An algorithmic stablecoin tries to stay at $1 by having code change its supply, not by holding cash or bonds. When the price goes above $1, the protocol creates new tokens. When it falls below $1, the protocol takes tokens out of circulation. Most of these coins are not collateralized at all, or only partly. If confidence goes, nothing holds the price up except the mechanism, and under sustained selling that mechanism can speed up the fall. By Allium's count on September 23, 2026, purely algorithmic designs were 0.04% of adjusted onchain stablecoin supply: $0.13 billion of $313.74 billion.
Where things stand in 2026
- Market share. Allium's data for September 23, 2026 put purely algorithmic designs at 0.04% of the market, a niche next to reserve-backed coins.
- The criminal case over the largest failure is over. On December 11, 2025, Judge Paul Engelmayer in the Southern District of New York sentenced Terraform Labs co-founder Do Hyeong Kwon to 15 years in prison. Kwon had pleaded guilty to wire fraud and to conspiracy to commit securities fraud, commodities fraud and wire fraud. He was also ordered to forfeit more than $19 million.
- US law leaves them outside the payment stablecoin regime. The GENIUS Act became law on July 18, 2025 (Public Law 119-27). It requires permitted payment stablecoin issuers to "maintain identifiable reserves backing the outstanding payment stablecoins" on "an at least 1 to 1 basis" (Section 4(a)(1)(A)). A coin backed only by its own sister token cannot meet that requirement. Section 14 tells the Treasury Secretary to study non-payment stablecoins, "including endogenously collateralized payment stablecoins," within 365 days of enactment.
- The EU puts them under its stablecoin rules. According to A&O Shearman's summary of Recital 41 of the EU's Markets in Crypto-Assets Regulation (MiCA, Regulation (EU) 2023/1114), the asset-referenced token and e-money token rules apply "irrespective of how the issuer intends to design the crypto-asset," and the same applies to "so-called algorithmic 'stablecoins'".
How the peg is supposed to work
Chainlink's explainer (last updated February 11, 2026) describes the basic loop:
- Above $1: "the protocol automatically mints more tokens to increase supply and lower the price."
- Below $1: "the protocol contracts the supply—often by burning tokens or issuing bonds—to push the price back up."
Chainlink says these coins are "typically non-collateralized or under-collateralized." BitGo says they "use smart contracts as the primary stability mechanism," so no person has to step in to defend the price. Circle's USDC learning page compares them with reserve-backed coins: algorithmic stablecoins "typically ditch the concept of reserve backing and let code do the balancing act."
The code needs to know the market price, and it gets that from oracles, which are price feeds. Chainlink warns that if this data is "manipulated or delayed," the protocol could mint or burn the wrong number of tokens. Chainlink sells oracle services, so it has a commercial interest in this point.
The three design families
Rebasing
Chainlink: rebasing coins "automatically adjust the balance of tokens in every holder's wallet." It names Ampleforth as an example. The number of tokens you hold changes, and the protocol aims to bring each token back to its target.
A simple example with made-up numbers: you hold 10 tokens and each trades at $2. A rebase that doubles supply leaves you with 20 tokens. If the price returns to $1, you still hold $20. The rebase changes your token count, not your share of the total supply. So a falling price shrinks your balance and your dollar value along with it. A rebase does not protect anyone from losses.
Seigniorage (dual-token)
BitGo: "seigniorage (dual-token) models pair the supply of a stablecoin with a secondary token." Chainlink describes the second token as a "share" or "bond" token "intended to absorb volatility." Allium calls it the "absorber" token. When the stablecoin is below $1, holders can redeem one stablecoin for $1 worth of newly minted absorber tokens. That removes stablecoins from circulation, but it adds absorber tokens.
Fractional-algorithmic
Chainlink calls these "a hybrid model": coins "backed partially by collateral (like USDC) and partially by an algorithmic mechanism." The collateral gives some protection. The algorithmic part still carries the risks described below.
What actually holds this coin at $1?
Answer a few questions about a coin sold as "stable" to see which design it uses and where its peg can break.
What backs the $1?
- Cash and short-term government debt held as reserves → next question
- Partly collateral (such as USDC), partly an algorithm → Fractional-algorithmic (hybrid) design
- Only another token from the same issuer, or nothing at all → next question
Who can redeem, and at what price?
- Holders redeem at par from the reserves → Reserve-backed design
- Holders swap for "$1 worth" of a token whose price can fall → next question
What happens when the price falls below $1?
- One stablecoin is redeemed for $1 worth of a newly minted second token → Dual-token (seigniorage) design
- The token balance in every holder's wallet is adjusted → Rebasing design
The $1 rests on identifiable reserves. In the US, only coins that meet the GENIUS Act rule of reserves on "an at least 1 to 1 basis" qualify as permitted payment stablecoins. In the EU, MiCA applies its token rules whatever the design.
The collateral gives some protection, but the algorithmic part still carries the dilution and price-feed risks: if the oracle is delayed or manipulated, the mint and burn rules act on the wrong price.
Defending a falling coin means printing more of the absorber token, which dilutes it, and under sustained selling this can speed up a collapse. TerraUSD (UST), paired with LUNA, depegged this way in May 2022. A coin backed only by its own sister token cannot meet the GENIUS Act reserve requirement.
The number of tokens you hold changes, not your share of the total supply. A falling price shrinks your balance and your dollar value along with it, so a rebase does not protect anyone from losses.
This sorts a design into the categories the article describes. It does not check any real coin's reserves, oracle or legal status, and it is not a judgment on whether to hold one.
Why the peg breaks
Allium names the central flaw of dual-token designs: "defending a falling stablecoin means printing more of the absorber token, which dilutes it." Every redemption below $1 creates more absorber tokens. That pushes the absorber's price down, so each later redemption needs even more new tokens. Holders of both tokens then have a reason to sell before others do.
BitGo describes the same thing in general terms: "Under sustained selling pressure, the mechanisms designed to restore pegs can instead accelerate a collapse." Chainlink calls the end state a "death spiral," meaning "a rapid price collapse that the algorithm cannot stop."
The case that defined the category: TerraUSD, May 2022
In its 2023 complaint announcement, the U.S. Securities and Exchange Commission described TerraUSD (UST) as an "algorithmic stablecoin." It said UST "supposedly maintained its peg to the U.S. dollar by being interchangeable for another of the defendants' crypto asset securities, LUNA". That is the dual-token design described above. The SEC says that in May 2022, UST "depegged from the U.S. dollar," and that the prices of UST and its sister tokens "plummeted to close to zero." In its June 13, 2024 release, the SEC said the collapse wiped out $40 billion in market value.
What followed:
- April 2024: a jury found Terraform and Kwon liable for fraud in the SEC's civil case.
- June 2024: the court approved a final consent judgment. Terraform agreed to pay $3,586,875,883 in disgorgement, $466,952,423 in prejudgment interest and a $420,000,000 civil penalty. Kwon agreed to pay $110,000,000 in disgorgement and $14,320,196 in prejudgment interest, jointly and severally with Terraform, plus an $80,000,000 civil penalty. The SEC says payments go to harmed investors and creditors through Terraform's bankruptcy case.
- December 11, 2025: Kwon was sentenced to 15 years in prison in the criminal case, United States v. Kwon, 23 Cr. 151 (PAE).
Questions to ask about any coin sold as "stable"
- What backs the $1? Is it cash and short-term government debt you can redeem, crypto collateral, or only another token from the same issuer? The GENIUS Act defines "endogenously collateralized" coins as ones that rely "solely on the value of another digital asset" from the same originator. Those coins carry the most reflexive risk.
- What happens below $1? If the defense is to mint a second token, find out who absorbs the dilution and how quickly.
- Who can redeem, and at what price? Redeeming at par from reserves is a different promise from swapping for "$1 worth" of a token whose price can fall.
- Where does the price data come from? If the oracle is delayed or manipulated, the mint and burn rules act on the wrong price.
- Which legal regime applies? In the US, only coins that meet the GENIUS Act reserve rules qualify as permitted payment stablecoins. In the EU, MiCA applies its token rules whatever the design.
