Are algorithmic stablecoins really stable?

Therefore, stablecoins were developed as a reliable solution for addressing the high volatility in the crypto domain. Among the many types of stablecoins, algorithmic stablecoins have been touted as the ‘ppurely stable’ decentralized crypto tokens. Are they truly stable? What do algorithm-based stablecoins bring to the table?

What are fractional-algorithmic stablecoins?

Fractional-algorithmic stablecoins are partly collateralized, meaning they are somewhat backed by a real-world asset. Frax is an example of a fractional-algorithmic stablecoin, as it is partially backed by USD Coin, a stablecoin that is backed by the U.S dollar. In some cases, algorithmic stablecoins can be very beneficial.

Can a stablecoin be collateralized?

However, stablecoins can also be collateralized on-chain using decentralized mechanisms, as is the case with DAI. Algorithmic stablecoins are different. Algorithmic stablecoins, in their purest form, are completely uncollateralized. Their value is not backed by any external asset.

Are Stablecoins backed by real assets?

However, some stablecoins aren't backed by real assets at all. These are algorithmic stablecoins. As the name suggests, this kind of stablecoin uses an algorithm to maintain a consistent value. These algorithms usually link two coins and then adjust their price depending on the supply and demand of investors.