What are Algorithmic Market Operations (AMOs)?

There are four primary types of stablecoins: fiat-backed, crypto-backed, commodity-backed, and algorithmic. The first three categories can be considered collateral stablecoins. As the names imply, these coins are backed by fiat, crypto, and on-chain tokens. These tokens can be redeemed or swapped.

One of the best-known biggest collateralized stablecoins is Tether (USDT). The value of one tether is pegged to the value of one US dollar. It is currently the most used stablecoin in the market. Its market cap, or total market value, is recorded at $82 billion as of April 2022.

The supply of collateralized stablecoins is manually regulated by regularly minting and burning the cryptocurrency, thus increasing or decreasing it.

Algorithmic stablecoins are cryptocurrencies that use an algorithm to regulate the supply. These algorithms are known as market operation modules, or algorithmic market operations (AMOs). AMOs enable scalability while maintaining decentralization and transparency. One of the longest-running algorithmic stablecoins is Ampleforth (AMPL).

An AMO solution can help a stablecoin reach the growth and size requirements for cryptocurrency adoption. Thanks to AMOs, a centralized team is not needed to make in-house decisions. Instead, decision-making is done by using smart contracts, which reduce the risk of human error and market manipulation.

Algorithmic market operations have three core features:

• Decollateralization - the collateral ratio is automatically decreased;
• Recollateralization - the collateral ratio is automatically increased;
• Market operations - the part of the strategy that does not affect the collateral ratio.

If the price of the algorithmic stablecoin ever goes above its pegged value, the collateral ratio is automatically lowered. The supply then expands and the AMO controllers proceed as normal. This way, the value of the stablecoin maintains the balance.

If the collateral ratio drops too low and the stablecoin falls below the pegged value, the AMO runs the recollateralization. That way, the collateral ratio is brought back up, and the value is once again kept stable.

An AMO can be built following the general specifications of anyone who wants to maintain an algorithmic stablecoin. Algorithmic stablecoins can perpetually increase or decrease the circulation of their tokens thanks to algorithmic market operations or the algorithms programmed in their smart contracts.

This makes the capital of algorithmic stablecoins efficient. Additional coins are automatically minted if the price rises and the excess is burned if the value sinks. Having this system in place means there is no need for collateral backing.