Get to know Djed, Cardano’s algorithmic stablecoin
One of the biggest hopes for Cardano (ADA) investors is the arrival of a stablecoin on the altcoin network. Although it already has a synthetic stablecoin iUSD, big hopes surround Djed, an algorithmic stablecoin that could mark history as a competitor to Ethereum (ETH) in the development of smart contracts.
Djed will keep its value as close to $1 as possible by leveraging the smart contract design on the Cardano blockchain. The stablecoin will hold a reserve of base currencies while mining and burning other stable assets and reserve currencies to contain fluctuations.
Smart contract programming will be used to ensure that the stablecoin works effectively for transactions in the world of decentralized finance (DeFi).
In addition, it will have two versions. The first one will be designed only to serve as a medium of exchange. The second one is a smart contract that uses a continuous pricing model and dynamic rates to react more quickly to external events.
According to the COTI blog, Djed aims to be the main currency used to pay all transaction fees on the Cardano network, which will bring more utility to the stablecoin ecosystem and make transaction fees more predictable.
Could Djed collapse like Terra’s stablecoin?
A collapse may be a major crypto investor’s fear as the algorithmic stablecoin model presented by Terraform Labs experienced one of the biggest collapses in the cryptocurrency market in 2022.
Just as USTC was backed by Terra Classic (LUNC), Djed will be backed by Cardano. In this sense, by sending ADA to a smart contract, the investor would receive the same amount in stablecoin, and if the user sends Z to the smart contract, he would receive the equivalent in ADA.
But what if the price of Cardano undergoes a sharp market correction? Surely that would cause the ecosystem to collapse, as the Djed in circulation would no longer be backed up.
To solve this problem, SHEN will be the reserve currency in the smart contract. This will be used to cover price fluctuations on Cardano. The warranty rate will be 400-800%.
The value of SHEN, on the other hand, will be volatile and will offer incentives every time an investor swaps DJED or SHEN for ADA. This may help maintain the stability of the stablecoin.
Another point is the simplicity of the contract (four trades) and some trade locks. At least three locks should keep the DJED contract from going bankrupt on its minimum implementation.
Lock 1: The purchase of stablecoins (DJED) should only be allowed if the reserve ratio is higher than a certain fraction (r > r min).
Lock 2: Purchase of reserve currencies (SHEN) should be permitted only if the reserve ratio is a certain fraction (r
Lock 3: The sale of reserve coins should only be allowed if the reserve ratio is greater than a given fraction (r> r min).
How can Z affect the price of Cardano?
The arrival of stable coins on the Cardano network could help the cryptocurrency advance as an “Ethereum killer”; After all, stable assets are the ones that have performed best in recent years.
Analyzing the main altcoin on the market, for example, it is possible to see that a good portion of the transactions that occur on the ETH network are stablecoins. Furthermore, in the top 10, three of the cryptos with the highest market capitalization are stable assets.
With the arrival of Vasil, Cardano looks set to enter this space and take advantage of the use of its blockchain, which could be positive for ADA pricing.
