Cardano recently confirmed that two USD stablecoins would soon launch on the platform. But while the fiat-backed, regulatory-compliant USDA has escaped much criticism, the Djed stablecoin developed by payment firm COTI has come in for some flak.
The reasons for this are not difficult to fathom, though the arguments themselves are based on flawed logic. Ultimately, the preemptive criticism stems from the fact that Djed is an algorithmic stablecoin, leading some users to draw parallels to TerraUSD (UST), the failed stablecoin at the heart of the great Terra crypto crash of earlier this year.
In truth, the similarities between Djed and UST are scant. While both are pegged to the mighty dollar through an algorithmic mechanism, and each backed by reserve cryptocurrencies, important distinctions between the two render common criticisms moot. Particularly when naysayers suggest Djed could implode like UST did back in May.
Not Your Average Algorithmic Stablecoin
While some members of the crypto community won’t go near an algorithmic stablecoin after the Terra fiasco, comparing Djed to UST is an apples-to-oranges scenario – as its issuer COTI has been at pains to point out.
That said, the mood music around Djed ahead of its January, 2023 launch is overwhelmingly positive. A recent CoinTelegraph poll saw 58.6% of 12,637 users confirm that they would use Cardano’s upcoming algorithmic stablecoin. Given that Yes or No were the only two options – and those who might answer ‘Unsure’ or ‘Don’t know’ are likelier to click ‘No’ – that’s an impressive return.
One of the main benefits of Djed is that it is overcollateralized – backed by a much larger pool of assets than its face value, providing additional stability, transparency and security. These on-chain proof of reserves guarantee that user deposits are safe, and the topic has been discussed endlessly since the collapse not only of Terra but latterly, FTX.
While mismanagement of funds was the straw that broke the camel’s back in the case of FTX, Terra’s demise was precipitated by the dwindling confidence of investors in both UST and sister token LUNA. The problem, of course, was that when one asset failed, the other was dragged down with it: LUNA and UST were like Romeo and Juliet, star-crossed lovers doomed to die in the same ugly feud. Far from being overcollateralized, UST was actually extremely vulnerable to fluctuations in value based on market forces and economic conditions.
Djed does not suffer from the same inherent vulnerabilities, and not only because it’s overcollateralized with a healthy reserve ratio (up to 8X) that ensures there’s enough to buy back every Djed stablecoin in circulation at $1 worth the underlying asset. Importantly, these reserves are independent of the Djed project.
Thus, while smart contracts ensure continual price stabilization, Djed is physically backed by crypto that has its own long-established and ever-expanding utility. Reserves will be made up of Cardano’s native token, $ADA, with $Shen functioning as the reserve coin.
When unveiling Djed at the recent Cardano summit in Lausanne, COTI CEO Shahaf Bar-Geffen emphasized the need for a stablecoin “that is decentralized and has on-chain proof of reserves,” one that could represent “a safe haven from volatility in the Cardano network.” According to COTI’s big boss, Djed fits the bill – no pun intended.
A Real Safe Haven?
Although some might say that UST was also touted as a safe haven (and indeed all stablecoins claim to be safe havens), Djed is fully algorithmic and automated: the whitepaper describes the protocol as behaving like “an autonomous bank that buys and sells stablecoins for a price in a range that is pegged to a target price.”
Another notable distinction is that holders of Djed’s reserve currency ($Shen) are incentivized by payments generated from mint/burn fees. As such, they are actively encouraged to keep more stablecoins in circulation. This differs from the seigniorage revenue model of UST, wherein holders were motivated to support projects like Anchor that artificially limited the quantity of stablecoins in the market.
As a new project in an industry that’s endured something of a reputational annus horribilis, Djed will have a way to go before it can be called a success. If it can live up to its billing though, it could become a go-to for Cardano enthusiasts who want to minimize volatility and flee to safety in times of market strife.
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