Algorithmic Stablecoin

An algorithmic stablecoin is a specific type of stablecoin that uses software algorithms and smart contracts, rather than direct fiat or commodity reserves, to maintain its peg to a stable asset like the US dollar. Instead of holding an equivalent amount of collateral in a bank account, these stablecoins rely on automated mechanisms to dynamically adjust their supply in response to price fluctuations. If the stablecoin's price deviates from its peg (e.g., goes below $1), the algorithm will reduce the supply by burning tokens or incentivizing users to lock them up. Conversely, if the price goes above the peg, the algorithm increases the supply by minting new tokens.