Just some days ago, Shahaf Bar-Geffen announced that Cardano’s algorithmic stablecoin, Djed, is going to go live in 2023. According to the CEO of COTI, they are planning to launch Djed on January 2023. This was revealed to the public during the Cardano Summit on the 20th of November; so, two days ago.
For your information, COTI is a stablecoin development company. This company claims to be the world’s first platform that is properly optimized for creating stablecoins.
What is DJED?
DJED is going to become Cardano’s first algorithmic stablecoin. This price-stable digital asset is going to be algorithmically backed by ADA, Cardano’s native token. Although Cardano had planned the release of this stablecoin way back, they paused working on it for a brief period of time.
The way this will work is simple. Whenever you send ADA on a Cardano smart contract, the receiver will get the same dollar value worth in DJED. So, by sending 3 ADA to a smart contract, the sender will get $1 worth of DJED in return.
Logically, such a model is similar to the one the original Luna project was using back before the hard fork; and we all know what happened. The day that Luna – the token that used to back the Terra stablecoin UST – experienced a crash, the price of UST was not stable anymore because Luna was unable to back UST.
The same could happen to Djed, however, COTI and Cardano got something else to cover for them. Unlike UST, two cryptocurrencies will back Djed. As per Bar-Geffen’s announcement, whenever ADA has price fluctuations, SHEN will back Djed. To incentivize people to hold SHEN for as long as possible, each transaction with the DJED/ADA and SHEN/ADA market pairs will reward SHEN holders with fees.
Not only do we need a stablecoin, but we need one that is decentralized, and has on-chain proof of reserves.
Shahaf Bar-Geffen, CEO of COTI
Can Cardano’s Stablecoin Suffer the Same Fate as UST?
The market is still in shock from the de-pegging of UST, the Terra stablecoin. UST was one of the biggest stablecoins in the market back in May 2022. What made this worse was the fact that the whole market crashed after this occurrence. To paint a better picture, UST was backed solely by LUNA, and when the LUNA token experienced major downside volatility, the algorithm of UST could not keep up. This caused it to de-peg from its stable price. After it de-pegged, the algorithm began issuing millions of new LUNA tokens in the market, causing the price of LUNA to crash to nearly zero in just 2 days.
To ensure this doesn’t happen, Cardano is going to use two cryptocurrencies to back Djed. While this is a better strategy than the one that Luna used, it leaves room for mistakes. Both of these cryptos are prone to volatility. This means that the possibility of them crashing exists.
Both UST and DJED, however, have the same goal – being a decentralized stablecoin. The current major stablecoins, USDT, USDC, and BUSD, are all backed by cash and US Treasury bills. One way or the other, this makes them centralized. Ultimately, Cardano learned from the mistakes of Terra. Because of this, we might have a better, improved version of a decentralized stablecoin.