Algo Stablecoins

Algorithmic stablecoins were meant to solve stablecoin centralization by removing the need for fiat backing or traditional collateral. Instead, they introduced new risks and in most cases, catastrophic failure.

Whether partially collateralized or entirely unbacked, most algo stablecoins depend on one thing: belief in the system’s future growth. When that belief breaks, so does the peg.

What Are Algo Stablecoins?

Algorithmic stablecoins aim to maintain a $1 peg through incentive mechanisms and supply adjustments, rather than direct backing with real assets. They often rely on:

• Seigniorage models (e.g., Basis Cash, Empty Set Dollar)

• Dual-token designs where one token absorbs volatility (e.g., Terra/LUNA)

• Rebasing or contraction/expansion logic based on market price signals

When the stablecoin trades below $1, the system incentivizes users to burn it (often for a governance or share token). When it trades above $1, it expands supply to push the price back down.

In theory, this creates a self-correcting mechanism. In practice, it creates death spirals.

Why They Fail

1. No Hard Collateral

Most algo stables aren’t backed by any real assets. The system's value is entirely reflexive, it depends on the token price staying high enough to maintain trust. Once confidence drops, there’s nothing holding it together.

2. Fragile During Crises

These models collapse under stress. When sell pressure increases, users lose faith in the protocol token, which is usually required to maintain the peg. Panic selling accelerates the problem, leading to total devaluation.

3. Negative Reflexivity

The same mechanics that support the peg during good times amplify losses during bad times. Peg breaks lead to redemptions, which drive down the backing token, which causes more redemptions. It’s a loop — and not a good one.

4. No Sustainable Yield

To attract demand, many algo stablecoins offer unsustainably high rewards, either through emissions or circular lending schemes. These rewards dilute token value or depend on continuous new users to sustain payouts.

The LUNA / UST Collapse: A Case Study

LUNA and UST were hailed as the most successful algorithmic stablecoin system, until they lost $60B in value in under a week.

• UST was “backed” by the value of LUNA

• UST redemptions minted more LUNA

• As UST lost its peg, redemptions skyrocketed

• LUNA hyperinflated to absorb the losses

• Eventually, both collapsed to near-zero

This wasn’t just a failure of execution — it was a failure of model design.

Why Tharwa Is Different

Tharwa avoids algorithmic mechanics entirely. thUSD is:

• 100% backed by real-world assets — sukuk, gold, real estate, and other yield-bearing instruments

• Structured around capital preservation, not emissions or reflexivity

• Actively managed by the Confluence Engine to minimize drawdowns

• Redeemable at any time via real asset exposure or secondary markets

• Monitored and defended by autonomous circuit breakers, OTC infrastructure, and whitelisted liquidity

There is no secondary token holding the peg up. No belief loops. No supply gimmicks. Just real capital, structured intelligently.