Price Adjustment Algorithm

Definition ∞ A price adjustment algorithm is a computational routine designed to automatically modify the cost of an asset, service, or resource based on predefined rules or market conditions. These algorithms react to supply and demand dynamics, liquidity, or external data feeds to maintain a desired price stability or market balance. They are crucial for automated market makers and stablecoin protocols.
Context ∞ Price adjustment algorithms are central to the functioning of decentralized exchanges and algorithmic stablecoins in the digital asset space. Discussions often involve the stability mechanisms of these algorithms, their susceptibility to manipulation, and their responsiveness to extreme market volatility. Future developments focus on creating more robust and adaptive algorithms that can withstand market shocks and maintain peg stability effectively.