The stablecoin will be backed and supersized using only cryptocurrency including ADA and SHEN – the smart contract reserve token.
Shahaf Bar-Geffen – CEO of COTI, a stablecoin development company – revealed the launch date of Cardano’s new algorithmic stablecoin on Monday at the Cardano Summit.
After a successful audit, the over-collateralized DJED token will go live in January 2023.
What is DJED?
DJED is Cardano’s attempt to create a price-stable digital asset backed by ADA – the network’s native cryptocurrency.
By sending ADA to a given smart contract address on Cardano, users will receive the same dollar value of DJED in return. Similarly, by returning 1 DJED to the smart contract, the sender will receive $1 worth of ADA.
This pattern could theoretically break down if ADA were to experience major downside volatility, resulting in the DJED tokens in circulation being completely unsecured. As such, the smart contract will also include a reserve currency, SHEN, to hedge ADA price fluctuations, provide price stability, and guarantee a collateralization rate of 400-800%.
SHEN holders will be rewarded with a fee each time someone trades DJED or SHEN for ADA (or vice versa), creating an incentive to hold the token and help maintain the stablecoin peg ratio.
Unlike DJED, Shen will not be pegged to price, leaving it open to volatility, much like ADA. However, the smart contract will prevent anyone from creating new SHEN tokens once the smart contract reaches a maximum threshold, so as not to dilute existing holders.
Recent market events have proven again that we need a haven from volatility, and Djed will serve as a haven in the Cardano network,” Shahaf Bar-Geffen said. “Not only do we need a stablecoin, but we need one that is decentralized and has proof of on-chain reserves.”
Evidence of reserves
“Proof of Reserves” is a growing trend among crypto industry giants following the FTX fallout, in which the exchange went bankrupt after allegedly misappropriating depositor funds for lending activities. This prevented the exchange from meeting customer withdrawals following a bank run earlier this month.
Rival exchanges including Binance and Bitstamp have agreed to provide blockchain-based proof of reserves to assure customers that their funds remain safe at all times. Grayscale, however – the owner of the world’s largest bitcoin fund, GBTC – refuse to provide such transparency over the weekend, citing “security concerns”.
Reserve transparency is a long-standing expectation for stablecoin providers who rely on adequate reserves to satisfy token buybacks at all times. Tether, the USDT issuer, has faced years of scrutiny over the legitimacy of its $60 billion+ reservations but has so far managed to satisfy redemptions when under constraint.
Organizations like Terra have attempted to design algorithmic stablecoins that remove the requirement for trust in a centralized issuer. However, the ecosystem’s UST and LUNA tokens both crashed to zero in May, making industry participants and regulators Beware of similar models.
The three major stablecoins – USDT, USDC, and BUSD – are all backed only by cash and US Treasuries, according to their latest attestation reports.
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