Algorithmic Stablecoins: Risk, Design Flaws, and Future Potential

The world of cryptocurrency keeps developing and moving at a very fast pace and it is something quite evident to see. More innovations keep coming up and one of it that has stand out is stablecoin. Stablecoins over the years have become a major financial tool that has been able to give investors massive hedge over the volatility nature of the crypto market and generally the digital assets involved.

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Of course stablecoins are created to help maintain a very stable value of the digital asset involved and this helps to make it a major form of payments, savings and even other financial services across the financial system. Perfect example are the stablecoins of USDT which we call tether. When it comes to stablecoin, there are various types of stablecoins. Some we are familiar with and some we might be hearing it for the first time. Today I will be talking about the algorithmic stablecoins.

Algorithmic stablecoins have been able to bring out a very stable value to major digital assets over the years and which we might not be aware of. Of course like the name implies, they are designed to give a stable value to digital asset or cryptocurrency but through the use of smart contracts and algorithms. Algorithmic stablecoins work in a way of respecting the demands and supply law to make sure stability is provided for the price of the particular coin or asset.

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When it comes to algorithmic stablecoins, there are some risks and challenges involved which I will like to talk about. The first is the lack of collaterization. Algorithmic stablecoins depends on algorithm alone which to me is a very great risk that needs to be looked into. I will say algorithmic stablecoins does not have a safety net as compared to other stablecoins we know like USDT and even Steem Dollar. The second risk I noticed is that it does not have the power to handle extreme volatility. For stablecoins generally, they are created to handle the Volatility of the crypto market but when it comes to algorithmic stablecoins, there is a limit to the volatility it can handle.

I will say one of the major reasons why algorithmic stablecoins have so much of the risk and challenges involved is because of the design flaws involved in it. What do I mean by that? The stablecoins in nature have complex mechanisms which if you are a novice to the crypto world, it might prove quite difficult for you to understand. Not only that, the fact that algorithmic stablecoins is designed in a way to so much depend on the behaviour of the market and user also makes it challenging and risk involved.

Of course even with those risks and challenges involved, I am still very optimistic about the future potential of algorithmic stablecoins in years to come. I am so optimistic. We might not be there right now but that does not mean we will not get there. The fact that algorithmic stablecoin is Decentralised finance integrated makes it something to actually look into. Not only that, I believe in years to come, we will see more usage case of stablecoins much more than now and which will help to drive the massive adoption of the algorithmic stablecoins.