Algorithmic stable coins use market incentives, controlled by the algorithms that give the cryptocurrency its name, to maintain a stable price against a currency such as a dollar, rather than backing the price with assets like cash or Treasury securities, as other stable coins do.

An algorithmic stable coin called TerraUSD is now the third-largest stable coin by market value. This stable coin has unpegged from the Dollars just a few hours ago. You could use 60 cents to acquire a dollar of this stable coin. It could be an opportunity for arbitrage or the value of UST could go lower as confidence fades.

The idea behind an algorithmic stable coin is that you create an economic incentive with another token in order to maintain its stability. The confidence of the stable coin comes from another token. Unlike the US Dollar, the confidence is backed by the productivity of the nation, the tax income of the citizens, the military power and its technological marvels, etc.

I don’t know where that confidence comes from for Luna and UST.

Source: iSquare