Algorithmic / under-collateralized stablecoin
A economic risk factor in the v1.7.0 rubric. Measured per protocol on a s cadence.
Methodology how we score#
What this measures
This factor is a curator-assigned categorical classification: whether the protocol is an algorithmic or under-collateralized stablecoin design per curator classification. The classification is based on the protocol's stated design, its collateralization mechanism, and the nature of its stabilization mechanism. Purely fiat-backed or overcollateralized designs score green; partially algorithmic designs or designs relying on endogenous collateral score yellow; purely algorithmic or fractional-reserve designs score red.
Why it matters
Algorithmic stablecoins represent a distinct economic failure mode not present in overcollateralized lending or AMM designs: the reflexive collapse. Under Terra/Luna, the protocol's stabilization mechanism (mint/burn arbitrage between LUNA and UST) amplified rather than damped the depegging event, producing a total loss of approximately $40B in market value within days. The fundamental risk is that the stabilization mechanism is pro-cyclical at the tail: it works well during small deviations but fails catastrophically during large ones because the collateral (endogenous LUNA) depreciates as the stabilization mechanism is exercised. Any protocol featuring an endogenous token as a meaningful component of its stabilization reserve is exposed to this dynamic.
Green / Yellow / Red
Green: protocol uses no algorithmic stabilization; stablecoin is fully backed by exogenous overcollateralized assets with a minimum collateral ratio enforced on-chain. Yellow: protocol uses a hybrid mechanism with partial algorithmic backing; stabilization reserve includes some endogenous tokens but exogenous collateral exceeds fifty percent. Red: protocol is primarily algorithmic (stabilization reserve is majority endogenous tokens) or is fractional-reserve by design.
Common gray cases
Protocols that use algorithmic mechanisms for rate adjustment (e.g., Liquity's interest rate targeting) but maintain full collateralization are not classified as algorithmic stablecoins; the risk category applies to stabilization collateral composition, not rate-setting mechanisms.
Notable historical examples
No cross-hacked incidents currently linked in database for this factor.
Measurement what to look for#
Classify whether the protocol is an algorithmic or under-collateralized stablecoin design per curator classification.