Algorithmic stablecoins are coins that use algorithms to balance the circulating supply of the asset. The algorithm issues more coins when price increases and buys them off the market when the price falls.

For example, assume a stablecoin is priced at $1. When the price drops to $0.80, an algorithm recognizes the imbalance between supply and demand, and automatically sets a market buy order to push the price back. In case the price goes above $1, the algorithm sells assets to maintain the price on the predefined level that keeps the peg. 

The top algorithmic stablecoins in terms of market capitalization, are currently Empty Set Dollar (ESD) and Ampleforth (AMPL). Liquidity incentives have recently caused AMPL to lose its peg and rise to $3.

The spike aligned with its launch of  ‘Geyser’ on June 23rd last year — an incentive program that distributed rewards (in AMPL) for users who supplied AMPL-ETH liquidity on Uniswap, a non-custodial decentralized trading platform. 

In addition to earning Liquidity Provider (LP) fees on Uniswap, users who provided AMPL-ETH liquidity could take their LP tokens and stake them on the Geyser platform to earn even more rewards.

It’s important to note algorithmic stablecoins are extremely new and these projects are positioned as experiments to grow and improve the DeFi space. It will be interesting to see over time how they adjust in order to reach the goal of algorithmic stability without collateral or debt supporting it.

Source: https://www.cryptocompare.com/email-updates/daily/2021/jan/12/