Stablecoin Glossary
Algorithmic Stablecoin
An algorithmic stablecoin relies materially on protocol rules and economic incentives that adjust supply, demand, or linked-token balances in an effort to keep the stablecoin near its reference value.
Explanation
Algorithmic stablecoin designs vary widely. Some expand or contract token supply when the market price moves away from the target. Others use a secondary token, arbitrage mechanism, treasury, or partial collateral alongside automated rules. Their stability depends on market participants continuing to respond to the incentives embedded in the system. Large shocks can overwhelm those incentives, especially when confidence in the linked assets or redemption mechanism deteriorates.
Why it matters
Algorithmic designs can transmit stress between linked tokens and can fail rapidly when the incentives supporting the peg stop attracting sufficient market demand.
Example
A two-token system may allow users to exchange a stablecoin for a variable-value companion token at a protocol-defined rate intended to support the peg.
Related terms
Last reviewed: September 2026