Seigniorage or Algorithmic StableCoins is the stable coins that are designed to Expand or Contract their supply according to the Demand & Supply of the market.
Before getting into Algo Stablecoins, let's understand what are stablecoins in short,
Stablecoins are acting the same as a fiat currency in Crypto Space, you can say it a Fiat Currency of Crypto Space in Digital Form. These coins are generally backed by the Fiat Currency of the particular country like (USDT by Dollars) or other Cryptocurrencies or Some Precious Metals.
USDT (Tether) is one of the most popular Stablecoin in #Crypto Space, One unit of a #Stablecoin equals $1.
Algo-StableCoins method uses ‘Smart Contracts’ that automatically expand and contract the supply using algorithms to maintain value.
Said StableCoin has a $1 value. The price drops to $0.80, indicating the supply of StableCoins is higher than the demand. The algorithm uses seigniorage to buy ‘said’ StableCoin, thereby decreasing supply and pushing the price back to $1.
Users are essentially investing in the coins. When said StableCoin trades above $1, the algorithm issues additional tokens increasing supply until the price returns to $1.
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