What are algorithmic stablecoins?

Algorithmic stablecoins exemplify these traits; part monetary economics, part financial markets, part mathematics, and part technology. Sitting at the intersection of money and blockchain technology, they are new and complex—and pose many challenges and unanswered questions over how the future of DeFi will unfold.

What are stablecoins and how do they work?

Stablecoins are digital assets designed to hold a certain value relative to a different asset, most commonly the U.S. dollar. They have become a popular way to hedge against crypto price risk and move funds across exchanges throughout the world.

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.