Why the Ponzi Label Sticks to Algorithmic Designs

The fundamental flaw: system solvency is a function of its own token price. A falling $LUNA price reduced the collateral value backing $100B+ in UST, creating a negative feedback loop.\n- Reflexive Collateral: Native token is both governance and primary backing asset.\n- Death Spiral Math: To mint $1 of stablecoin, you must burn $X of volatile token. If X falls, you must burn exponentially more, accelerating the crash.

Protocols like Empty Set Dollar (ESD) and Basis Cash promised arbitrage profits to 'bond' holders during contractions, betting on infinite future growth.\n- Ponzi Dynamics: Rewards for early stakers are paid from capital of new entrants minting the stablecoin.\n- Demand Assumption: Model requires perpetual net-positive demand for the stablecoin to avoid triggering the bond/contraction phase.

Algorithmic stability relies on a price oracle (e.g., Chainlink) to trigger mint/burn functions. This creates a single point of failure and manipulation.\n- Oracle Lag: In volatile markets, the reported price is stale, causing inefficient or incorrect arbitrage.\n- Manipulation Vector: As seen with MIM (Magic Internet Money), oracle exploits can mint unlimited stablecoins against manipulated collateral.

Frax Finance survives by dynamically blending algorithmic and collateralized backing, avoiding pure reflexivity.\n- Collateral Buffer: Always maintains a >80% collateral ratio (USDC), absorbing initial sell pressure.\n- Algorithmic 'Last Resort': The uncollateralized fraction is stabilized via the FXS mint/burn mechanism, but within a bounded, managed risk envelope.

High Total Value Locked in Curve/Convex pools creates a false sense of security. Liquidity is mercenary and flees at the first sign of weakness.\n- Flywheel Dependency: Protocols like UST used Anchor's ~20% APY to bootstrap demand, not utility.\n- Instant Unwind: When confidence breaks, concentrated LP exits cause massive slippage, breaking the peg beyond recovery.

A stablecoin with no legal claim on assets and no responsible entity is a regulator's nightmare. The SEC sued Terraform Labs for selling unregistered securities.\n- No Redemption Right: You cannot redeem UST for $1 of underlying assets—only for a volatile governance token.\n- Enforcement Target: Pure algorithmic designs are the easiest to prosecute as they fit the Howey Test perfectly: investment of money in a common enterprise with profits from others' efforts.

Algorithmic stablecoins like TerraUSD (UST) conflate price stability with demand. The protocol's primary utility is to create more of itself, making growth a prerequisite for stability.\n- Demand is Synthetic: Stability relies on arbitrage incentives, not exogenous use.\n- Death Spiral Inevitable: Negative sentiment reduces collateral value, disabling the stabilizing mechanism.

Tokens like Ampleforth and OlympusDAO (OHM) use elastic supply to target a price. This creates perceived scarcity while diluting holders. The "protocol-owned liquidity" model is a circular promise.\n- Value is Redistributed, Not Created: Rebasing punishes sellers and rewards holders, a hallmark of a Ponzi scheme.\n- TVL is the Product: The primary use case is staking to earn more tokens, creating a closed-loop economy.

Projects like Frax Finance and Ethena's USDe attempt to hybridize algorithms with real yield. The challenge is that the algorithmic portion remains a reflexive, zero-sum game.\n- Yield Must Be Exogenous: Reliance on staking derivatives (e.g., stETH) or perpetual swap funding rates imports external risk.\n- Ponzi Accusation Persists: Any design where new deposits subsidize earlier users' yields will attract the label until proven otherwise.