Algorithmic Stablecoins in 2025: The Great Comeback or Just Smoke?

Question

After the disasters of Terra and UST in 2022, algorithmic stablecoins are experiencing a surprising resurgence in 2025. But the question everyone is asking is: did they really learn or are we back to square one?

How do these things work?

Algorithmic stablecoins are tokens designed to maintain a stable value (typically $1) without the need for real cash backing. Instead, they use smart algorithms that automatically adjust the supply based on demand:

If the price rises to $1.10: more tokens are issued to lower the value
If it falls to $0.90: tokens are withdrawn to increase scarcity

Sounds perfect in theory. The reality? It has been a disaster.

Why they exploded in the past

The biggest failure was UST from Terra in 2022. The token was backed by a circular mechanism with LUNA that collapsed when investors lost confidence. Once people started selling in panic, the algorithm could not contain the fall. Result: massive losses.

The fundamental problem: these stablecoins depend 100% on the market's belief in the model. When trust breaks down, there is nothing to hold it together. It's like a house of cards.

2025: True change or marketing?

The new projects say they learned their lesson. The main changes:

1. Hybrid model with real collateral

Now many projects include true reserves ( such as dollars or bonds ) as a buffer. They do not rely 100% on the algorithm.

2. Extreme transparency

Publicly auditable smart contracts, real-time data, documented risks. Goodbye to Terra's opaque algorithms.

3. More sophisticated mechanisms

Instead of just issuing/burning tokens, they now use on-chain auctions, decentralized derivatives, and dynamic supply control.

Projects that are making waves

Frax (FRAX) Hybrid mix that has withstood several market cycles. Maintains stability without relying on 100% collateral. The least risky model available.

Ethena (USDe) Newbie using derivatives coverage to protect against shocks. Tries to do this without relying on classical liquidations. Still in the trial by fire.

Gyroscope (GYD) In the early stage, it promises a dynamic balance between decentralized pools and adjustable parameters. Too early to know if it withstands real crises.

Are they going to work this time?

Honestly? It's still a risk. Decentralization is attractive, especially with regulation tightening around USDT and USDC. But algorithms alone are not enough. You need:

Deep liquidity
Real use in the crypto economy
Resistance to extreme liquidity shocks
Proven long-term credibility

In 2025, algorithmic stablecoins are at a testing moment. They have smarter proposals than three years ago, but they are still bets. If the algorithms + collateral + governance work in a severe bear market, they could be the future. If not, it will be another cycle of hype → promises → disaster.

Conclusion: Interesting, but monitor constantly. Stability without centralization sounds good in whitepapers, but the blockchain has not yet proven it in the long term.