After turbulent moments and notorious collapses, algorithmic stablecoins are resurfacing in 2025 with promises of greater robustness and more sophisticated mechanisms for maintaining parity. But the doubt persists: could this be a new chapter of stability for this type of asset or just a cycle of promises that will disappoint again?

With the growing search for decentralized alternatives to centralized stablecoins (like USDT and USDC), algorithmic ones have come back into the radar of developers, investors, and enthusiasts.

In this article, we will explore how algorithmic stablecoins work, what went wrong in the past, and which projects are trying to correct these mistakes to gain market trust.

What are algorithmic stablecoins?

Algorithmic stablecoins are cryptocurrencies designed to maintain their value stable, usually pegged to the dollar, without having real reserves (like dollars or bonds) as collateral. Instead, they use algorithms and smart contracts to automatically adjust the supply and demand of the token with the aim of maintaining its parity (usually $1).

This automatic adjustment works similarly to a decentralized monetary policy. If the price of the stablecoin rises above $1, new tokens are issued to reduce the price. If the price falls, tokens are removed from circulation, increasing their scarcity.

The idea is elegant in theory: stability without depending on a central institution. But, as history has shown, practice can be much more challenging.

What went wrong in the past?

The most well-known example of failure was that of TerraUSD (UST) from the Terra blockchain in 2022. The token was pegged to the dollar based on a mechanism that involved its burning and issuance with the LUNA token. When trust in this model was shaken, investors began to sell en masse, causing a collapse in both assets.

This "domino effect" exposed the greatest vulnerability of algorithmic stablecoins: the dependence on collective trust in the functioning of the algorithm. Once this trust is broken, the stability mechanism can spiral out of control, exacerbating the token's devaluation.

Other smaller projects also failed, such as the case of Basis and Empty Set Dollar, which could not sustain their stability for long. In general, the lack of anti-fragile mechanisms for extreme scenarios was a critical point.

What changed in 2025?

With lessons from the past, current projects have sought more conservative and realistic approaches. One of the main changes is the inclusion of partial reserves in real assets, creating a hybrid model. That is, even if the basis for price control is algorithmic, there are real collaterals that help prevent sudden devaluations.

Another aspect is transparency: new protocols offer greater real-time auditing, smart contracts with open logics, and clear documentation about the risks involved. This direct communication with investors has been fundamental to rebuilding trust.

Moreover, dynamic mechanisms for controlling supply have emerged, which are not based solely on direct issuance or burning, but also on auctions, issuance of internal debt, or the use of on-chain derivatives.

Ultimately, what is causing the reliability in this type of stablecoin to be restored at this moment is a set of aspects that can deliver greater firmness and robustness to them. Instead of projects whose algorithms were obscure, there is now a greater interest in having serious and reliable external validation.

Projects that are drawing attention

Among the names that stand out currently, some projects have adopted innovative proposals:

  • Frax: One of the most hybrid models in the market, it combines real reserves with an algorithmic part. Frax has performed well through various market phases and seeks to maintain its stability without relying exclusively on total collateral;

  • Ethena (USDe): Recently created, USDe has attracted attention for adopting hedge instruments and decentralized derivatives to maintain its parity. Its model aims to protect itself from market shocks without relying solely on classic liquidations;

  • Gyroscope (GYD): In its early phase, it promises a model of dynamic stability, with a balance between decentralized pools and adjustable governance parameters.

It's still early to say whether these projects will remain stable in adverse environments, but they demonstrate significant evolution compared to previous models.

And, it's worth remembering: here we are just briefly presenting these projects to you. Before making any investment decisions, it is necessary to research more deeply about each project.

Do algorithmic stablecoins have a future?

The interest in this type of stablecoin remains strong for a simple reason: total decentralization is a valuable proposition. In a scenario of increasing regulation and greater scrutiny over centralized issuers, projects that operate without relying on an intermediary entity gain relevance. However, the sustainability of this model depends on the technical and economic capacity to withstand liquidity crises, speculative events, and macroeconomic changes.

In summary: just good algorithms are not enough. It is necessary to build a robust ecosystem, with deep liquidity, practical usage, and clear communication.

So, are you going to add any project of this kind to your portfolio?

In 2025, algorithmic stablecoins are experiencing a moment of reassessment. They return with more solid proposals, aware of past mistakes, but still face distrust and the challenge of proving themselves in the long run.

If they can fulfill the promise of stability without centralization, they could become a key piece in the future of decentralized finance. For now, they remain a potential bet, but one that requires caution, study, and constant monitoring by the more attentive investors.

Did you already know any of these projects we told you about?

#StablecoinRevolution #Stablecoins

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