An algorithmic stablecoin like HBD offers protection in the sense that it is backed by an asset: HIVE. The key difference is that this is not in a reserve account. In this instance, it is backed by the USD value of the market capitalization of HIVE.
HBD is not backed by anything. If the market capitalization of Hive drops, the value of HBD drops because forced on-chain conversion methods will give less than $1 HBD to preserve the integrity of the Hive.
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That is true except there is also the haircut rule in place. Hence if the market cap does drop, the production of HBD is stopped.
This is no different than have an asset backed reserve like BTC and it drop by 50%. If that happens, what happens to the backing.
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