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Is It the End of Algorithmic Stablecoins?
Author: Catherine
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After the UST crash, confidence in algorithmic stablecoins started to wane. But are all algorithmic stablecoins flawed by design? What are algorithmic stablecoins made of and what are the risks and advantages? Read our explainer article!

What are Stablecoins? What Types Do They Come In?

tether usd coin
Source: DrawKit Illustrations on Unsplash

A stablecoin is a type of cryptocurrency token, the value of which is tied to the price of another asset: a fiat currency, commodity, or even real estate. The most popular variations of stablecoins on the crypto market today are pegged in a 1:1 ratio to USD.

Stablecoins have become a cornerstone of the market: large amounts of trading volume go through them. These tokens combine the benefits of fiat currencies and the borderlessness and accessibility of cryptocurrencies.

There are several subsets of stablecoins characterized by their backing mechanism:

What are Algorithmic Stablecoins?

As the name suggests, the value of an algorithmic stablecoin is maintained by algorithms. This is considered to be the least centralized type of stablecoins but it is not a type free of risks.

What algorithmic stablecoins are there in particular?

Therefore, a double-token design that was made popular by Terra is rather common, but some protocols tried to improve it. And there are quite a few challenges to improve on.

What are Algorithmic Stablecoins Criticized For?

Terra’s depeg and collapse highlighted the risks of the commonly applied seigniorage model.

Is UST Crash the End of Algorithmic Stablecoins?

There are still multiple projects that work on a design similar to Terra’s. Does it mean that their fall is a question of time?

First of all, they still can learn from Terra’s mistakes and improve. This is especially true for the stablecoins that withstood the capitulation: now is the best time to introduce improvements.

Moreover, not all algorithmic stablecoins share the same design. As mentioned before, there is Frax stablecoin that combines crypto-collateralization with seigniorage, or Neutrino USD that has two tokens backing it.

There is no doubt that UST’s lesson was painful for an unprecedented number of people. But following the shakeout, the projects that managed to take an impact will gain experience in dealing with “black swans”.


In the immediate aftermath of Terra’s crash, all algorithmic stablecoins suffered a hit to their reputation. Nevertheless, the market is still standing and protocols have gained a chance to learn from their competitor’s mistakes.

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