This type of stablecoin is reliant upon an algorithm that pegs itself to a physical currency. They are not fully backed by collateral but instead rely on the laws of supply and demand to maintain their 1:1 price peg.
When the demand for an algorithmic stablecoin increases and the price of the stablecoin surpasses its peg (EG $1.00), the protocol issues a fresh supply of stablecoins to reduce the price back to peg. Inversely, if the price of the stablecoin falls below $1.00 due to reduced demand, stablecoins are removed from circulation via a process called burning.
Due to being both located on the blockchain and undercollateralized, algorithmic stablecoins are both decentralised and capital efficient. However, the overarching weakness of algorithmic stablecoins lies in their (sometimes ‘lack of’) stability.
The 2022 bear market was spearheaded by TerraUSD (UST) collapsing. At its peak, it was a top 10 overall cryptocurrency and a stablecoin many people used. For a TLDR and how the ‘death spiral’ of UST began, you can read a breakdown from genesis to end here.