An algorithmic stablecoin is a type of cryptocurrency designed to keep its value steady—usually pegged to something like the U.S. dollar—using smart contracts instead of traditional reserves. 

So rather than sitting on a pile of cash in a bank, it uses code to balance supply and demand in real time.

Here’s the basic idea: if the coin’s price creeps above its target, the system mints more of it to bring the price back down. 

If the price dips too low, it either burns coins or encourages users (usually with incentives) to help push it back up. It’s like a thermostat for price—just automated and way geekier.

The major thing these coins try to do is bring something called seigniorage—basically profit from minting money—back into the hands of users. In a well-functioning system, that value stays inside the ecosystem, rather than going to a central bank or a company holding reserves.

Of course, this concept hasn’t come without its hiccups. You might’ve heard of TerraUSD (UST)—a well-known algorithmic stablecoin that paired with a sister token called LUNA to manage its stability. 

That one… didn’t end well. The system collapsed in 2022, causing a massive ripple effect across the crypto world. 

On the flip side, there are more measured attempts out there—like Frax, which blends algorithmic mechanisms with partial collateral to try and find a safer middle ground.

In short, algorithmic stablecoins are ambitious. They aim to offer the stability of fiat without the baggage of centralized control. Whether they’ll succeed long-term is still up for debate, but they’re definitely pushing the boundaries of what’s possible in decentralized finance.