INTRODUCTION

What are Algorithmic Stablecoins?

Algorithm-based stablecoins do not have any associated collateral. Therefore, they are also referred to as non-collateralized stablecoins. Algorithm-based stablecoins are completely new variants of cryptocurrency tailored for offering improved price stability. In addition, it can also help in balancing the supply and demand of the asset in circulation. Most importantly, algorithm-based stablecoins offer considerably improved capital efficiency in comparison to collateralized stablecoins.

The algorithm or the protocol backing up these stablecoins works as the ‘central bank’. It helps in increasing the supply in the event of the deflationary tendency of the token or reducing the supply in the event of a decline in the purchasing power of stablecoin. The rules for such actions by the algorithm are available in smart contracts in an embedded form. It is possible to change the rules only by leveraging social consensus or through governance votes associated with governance or seigniorage tokens.

What Is seigniorage?

Seigniorage is the difference between the face value of money, such as a ten-dollar bill or a quarter coin, and the cost to produce it. In other words, the economic cost of producing a currency within a given economy or country is lower than the actual exchange value, which generally accrues to governments who mint the money.

If the seigniorage is positive, the government will make an economic profit while a negative seigniorage will result in an economice loss.