We have looked at various types of Stablecoins in our series of articles, fiat-backed, crypto-backed, and commodities backed. There is another class of stablecoins that is very different. Algorithmic stablecoins use smart contracts to follow algorithms that are designed to manage the supply of a stablecoin to maintain a peg. Functionally, they are essentially creating and following monetary policy in a way that mirrors central banks efforts to stabilize national currencies. But amazingly, algorithmic stablecoins have outperformed central banks… in failing to stabilize value.
The idea is simple. A stablecoin algorithm system reduces the supply of the token if the price falls below the fiat currency that it is intended to track. If the price surpasses the value of the fiat currency, new tokens are put into circulation to reduce the value of the stablecoin. So that is pretty straightforward. But it is surprisingly hard to do. Success has been evasive.
Many protocols for algorithmic stablecoins were launched during 2020. Some become very famous and then infamous when their values were very volatile instead of remotely stable — for instance one coin varied from as high as $23.88 all the way down to $0.174. That is not very stable!
For the time being, algorithmic stablecoins have a well deserved bad reputation and Stablecomp has no near term plans to support any algorithmic stablecoin.
You might want to check out our previous articles:
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