Algorithmic stablecoins are cryptocurrencies that try to keep their prices stable using an algorithm or mathematical formula. Such cryptocurrencies usually adjust their prices depending on the price of another asset, for example, the USD. Therefore, they experience less price fluctuations compared to other cryptocurrencies.
Algorithmic stablecoins are often used in decentralized finance (DeFi) applications for lending, borrowing, providing liquidity, and other DeFi transactions. Algorithmic stablecoins can help reduce the volatility risks seen in other cryptocurrencies. However, algorithmic stablecoins do not always have price stability. Sometimes they may experience price fluctuations for a brief period. Also, their prices can change rapidly due to miscalculations of the algorithm or attempts at manipulation. Therefore, while algorithmic stablecoins are assets with lower volatility, they do have some risks.
Below are the advantages and disadvantages of algorithmic stablecoins:
Price stability: Algorithmic stablecoins experience lower price fluctuations than other cryptocurrencies. Therefore, they can be considered lower-risk assets for investors.
Decentralized finance (DeFi): Algorithmic stablecoins can be used for lending, borrowing, providing liquidity, and other DeFi transactions.
Low transaction fees: Algorithmic stablecoins offer lower transaction fees compared to fiat currencies.
Algorithm errors: Algorithm errors or manipulation attempts can quickly change the price of an algorithmic stablecoin. For example, issues encountered in Terra and UST.
Sufficient liquidity: Algorithmic stablecoins cannot have price stability without sufficient liquidity.
The Future of Algorithmic Stablecoins
Algorithmic stablecoins are cryptocurrencies that have rapidly gained popularity in recent years and are expected to be adopted and used more in the near future. We know that some countries are already taking important initiatives.
Furthermore, algorithmic stablecoins have the potential to replace traditional financial instruments in the cryptocurrency industry. However, we should remember that further regulation and adoption are needed for greater use of algorithmic stablecoins. While the future of algorithmic stablecoins looks promising, some hurdles need to be overcome.
Some algorithmic stablecoins are:
Dai (DAI): Dai is an algorithmic stablecoin that runs on the Ethereum blockchain and is pegged to the USD. Dai was created by MakerDAO and is managed by the MakerDAO community.
Ampleforth (AMPL): Ampleforth is an algorithmic stablecoin that runs on the Ethereum blockchain and is pegged to the USD. Ampleforth tries to keep its price stable by changing the supply of tokens according to the supply and demand in the market.
Each algorithmic stablecoin tries to keep its price stable by using a different algorithm or mechanism. Each of them has its own characteristics and can be preferred by investors for different purposes.