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Built to Fail: the Inherent Fragility of Algorithmic Stablecoins

Dr. Ryan Clements

Wake Forest Law Review

14 pages

Academic Paper

October 2021

Original Content 

Algorithmic stablecoins are inherently fragile. These
uncollateralized digital assets, which attempt to peg the price
of a reference asset using financial engineering, algorithms,
and market incentives, are not stable at all but exist in a state
of perpetual vulnerability. Iterations to date have struggled
to maintain a stable peg, and some have failed
catastrophically. This Article argues that algorithmic
stablecoins are fundamentally flawed because they rely on
three factors which history has shown to be impossible to
control. First, they require a support level of demand for
operational stability. Second, they rely on independent actors
with market incentives to perform price-stabilizing arbitrage.
Finally, they require reliable price information at all times.
None of these factors are certain, and all of them have proven
to be historically tenuous in the context of financial crises or
periods of extreme volatility.

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