Stablecoins have become an essential part of the crypto market, serving as an analogue of fiat currencies and allowing market participants to reduce the impact of high volatility*. The first stablecoins were collateralized directly with fiat money, government bonds, and other liquid assets.
* Volatility is a property of financial assets whereby their price can change sharply and frequently over short periods under the influence of market factors, news, and speculative demand, increasing the level of investment risk.
It is the presence of reserves that underlies the peg mechanism of classic stablecoins such as USDT and USDC. Over time, however, an alternative concept emerged that maintained a stablecoin’s value without collateral—solely through algorithmic mechanisms.
What algorithmic stablecoins are
Algorithmic stablecoins are a type of stablecoin whose exchange rate relative to a chosen currency or asset is maintained using mathematical models and smart contracts rather than by holding reserves.
Like all stablecoins, the primary goal of algorithmic stablecoins is to keep the price at the level of a reference benchmark. For example, if a coin is pegged to the US dollar, the algorithm must hold its value close to $1. A significant deviation in price (usually more than 1%) is called a loss of peg, or a depeg.
Price regulation in algorithmic stablecoins is achieved by changing the size of the token supply:
- When demand rises, and the price exceeds $1, the algorithm increases issuance, expanding supply until balance is restored.
- When demand falls, and the price drops below $1, part of the tokens is removed from circulation (burned), which should bring the value back to the target level.
Despite their innovative nature, algorithmic stablecoins remain a niche segment. After several high-profile collapses, investors more often prefer classic stablecoins. According to CoinMarketCap data as of January 2026, the total capitalization of algorithmic stablecoins is about $1 billion—190 times less than the capitalization of USDT alone. The share of algorithmic stablecoins in the stablecoin market does not exceed 0.3%.
Main types of algorithmic stablecoins
1. Purely algorithmic stablecoins
In such systems, the exchange rate is regulated exclusively by supply and demand. The most common mechanism is the rebase model*.
* Rebase is an algorithmic change in the total number of tokens in circulation depending on the deviation of the market price from the target level. At the same time, each user’s ownership share remains unchanged.
The most famous example of this model is TerraUSD (UST), which collapsed after massive sell-offs and the launch of the so-called “death spiral.” The issuance of UST was directly linked to the burning of the LUNA token, making the system vulnerable to a sharp loss of confidence.
As a result, the price of UST fell by more than 99%, dropping to $0.0075, and its market capitalization shrank to $39 million. This case clearly demonstrated the vulnerability of fully uncollateralized algorithmic models.
At the same time, there are more resilient examples, such as Ampleforth (AMPL), which also uses a rebase mechanism. Despite its relatively small market capitalization (around $35 million), the price of AMPL continues to remain close to its target level.
2. Algorithmic stablecoins with a hybrid model
Hybrid models combine algorithmic regulation with partial or excess asset collateralization. The form of collateral may vary.
For example, the MakerDAO protocol issues the DAI stablecoin, which is collateralized by various assets, including ETH and USDT, and operates under the principles of decentralized lending.
This category also includes USDD and Frax USD (FRXUSD). USDD, launched in the Tron ecosystem, uses a dual-token model and excess collateralization. As of January 2026, its capitalization is about $861 million, making it one of the largest algorithmic stablecoins.
3. Stablecoins with delta-neutral strategies
A separate category consists of algorithmic stablecoins that use complex financial instruments, including delta-neutral hedging in futures markets.
An example of this model is Ethena USDe (USDe), which many analysts consider a new stage in the evolution of algorithmic stablecoins. CoinMarketCap even accounts for capitalization separately, despite its hybrid model.
USDe is the largest algorithmic stablecoin, with a capitalization exceeding $6.3 billion, and ranks among the top three stablecoins overall, ahead of DAI and PayPal USD (PYUSD).
Advantages of algorithmic stablecoins
The main advantage of algorithmic stablecoins is their high level of decentralization. Token issuance is carried out directly through smart contracts, without the involvement of a centralized issuer or the need to undergo regulatory procedures.
In addition, classic issuers may restrict access to their products in certain jurisdictions. Algorithmic models lack such limitations and do not carry counterparty risk—users interact with code rather than a third party.
Another benefit is scalability: algorithmic stablecoins can rapidly increase supply without the need to coordinate reserves or comply with strict regulatory requirements.
Risks of algorithmic stablecoins
The key risk for algorithmic stablecoins remains the risk of losing their peg to the underlying asset. The complexity of algorithms increases the likelihood of model errors, which may surface under stressful market conditions. Uncollateralized algorithmic stablecoins are considered particularly vulnerable.
An additional risk factor is the absence of reserves, which reduces investor confidence. In the event of a depeg, users have no guarantees of compensation, unlike classic collateralized models.