People who actually hold DAI don't experience liquidation risks. It's the people who create the Collateralized Loan Deposits (CDPs) who are taking that risk, and in exchange, are given DAI.
Also, technically the value of UST was fully backed by LUNA, until the total market cap of LUNA dipped below the market cap of UST, and then it wasn't.
IMO it's not the collateralization that makes something an algorithmic stablecoin, it's the currency is managed entirely by on-chain smart contracts, as opposed to Tether or USDC etc, which are managed manually by humans working in a room somewhere. Who knows though, I just made that definition up. The algorithm that manages DAI is pretty rad, so it seems unfair to deny them the status of "algorithmic", but that's fine.
> Also, technically the value of UST was fully backed by LUNA
And what was LUNA backed by? Unless somebody gives a better definition I'll say it was backed by two things. One was UST successfully working as a stablecoin. The other was the vague promises made by the charismatic founder that they were enabling a whole ecosystem with hundreds of developers, creating blah blah. In other words, people bought into the hype that Terra was to become the next big blockchain startup and holding LUNA was as good as owning early stock.
So that goes back to the first point, and as soon as Terra wasn't able to run an effective stablecoin what was left? "We're still here making noise" says Do Kwon. Face palm.
Technically, sure. But now remember that market cap is simply last trade price * outstanding tokens and realize that if there’s not enough buyer demand to liquidate all tokens at that price or greater then UST wasn’t backed at that moment in any real sense. The true theoretical backing is buyer demand * buyer’s best bid for the sum of all buyers.
Also, technically the value of UST was fully backed by LUNA, until the total market cap of LUNA dipped below the market cap of UST, and then it wasn't.
IMO it's not the collateralization that makes something an algorithmic stablecoin, it's the currency is managed entirely by on-chain smart contracts, as opposed to Tether or USDC etc, which are managed manually by humans working in a room somewhere. Who knows though, I just made that definition up. The algorithm that manages DAI is pretty rad, so it seems unfair to deny them the status of "algorithmic", but that's fine.