Robert Steinadler, 10 months ago
Stablecoins came under scrutiny after Terra collapsed. For the first time, investors and regulators were asking how much trust we can have in these products. The last few weeks have shown that most stablecoins are indeed stable and that companies like Tether can redeem customers with actual US-Dollars.
Cardano is looking forward to releasing its own stablecoin in partnership with Coti. What is Djed and how is this stablecoin possibly more resilient than others?
In order to peg the value of Djed to the US-Dollar, there are two other tokens involved. The first one is ADA the native cryptocurrency to the Cardano blockchain. Each time a user wants to mint Djed he has to send ADA to the smart contract. If he should choose to redeem Djed the smart contract will return ADA according to the current dollar value at the time of redemption.
Unlike other algorithmic stablecoins the Djed smart contract won’t burn or mint ADA but instead build up a pool of ADA. The Djed token on the other hand is minted when ADA is sent and burned when Djed is redeemed for ADA.
It is possible that a situation could occur where the dollar value of the pooled ADA is lower than the stable dollar value of Djed tokens in circulation. This is why there is a second token involved called Shen.
Shen is a reserve coin that is not pegged to a specific asset and its price is fluctuating instead. Its purpose is to cover the collateralization rate, and the fluctuation as well as to ensure stability. Users mint Shen with ADA but are not allowed to redeem Shen if the pool is below the reserve ratio. If the reserve ratio remains at a maximum, the smart contract won’t allow to mint Shen.
In effect, Djed holders enjoy a priority to redeem ADA. In return for providing stability to the pool, Shen holders get rewarded with ADA that is deducted from the fees when minting or burning tokens.
The idea is to overcollateralize Djed somewhere between 400 % and 800 % with Shen as the reserve currency of the system. But since the Terra crash has revealed that algorithmic stablecoins carry risks the developers also built in two mechanisms to support the system. When the reserve ratio is dropping below 400 % the system limits actions:
In return, if the ratio is above 800 % minting of Shen will be prohibited and Shen holders can only redeem their tokens for ADA.
It is believed that this system will prove a lot more robust than the solution that Terra has presented. It is in fact very different in its approach and technology. What is even more important is that Cardano needs a decentralized stablecoin to help its ecosystem to thrive. The public testnet went live on May 4th and it will be exciting to see if Djed is going to be resilient as promised by Charles Hoskinson and Coti.
Jan 27, 2023
Cardano has no viable stablecoin solution and that’s not a good thing if you like to see your DeFi ecosystem grow. But there is light at the end of the tunnel! Coti is implying that Djed could launch next week and this would boost Cardano’s ecosystem and add a lot of valuable options for traders and long-term investors.
Nov 22, 2022
Last weekend in Edinburgh, Cardano's parent company announced its new sidechain Midnight. It will be a smart contract blockchain that allows users to exchange data without revealing more than they want to. Cardano expects businesses to be interested in Midnight. One of the reasons business shy away from public blockchains, is precisely their lack of privacy.
Nov 18, 2022
Cardano is developing its second-layer protocol dubbed Hydra that is meant to improve its scalability similarly like the Lightning Network is doing with Bitcoin. Recently, Hydra made some progress with a specific development that could boost Cardano and bring micropayments to the masses.
Nov 11, 2022
Cardano has been late to the NFT party and one of the reasons was the fact that its technical development took longer than expected. Many critics called Cardano a “ghost chain” for its lack of a DeFi and NFT economy. It seems that this assessment is far from being correct and while we are still facing a brutal bear market, Cardano NFT ecosystem is doing great.
Sign up to stay informed via our email updates