An algorithmic <a href="https://crypto-bible.com/en/glossary/defi-basics/stablecoin/" target="_blank">Stablecoin</a> uses code and incentive mechanisms — rather than real asset reserves — to maintain its price peg. When price rises above the peg, the protocol mints new tokens to dilute supply; when price falls below, it buys back or burns tokens to contract supply, theoretically returning the price to target. The core assumption: 'as long as market participants believe the mechanism works, the system sustains itself.' But this assumption often fails under extreme stress, triggering death-spiral collapses. The 2022 UST collapse is the most destructive failure case to date, and has left markets and regulators highly skeptical about the viability of pure algorithmic stablecoins.

An algorithmic <a href="https://crypto-bible.com/en/glossary/defi-basics/stablecoin/" target="_blank">Stablecoin</a> is a stablecoin design that maintains its $1 peg through code and market incentive mechanisms rather than real dollar or crypto asset reserves. The most representative case is UST (Terra), which paired with LUNA tokens and attempted to maintain the peg through <a href="https://crypto-bible.com/en/glossary/trading-concepts/arbitrage/" target="_blank">Arbitrage</a> mechanics — minting when UST > $1, burning when UST < $1. In May 2022, UST collapsed from $1 to near zero within days, causing approximately $40 billion in losses. This event fundamentally questioned the viability of 'pure algorithmic stablecoins,' and subsequent regulatory frameworks like MiCA and GENIUS Act require stablecoins to have real reserves.

Death spiral is the self-reinforcing collapse loop that algorithmic stablecoins can enter after de-pegging: <a href="https://crypto-bible.com/en/glossary/defi-basics/stablecoin/" target="_blank">Stablecoin</a> price falls → holders panic-redeem → paired token gets massively minted to maintain the peg → paired token collapses from inflation → stablecoin loses further confidence → more selling… until the entire system reaches zero. The core problem is that the mechanism meant to maintain the peg actually accelerates the collapse under stress. The 2022 Terra/UST collapse is the most destructive death spiral case to date, with approximately $40 billion in market cap evaporating within a week.

FRAX is the <a href="https://crypto-bible.com/en/glossary/defi-basics/stablecoin/" target="_blank">Stablecoin</a> issued by Frax Finance — once the most representative 'partial algorithmic stablecoin' experiment, initially designed as partially backed by USDC and partially supported by algorithms and governance token FXS. After UST's collapse in 2022, Frax governance voted to transition to 100% collateralization (FRAX v3), with reserves primarily in USDC and US Treasuries, completely abandoning the algorithmic component. FRAX's evolution represents the industry's actual response after consensus formed that 'pure algorithmic stablecoins aren't viable': trading capital efficiency for safety — though this trade-off caused FRAX to lose its original differentiated positioning.

The <a href="https://crypto-bible.com/en/glossary/derivatives-and-leverage/funding-rate/" target="_blank">Funding Rate</a> is a periodic payment mechanism in <a href="https://crypto-bible.com/en/glossary/derivatives-and-leverage/perpetual-futures/" target="_blank">Perpetual Futures</a> markets: longs (buyers) and shorts (sellers) pay each other every 8 hours based on market sentiment, keeping perpetual contract prices close to spot. In bull markets, longs pay shorts — this payment is the core yield source for Ethena's USDe. Holding sUSDe means you're collecting the 'go-long fee' from the entire crypto market: annualized over 20% in bull markets, but when bears dominate, shorts pay longs, and yield collapses or even turns negative.