A new type of digital asset called an algorithmic stablecoin is gaining steam among crypto-enthusiasts — and drawing steam among critics, who warn its risks are in plain sight.
Algorithmic stablecoins use market incentives, controlled by the algorithms that give the cryptocurrency its name, to maintain a stable price against a currency such as the dollar, rather than backing the price with assets like cash or Treasury securities, as other stablecoins do.
An algorithmic stablecoin called TerraUSD is now the third-largest stablecoin by market value, according to sites that track such value. It is not backed by dollars but instead uses a complex arbitrage system to maintain the price. According to some experts, that makes it inherently fragile.
