which are fiat backed, such as USDT and USDC. There is however an entirely different category of stablecoins emerging. This new variety of stablecoins – algorithmic stablecoins – are non-collateralized by nature and instead are balanced by computer algorithms that are designed to mimic the value of other currencies, such as fiat currencies. In this piece, we will discuss the difference between collateralized stablecoins and algorithmic stablecoins. We will also discuss the different subcategories that exist within the umbrella of algorithmic stablecoins.

Traditional Collateralized Stablecoins

As these are the most common variety of stablecoins, we will keep this part brief. If you would like to learn more about traditional collateralized stablecoins, feel free to take a look at All About Stablecoins before continuing with the rest of this article.

Traditional collateral stablecoins are backed by fiat currency at a 1:1 ratio and are by far the most popular variety of stablecoins on the market. These are considered off-chain assets. this is because the fiat equivalent of these coins is kept in reserve, by financial institutions or central issuers. The number of tokens must remain exactly equivalent to the amount of fiat currency that is used as collateral. Some of the biggest stablecoins in this category by market cap, are Tether (USDT), Coinbase (USDC), Gemini Dollar (GUSD) and True USD (TUSD).

What Are Algorithmic Stablecoins

Algorithmic stablecoins are stablecoins that are not backed by fiat currency, cryptocurrency, or commodities. Instead, these stablecoins are smart contracted and algorithmically generated. An algorithmic stablecoin system will increase and reduce the number of coins in circulation, in order to match the price to that of which it represents. The system will remove tokens when the stablecoin falls below the price of the asset and will add tokens when the stablecoin increases in value.

Potential Benefits of Algorithmic Stablecoins

The concept of the algorithmic stablecoin was derived from fear within the cryptocurrency community surrounding government regulation regarding collateralized fiat backed stablecoins. Although fiat backed stablecoins are the standard, changes in government regulation regarding stablecoin policies present a potential Achilles heel to the system.

If the government of the native country of a stablecoin issuer were to freeze the stablecoin issuer’s accounts – for any reason – the redeemability of the stablecoin itself would become zero. Granted this scenario is highly unlikely, especially regarding stablecoins such as USDT and USDC, the risk is still very real for stablecoin issuers who reside in countries with less than stable governments.

The most useful function of algorithmic stablecoins comes from the role they play in decentralized applications. As algorithmic stablecoins are fully decentralized in nature, they have the benefit of bringing the convenience of traditional collateralized stablecoins to various dApps such as DEXs and AMMs. Currently, algorithmic stablecoins are only used in DeFi protocols.

Types of Algorithmic Stablecoins

There have been a number of algorithmic stablecoin projects launched within the last several years, however we are only going to focus on the two most common algorithmic stablecoin models:

  • Rebasing Algorithmic Stablecoins
  • Seigniorage Algorithmic Stablecoins

Rebasing Algorithmic Stablecoins

Rebasing algorithmic stablecoins are the first and foremost of the DeFi stablecoins. The token price is stabilized by periodic “rebasing” of the token supply. Essentially this means that the total supply of stablecoins across every wallet is either increased or reduced based on a periodic scale. The amount by which the token supply is rebased in this system is controlled by smart contract and is proportionally related to the increase or decrease of the peg price by percentage.

Rebasing algorithmic stablecoins come with their own set of pros and cons and both of them stem from the fact that they share so much similarity with traditional crypto tokens. Rebasing algorithmic stablecoins are non-dilutive, meaning it is possible to make or lose profits simply by holding the asset. If you get into a rebasing algorithmic stablecoin early enough, you can stand to make a profit, and conversely if the market cap falls, so does the value of your holdings. Of course, since these coins are rebased, the effect is less pronounced than it is with traditional crypto tokens, which is why some people consider them a viable platform for parking crypto holdings.

Seigniorage Algorithmic Stablecoins

Seigniorage algorithmic stablecoins refer to the difference between a coin and its production costs. Network participants are incentivized to maintain the value of a token by it’s minting and burning. Essentially, this system involves a token which is pegged to a stable value, and another token which is used to incentivize network participants to accurately rebalance the token pegged to the stable value. This is the stablecoin model which is implemented within the Terra Luna ecosystem for its stablecoins.

Algorithmic Stablecoin Regulation

Currently, there is little to no clarity regarding the regulation of algorithmic stablecoins in any jurisdiction around the world. This doesn’t mean that algorithmic stablecoins will continue to exist without regulatory approval, but it’s unlikely that they will ever be classified as securities, so long as the projects remain fully decentralized.


Algorithmic stablecoins are certainly useful in the world of DeFi, but they possibility of them eventually replacing traditional collateralized stablecoins is next to zero. This is mainly because it’s incredibly difficult to design an algorithmic stablecoin that can sustain its viability for the long term. That however doesn’t mean that it is an impossible goal. At the rate DeFi protocols are developing, anything is possible!

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