Algorithmic stablecoins backed by altcoin networks maintain their value using algorithms rather than direct reserves of fiat currency. These stablecoins rely on smart contracts to automatically expand or contract the supply based on market demand, keeping their price stable. Altcoin-backed protocols like Terra (UST, before its collapse) or Frax Finance use a combination of governance tokens (e.g., LUNA, FXS) and algorithms to support stability.
These systems offer decentralization and scalability but also come with higher risks. If the supporting altcoin's value drops or if the algorithm fails to adjust supply quickly, the stablecoin can lose its peg. As a result, while algorithmic stablecoins promise innovation, they require careful monitoring and robust governance to succeed.
