Algorithmic Stablecoins
Algorithmic stablecoins maintain their peg through code, not collateral. When the price dips below $1, arbitrageurs burn the stablecoin to mint a governance token, contracting supply. When it rises above $1, they mint stablecoins by burning governance tokens. This two-token system works — until confidence collapses and both tokens spiral to zero. Terra/UST's $40B collapse in May 2022 remains DeFi's largest failure.
🔄 Mint/Burn Arbitrage Loop
The core mechanism: always $1 worth of GOV token can be swapped for 1 STABLE (and vice versa), regardless of market price. Arbitrageurs profit from the difference.
💀 Death Spiral Simulator
When confidence drops, the mint/burn loop becomes a death spiral: STABLE depegs → holders burn for GOV → GOV supply inflates → GOV price dumps → less backing → deeper depeg → repeat until zero.