What is an algorithmic stablecoin and how does it hold its peg?

An algorithmic stablecoin is a crypto token that aims to stay at a fixed value, usually one US dollar, by adjusting its supply through software and market incentives. Instead of a dollar in the bank for every token, it relies on traders acting on price gaps.

How do algorithmic stablecoins maintain their peg?

The usual design pairs the stablecoin with a second, freely floating token. TerraUSD shows how this worked. According to Decrypt's explainer, anyone could mint UST by paying the going rate in LUNA, which was then burned, and could also turn UST back into LUNA, burning the UST.

If UST slipped to 95 cents, a trader could buy it cheaply and swap it for a dollar's worth of LUNA. Burning UST was meant to lift its price. Decrypt noted it worked only while traders kept taking part.

What is the difference between an algorithmic stablecoin and other stablecoins?

Most stablecoins are backed by reserves. A fiat-backed coin holds cash and short-term government debt, and a crypto-backed coin holds more crypto than the tokens it issues. An algorithmic coin replaces part or all of that backing with a mechanism.

A reserve-backed coin that slips below $1 can still be redeemed against real assets. An algorithmic coin's backing is often its own sister token, whose value can fall at the same moment. The Bank for International Settlements noted in 2021 that no purely algorithmic stablecoin had been widely adopted. Synthetic dollars such as Ethena's USDe are a different design, backed by assets and hedges.

What are some algorithmic stablecoin examples?

• TerraUSD (UST). In May 2022, UST lost its peg and fell as low as about 30 cents, while LUNA lost more than 95% of its value. The SEC said the collapse wiped out about $40 billion in market value. A jury found Terraform Labs and founder Do Kwon liable for securities fraud in April 2024, and they agreed to pay more than $4.5 billion in June 2024. In December 2025, Kwon was sentenced to 15 years in prison after pleading guilty to fraud charges. See what happens when a stablecoin depegs.
• Frax (FRAX). Frax began as a fractional-algorithmic coin, partly backed by collateral and partly by an algorithm. In February 2023, its community voted to move to 100% collateral, with Frax's team saying the Terra collapse had tainted the algorithmic concept.

How does the GENIUS Act treat algorithmic stablecoins?

The GENIUS Act, signed in July 2025, makes it unlawful for anyone other than a permitted issuer to issue a payment stablecoin in the United States. Permitted issuers must hold reserves at least equal to the coins outstanding, in assets such as US dollars and Treasury securities. A coin that holds its value through an algorithm instead of those reserves would not meet that requirement. As of October 2026, regulators were still writing the detailed rules. The OCC said on October 21, 2026 that its final rule and the Act take effect on January 18, 2027.

Stablecoin rules differ by country and change often.