Algorithmic Stablecoin Failures — Deep Catalogue

What Makes a Stablecoin Algorithmic

A stablecoin's design determines what backs its peg. **Fiat-collateralised** (USDT, USDC, USDS): backed 1:1 by dollars or equivalents held by an issuer. **Crypto-collateralised** (DAI/USDS via Maker): backed by over-collateralised crypto positions. **Algorithmic**: not backed by any real asset; the protocol uses incentives and mechanisms to maintain the peg through demand-side or supply-side adjustments. Algorithmic stablecoins are the most theoretically elegant — no backing required — and also the most prone to catastrophic failure when the mechanism breaks.

The Pattern of Failure

Every major algorithmic stablecoin has eventually depeg-cascaded to zero. The pattern is consistent: peg holds during calm conditions because arbitrageurs find the mechanism profitable; under stress, arbitrage stops working; the peg breaks; the same mechanism that maintained the peg now amplifies the failure. Terra/Luna (May 2022, $40B+ destroyed in days) is the canonical case but is far from unique.

The Catalogue You Should Know

Major algorithmic stablecoin failures: **Terra/UST** (May 2022, $40B+ destroyed); **Iron Finance** (June 2021, $2B+); **Empty Set Dollar/Basis** (2020); **USDR (Real Estate USD)** (October 2023); **Beanstalk** (multiple incidents); **Fei Protocol** (significant depeg followed by acquisition). Each has its own specific mechanism story, but the broader pattern — algorithmic stability mechanisms that work in calm but fail in stress — is universal.

• Algorithmic stablecoins are unbacked — relying on mechanism, not collateral
• Every major algorithmic stablecoin has eventually depeg-cascaded to zero
• The mechanism that maintains the peg becomes the cascade amplifier under stress
• The failure history is consistent across diverse designs