How Algorithmic Stablecoins Work: Everything You Need To Know About the Cryptocurrency

Algorithmic stablecoins are becoming popular as more people and businesses adopt crypto payments, but they pose their own challenges.

Ruchi Gupta - Author

Apr. 20 2022, Published 7:15 a.m. ET

A man walks in front of a Bitcoin trading graph
Source: Getty Images

Although algorithmic stablecoins are becoming popular, many investors don't fully understood how they work or how to take advantage of them to make a profit. Are algorithmic stablecoins for you?

Article continues below advertisement
Article continues below advertisement

Although conventional cryptocurrencies such as Bitcoin and Ethereum are more flexible than fiat money for transactions, they can be extremely volatile. Stablecoins, such as Tether (USDT), are a type of cryptocurrency designed to maintain a stable value. Stablecoins bring the flexibility of cryptocurrency and the stability of fiat currency, making them ideal for payments. While some stablecoins are backed by reserve assets such the dollar or gold, others aren’t collateralized.

How algorithmic stablecoins work

Uncollateralized stablecoins are also called algorithmic stablecoins: instead of being backed by a reserve asset, their value and supply are controlled through software code rules or algorithms. The code acts as the central bank. If the crypto’s value rises too high, the software automatically releases more coins to bringing the price down. If the value drops too low, the software removes some coins from circulation, bringing up the price.

Article continues below advertisement
Source: CoinMarketCap

Many algorithmic stablecoins have their value pegged to the U.S. dollar. However, some are pegged to another cryptocurrency, a basket of fiat currencies, or a group of cryptocurrencies.

Article continues below advertisement
Article continues below advertisement

How to invest in algorithmic stablecoins

People who money in the crypto market usually do it through capital gains. But with stablecoins, you can’t count on the capital gain for profit. Instead, you profit by participating in DeFi programs such as lending and staking.

Some examples of algorithmic stablecoins

If you’re looking for the best algorithmic stablecoin to invest in, there are several options.

Ampleforth (AMPL)

Regarded as a pioneer algorithmic stablecoin, Ampleforth (AMPL) has a maximum supply of 395 million tokens. It’s programmed to maintain a value roughly equal to $1: more AMPL tokens are released if the price goes above $1.06, and AMPL tokens are removed if the price falls below $0.96.

Article continues below advertisement

TerraUSD (UST)

Similar to Ampleforth's token, TerraUSD (UST) is programmed to maintain a value equal to $1. But it has no upper supply cap. The developer describes it as a scalable, yield-bearing crypto.

Article continues below advertisement

Based (BASED)

The Based stablecoin, on the other hand, has its value pegged to another cryptocurrency, TOMB. The pegged crypto’s value has ranged between $4.22 and $0.98. BASED has no upper supply limit.

Article continues below advertisement

Algorithmic stablecoins pose risks that investors should keep in mind

Many think algorithmic stablecoins are the future, since their scaling isn’t constrained by the availability of collateral to put in the reserve (as the case with conventional stablecoins). However, maintaining the stable value isn’t easy: a bank run could cause prices to crash, as was the case with the Titan token. Mark Cuban was one investor burned in the Titan token debacle.


Latest Cryptocurrency & Blockchain News and Updates

    Opt-out of personalized ads

    © Copyright 2024 Market Realist. Market Realist is a registered trademark. All Rights Reserved. People may receive compensation for some links to products and services on this website. Offers may be subject to change without notice.