Why Composability is the Achilles' Heel of Algorithmic Stability

Composability turns a de-peg into a systemic event. When the stablecoin (UST) falls below $1, arbitrage burns it for discounted collateral (LUNA), increasing its supply and crashing its price in a reflexive loop.

• Key Trigger: Anchor Protocol's ~20% yield created massive, fragile demand.
• Key Amplifier: On-chain DEXs (e.g., Curve pools) provided instant, liquid exit ramps, accelerating the feedback.
• Result: $40B+ evaporated in days as the mint/burn mechanism became a death spiral.

Composability with yield farms creates unsustainable incentives. The IRON stablecoin's partial collateralization relied on liquidity from its governance token (TITAN) farm, creating a circular dependency.

• Key Trigger: High APYs (>1000%) on TITAN-ETH pools on SushiSwap drained liquidity from other protocols.
• Key Amplifier: When TITAN price fell, the collateral pool became undercollateralized, triggering a bank run via the same DEX pools.
• Result: Near-total insolvency in <48 hours, demonstrating how farm emissions can mask fundamental instability.

Price oracles (Chainlink, Pyth) are critical for collateral valuation. In a crisis, composability allows manipulation to spread. A de-peg on one venue can poison the oracle price, triggering liquidations across all integrated lending protocols (Aave, Compound).

• Key Trigger: Thin liquidity on a single DEX allows a large sell to create a low-price outlier.
• Key Amplifier: If the oracle uses this outlier price, it forces mass, undercollateralized liquidations system-wide.
• Result: Cascading insolvency where the failure of one protocol guarantees the failure of others, as seen in multiple smaller algo-stable blow-ups.

Composability creates a positive feedback loop between price and collateral. A small de-peg triggers liquidations and arbitrage across Uniswap, Curve, and lending markets like Aave, accelerating the collapse.

• Anchor Protocol's UST became a core yield-bearing asset, creating a $20B+ synthetic demand loop.
• Iron Finance's TITAN collapsed when its LP token was used as collateral, creating a recursive liquidation cascade.

Stablecoin pegs rely on price oracles. Composability forces these oracles to aggregate from highly composable, manipulable DEX pools.

• Terra's UST peg relied on Chainlink oracles fed by thin Curve pools, vulnerable to flash loan attacks.
• Frax Finance mitigates this with its AMO system, actively managing liquidity across multiple venues to reduce oracle dependency.

Composability incentivizes protocol-native token emissions to bootstrap liquidity, creating artificial demand that masks fundamental instability.

• Wonderland's TIME (MIM) used unsustainable >100,000% APY farming to prop up demand for the stablecoin MIM.
• This creates a Ponzi-like structure where the peg's health is tied to speculative token inflation, not asset backing.

Algorithmic stablecoins are monolithic systems forced into a modular world. Their internal logic (mint/burn) cannot keep pace with the speed of external arbitrage across Layer 2s, cross-chain bridges, and intent-based solvers.

• Ethena's USDe attempts to solve this by being natively integrated with perpetual futures exchanges like Deribit, controlling the hedging loop directly.
• Legacy algos were too slow; arbitrage bots on LayerZero and Across would front-run the protocol's own stabilization mechanism.

When an algo-stable is used as collateral, its failure poisons the entire credit system. This is the systemic risk of composability.

• MakerDAO's survival during the UST collapse was due to its explicit blacklisting of the asset as collateral.
• Protocols like Aave and Compound that listed UST suffered direct losses and impaired liquidity across their entire pools.

The solution isn't less composability, but smarter, gated integration. Future stablecoins must function as sovereign stability zones with controlled interfaces.

• Lybra Finance's eUSD and Prisma Finance's mkUSD use LSTs as non-correlated, yield-generating collateral, reducing reflexive loops.
• CrvUSD's LLAMMA algorithm creates a continuous, non-liquidating stabilization mechanism, better suited for composable environments than discrete mint/burn.