Despite users’ distrust since the Terra UST affair, the Cardano blockchain (ADA) has just inaugurated the successful deployment of its algorithmic stablecoin DJED on Wednesday 31 January. What to expect
DJED launched on Cardano
This Tuesday, January 31, marks the launch of the stablecoin Djed (DJED) on the Cardano blockchain mainnet. Launched by Coti and backed by Input Ouput, DJED is an algorithmic stablecoin, much like the now-defunct UST from Terra or the USDD from Tron. Like these stablecoins, the DJED follows the price of the US dollar.
In practical terms, algorithmic stablecoins work differently from the USDT or USDC, which are backed 1:1 by cash. Instead, algorithmic stablecoins are backed by a basket of assets and an arbitrage mechanism that theoretically holds their price to the dollar.
Coti’s official release informs us that after more than a year of development, DJED has passed all security tests and audits. This launch opens up new opportunities for the decentralised finance ecosystem (DeFi) on Cardano:
The launch of DJED is an important milestone for Coti, the Cardano ecosystem and DeFi as a whole. As an open source decentralized protocol, DJED is community-driven, as it offers users the ability to own, mine and burn DJEDs and SHENs. “
At the time of writing, DJED is 798% backed by ADA, the native cryptocurrency of the Cardano network. A second cryptocurrency will also act as a reserve currency: SHEN. Like ADA, users will be able to participate in the arbitrage and price maintenance mechanism of DJED by creating or burning SHEN tokens.
Specifically, if the DJED price falls below the dollar, then users will be able to burn 1 DJED to receive an equivalent dollar in ADA or SHEN. Thus, this induces downward pressure on either of these crypto-currencies and upward pressure on stablecoin, which theoretically regains its price.
However, an additional ‘safety’ has been added. If collateralisation exceeds 800%, buying SHEN will be impossible and if it falls below 400%, selling SHEN will be impossible. In other words, in this situation, users may no longer be able to exercise this arbitrage.
A divisive launch
The launch of this stablecoin has not been unanimous. On the contrary, it has sparked investor fears that a new algorithmic stablecoin will take over the market.
And for good reason, algorithmic stablecoins do not have a very good reputation. The famous UST from the Terra ecosystem belonged to this category and saw its price detach from that of the dollar, never to recover, taking millions of investors into the abyss.
Despite this, Coti wanted to reassure investors:
“The DJED has a unique over-collateralisation mechanism of 400% to 800% with proof of on-chain reserves to protect its value in different market scenarios. “
This announcement is part of a series of new initiatives by the team developing the Cardano network. Earlier in 2023, Charles Hoskinson, former Ethereum founding member and co-founder of Cardano, had for instance announced the willingness to develop sidechains on his blockchain.
Unfortunately, recent news is not necessarily positive for Cardano, which suddenly saw half of its nodes disconnected from the network on 23 January, for no apparent reason. An unexplained failure that did not reassure investors.