A COTI network update says that the launch of Djed, Cardano’s over collateralized stablecoin, is set for next week.
The sync was initiated a week back by the COTI team. They reportedly completed the process the very next week.
Along with the upcoming release of the stablecoin Djed, people are also looking forward to the release of SHEN, the backup token of the protocol. The particular token is native to the Cardano network.
This essay will look at the basics of Djed, including how it works and how it might affect the market.
Djed’s launch is coming week!” on January 24, 2023, COTI said.
A Definition of the Djed Stablecoin
COTI and IOHK introduced DJED, a USD-pegged algorithmic stablecoin, during the 2021 Cardano Summit. DJED stabilizes turbulent markets.
Djed is an algorithmic stablecoin protocol that functions as a standalone bank. According to the IOHK release, it buys and sells stablecoins with a price range fixed to a target price.”
DJED will be the first cryptocurrency to have formal verification to ensure price stability, making it perfect for decentralized finance (DeFi).
COTI will oversee all front-end project operations and will get paid when DJED and its reserve coins are made and destroyed.
In the meantime, smart contracts will free banks from having to keep prices stable, which is a very important part of the protocol.
When the price of DJED goes up too much, the contract will automatically give out more coins.
The contract would purchase more DJED tokens as the price goes down, which would bring it right back up. To keep the value stable and steady, the contract would ensure it has a reserve of base coins.
The Djed Stablecoin: How Does It Operate?
“Djed is linked to the US dollar via an ADA-backed smart contract.” “Users send ADA to the smart contract in charge, and they receive the same number of Djed in return.”
This creates a pool of ADA that makes sure there are enough Djed to go around.
On the other hand, people who own Djed can trade 1 Djed to the smart contract for $1 worth of ADA. The Djed is then destroyed by the smart contract, which keeps the dollar peg.
But the cryptocurrency market is always changing, so it’s possible that ADA could drop sharply.
If that happens, there might not be enough ADA in the contract to pay back Djed holders.
It was a lesson learned the hard way by the TerraUSD (UST), when it experienced a major dip in its value back in May 2022.
A smart contract reserve of SHEN, Djed’s reserve currency, stabilizes its stablecoin price. This new method stabilizes stablecoin prices.
The reserve is collateralized and it is currently between 400% and 800%. In case the ADA token goes down, the holders of DJED will not be losing their tokens as they will be paid in SHEN.
If the reserve ratio is below 400%, burning SHEN would not bring in ADA as a byproduct, and if it is above 800%, SHEN cannot be created. Together with Djed’s proof-of-reserve, this creates a trustworthy and open system that is important in the current market.
Unlike the Djed, which is tied to the dollar, the SHEN is unstable and depends on market conditions. As an incentive, every time SHEN, DJED, and ADA are traded for each other, or vice versa, SHEN holders will get a charge.
Possible Potential Applications of Algorithmic Stablecoins
There are several possible uses:
Algorithmic stablecoins are good for peer-to-peer (P2P) transactions because they let people send money quickly, cheaply, and safely.
Due to their low transaction costs, fast transaction times, and greater stability. Algorithmic stablecoins could be used as an alternative to traditional cross-border payment systems.
Many insurance companies have already started to investigate how algorithmic stablecoins could be used to make insurance more reliable and stable.
Insurance companies can quickly pay out claims in stablecoin because there is no financial middleman. This is an excellent opportunity to increase efficiency in the insurance industry.
In the lending market, algorithmic stablecoins can be used instead of cryptocurrencies that are more volatile. By taking advantage of how stable algorithmic stablecoins are, borrowers.
Lenders may be able to make more reliable loan agreements.
Decentralized Finance: The decentralized financial ecosystem would be a lot better with algorithmic stablecoins.
These currencies can give people a safer and more stable way to exchange money. They can trade in more reliable digital assets.
A lot of international payment networks are thinking about adding algorithmic stablecoins to their systems right now.
Stablecoins based on algorithms is a viable alternative to traditional payment methods. They are more stable, less expensive, faster, and more secure.
History’s Lessons
In April 2022, the algorithmic stablecoin Terra UST passed Binance USD to become the third-largest stable currency in the world. But because of a crash in May, it was taken off this spot.
Former Diem stablecoin project head economist warns that algorithmic stablecoin may enter a “death spiral” or run out of reserves in a bad market. This was stated in a study published in 2021 by Christian Catalini.
He said that such things were “unlikely to be able to last” for algorithmic stablecoins. This means that digital currencies backed by assets are still the most reliable option on the market right now.
The algorithmic stablecoins’ market has been moving downwards at a steady rate since April 2022. From then until now, the market share has declined from 12.4% to 1.71%.
This drop in popularity shows that the market is moving away from stablecoins that are based on algorithms.
The Future Is Here: Algorithmic Stablecoins
Cardano supporters were thrilled to hear that the protocol for the cryptocurrency had the most development work in 2022. Even more than the stablecoin platform Djed.
Also, the platform has already made a big impression by putting out the first Python-written smart contract. Now, eTukTuk, the world’s first EV startup based on blockchain, will be a part of Cardano.
The cryptocurrency community will keep a close eye on how well the Djed launch goes and how it affects the price of ADA. Will Cardano’s magic make ADA show up in a spectacular way? Time alone will tell.