What is a Stablecoin?

Stablecoins are a type of cryptocurrency that tracks real-world assets, like the U.S. dollar or Euro. Due to the volatility in the cryptocurrency market, investors sometimes need to park their funds in a stable asset. Stablecoins offer investors and traders a haven from volatility. The most notable stablecoins are the USDT and USDC. Both these stablecoins are collateralized or backed by U.S. dollar reserves. In other words, for every 1 USDT or USDC coin, $1 is reserved as collateral. Since it is difficult to raise and maintain the collateral reserves required for such stablecoins, crypto creators invented algorithmic stablecoins.  

What are Algorithmic Stablecoins? 

Algorithmic stablecoins are cryptocurrencies pegged to a real-world asset, like the U.S. Dollar, using a smart contract (or algorithm) instead of fiat collateral reserves. There are numerous algorithmic stablecoins, and they use different algorithms to maintain their peg. The most common mechanism usually requires a two-token system. For example, for one algorithmic stablecoin minted, you burn $1 worth of the native token. Smart contracts automate the process and regulate supply and demand. In addition, users receive incentives for their participation. As smart contracts are lines of code, there are risks associated with algorithmic stablecoins. 

Risks Associated with Algorithmic Stablecoins 

Algorithmic stablecoins are inherently risky because they do not hold collateral reserves. In other words, the entire pegging system relies on smart contracts (or algorithms) to maintain stability. Algorithms are prone to hacks and market manipulation. The LUNA and UST depegging events showed how easily things go wrong with algorithmic stablecoins. 

Below, we look at the top 10 algorithmic stablecoins by market capitalization:

Neutrino USD

USDN is an algorithmic stablecoin that tracks the U.S. dollar, created on the Waves blockchain. 

The Neutrino system consists of 3 tokens: WAVES, USDN and NSBT. WAVES is the native token of the Waves blockchain and pays for transaction fees. It also serves as collateral for USDN. For one USDN minted, you burn $1 worth of WAVES tokens. NSBT is a recapitalization and governance token that ensures the USDN collateral reserves its stability. By staking USDN, holders are incentivized and earn rewards of up to 15% APY. USDN is available on KuCoin, MEXC, and Uniswap. 

USDD

USDD protocol is a decentralized stablecoin that follows the U.S. dollar, created on the Tron Network. USDD is over-collateralized by multiple digital assets, including TRX tokens, BTC, and USDT. TRON DAO is responsible for issuing and maintaining the USDD peg. The collateral ratio held by TRON DAO is 130%, which exceeds the circulating supply of USDD. USDD is available on Bybit, Huobi, and Gate.io. 

TerraClassicUS

Before the catastrophic depegging event in May 2022, TerraUSD (UST) was the decentralized and algorithmic stablecoin pegged to the U.S. dollar. It was built on the Terra blockchain and backed by the LUNA token, Terra’s native and governance coin. By staking UST, holders received 20% APY. The Luna Foundation Guard was responsible for maintaining the UST stability by accumulating bitcoin and Luna tokens. After the crash, UST sits way below the $1 mark, and Do Kwon, Terra Luna founder, has forked the chain. The original TerraUSD is now called TerraClassicUS (USTC), and a new coin called Luna 2.0 exists. Luna 2.0 does not have a stablecoin. USTC is available on Binance, Bybit, Huobi, and Gate.io. 

Fei USD

Fei USD is a decentralized algorithmic stablecoin pegged to the U.S. dollar, built on the Ethereum blockchain. TRIBE DAO is responsible for issuing the stablecoin. Fei Protocol runs on two crypto assets: FEI stablecoin and TRIBE governance token. Fei coined the Protocol Controlled Value (PCV) to maintain its peg. The PCV protocol allows Fei to use the staked capital to pursue its objectives, such as maintaining stability in the peg, providing liquidity, and generating yield.  FEI tokens are available on Gate.io and Uniswap among other exchanges.

sUSD

sUSD is a decentralized algorithmic stablecoin or synthetic USD token built on the Ethereum blockchain. It tracks the price of the U.S. dollar through price feeds supplied by Chainlink’s decentralized network of oracles. sUSD is primarily created for decentralized exchanges and offers traders and investors access to digital assets with zero slippage. The protocol also has the SNX token, which it uses for governance. Users can stake SNX to earn rewards. sUSD is available on KuCoin, Gate.io, and Uniswap.

Frax

Frax is a fractional-algorithmic stablecoin pegged to the U.S. dollar, built on the Ethereum blockchain. It has a two-token system – Frax Shares (FXS) is the native and governance token, and Frax (FRAX) is the stablecoin. Since it is fractionally collateralized, the protocol also holds USDC as a reserve. As adoption increases, Frax intends to hold Ethereum and Bitcoin as part of their collateral reserves. FRX is available on Gate.io, and Uniswap.

 USDX

USDX is an algorithmic stablecoin pegged to the U.S. dollar, built for the Kava DeFi Network. The stablecoin is only mintable for loans backed by cryptocurrency. In other words, users can deposit their cryptocurrencies and borrow USDX tokens to participate in the DeFi protocols in the Kava Ecosystem. USDX is available on Kava Swap.

Celo Dollar

Celo Dollars (cUSD) is an algorithmic stablecoin that follows the U.S. Dollar, built on the Celo Blockchain.  The Celo Reserve deploys smart contracts that uses a portfolio of cryptocurrencies to expand and contract the supply cUSD, similar to MakerDAO’s lending protocol. cUSD collateralized by digital assets including Celo’s native asset CELO, BTC, ETH, and other stablecoins. cUSD is available on Huobi, Gate.io, and KuCoin.

Celo Euro

Celo Euro (CEUR) is an algorithmic stablecoin that tracks the Euro, built on the Celo Blockchain. The Celo Reserve deploys smart contracts that use a portfolio of cryptocurrencies to expand and contract the supply CEUR. CEUR uses digital assets such as CELO, BTC, and ETH for collateral CEUR is available on Huobi, Gate.io, and Uniswap.   

Ampleforth

Ampleforth is an algorithmic stablecoin pegged to the 2019 value of the U.S. dollar, which is $1.09. The protocol is built on the Ethereum blockchain. Ampleforth aims to be an elastic and undiluted currency – so that the price of 1 AMPL token always equals $1.09. It achieves this by using an automatic adjustment process for AMPL holders. For example if the price of 1 AMPL equals $2.18, a wallet holding 1 AMPL will be adjusted to hold 2 AMPL tokens. So that the price of 1 AMPL equals $1.09 dollars at all times. AMPL is available on FTX, KuCoin, Gate.io, and Uniswap.  

Should You Use Algorithmic Stablecoins?

Algorithmic stablecoins are still new in the cryptocurrency space, and some like Terra Luna have not survived the onslaught of the volatile cryptocurrency market.  As mentioned before, the fact that algorithmic stablecoins do not use traditional collateral automatically qualifies them as high risk assets. However, the industry is forever evolving and innovating. Creators are learning from past mistakes and creating better algorithms. It is worth doing your own research before picking an algorithmic stablecoin to park your funds.