The much-awaited Cardano-based algorithmic stablecoin DJED is set to be launched on January 2023. This was announced by Shahaf Bar-Geffen, CEO of Coti, in the 2022 Cardano Summit.
The new stablecoin was first announced in 2021 by Charles Hoskinson, Cardano’s founder, in the 2021 Cardano Summit.
Unlike the more popular fiat-backed stablecoins, DJED will be algorithmic by design, wherein a smart contract will ensure the stability of its peg. It is designed to operate by keeping reserve coins and keeping price stability by minting and burning the stablecoin and the reserved coins. A stablecoin should always have a 1:1 peg to the US dollar and the smart contract maintains this by selling more coins as the price increases and buying more as the price decreases.
The logic behind algorithmic stablecoins can be easily understood if we think about the law of supply and demand. If the smart contract sees that the price is getting too low, it will cut down the supply by buying and burning some tokens, thus limiting the number of circulating stablecoins. The limited supply will increase the value of the token. Conversely, If the price is too high, then the smart contract will mint new coins to push down the value.
DJED is not just another stablecoin built on top of the Cardano blockchain, it was also created to serve as the token that will be used to settle transaction fees within the Cardano Network. This will ensure price stability since transactions can be settled with stablecoins instead of tokens, which fluctuate in value.
About Coti
Coti, the creator of DJED, is a blockchain ecosystem that aims to provide fast and secure transactions without high fees. Instead of Proof-of-work (POW) or Proof-of-stake (POS) protocols, Coti relies on a unique consensus mechanism called proof-of-trust (POT) to validate network transactions. The company was founded in 2017.
Stablecoin Regulations
The crypto space was rocked by the failure of Terra (LUNA) and its algorithmic stablecoin TerraUSD (UST). UST’s implosion called for stricter regulations for cryptocurrencies and more specifically stablecoins. There is a proposed bill in the US Congress called the Stablecoin Transparency Act which calls for fiat reserves for stablecoins. In the bill, issuers of stablecoins are required to publish audited proof of reserves on a monthly basis.
Tether Holding Ltd, the issuer of USDT, was also fined $41 million by the Commodity Futures Trading Commission (CFTC) for misleading investors that their stablecoin is 100% backed by fiat currencies.
Will Cardano’s First Algorithmic Stablecoin Succeed?
There have been numerous attempts to create a stablecoin on top of the Cardano chain. USDA, the first fiat-backed and regulation-compliant Cardano stablecoin will also be launched in early 2023. These two tokens will add to the 89 other stablecoins in the market.
Luna and TerraUSD’s (UST) collapse is still fresh in the minds of many investors who have lost a lot of money. Its algorithmic design was seen as a technological breakthrough and a better option than fiat-backed stablecoins. But exploits were able to force it to lose its peg from the US dollar and lose 99.9% of its value. The fiasco made investors question the underlying assets of the stablecoins they hold.
DJED’s success will depend on a lot of things. Will the crypto community be willing to invest in another algorithmic stablecoin? The recent collapse of several crypto companies is seen as an aftershock from UST’s collapse. Recent negative bad news has already put a lot of people on the edge and it will take a lot of convincing for people to try a stablecoin backed by “programming”.
Tighter crypto regulations might also hinder DJED ’s growth. How will the project tackle proof of reserves once the Stablecoin Transparency Act becomes law?
On the flip side, DJED is built on top of Cardano, a Top Layer 1 blockchain. Cardano’s founder Charles Hoskinson is seen as a crypto innovator who takes his time to perfect projects. A lot in the community respect and trust him. If Charles endorses the project, then investors will probably give it a chance.
A lot of the technologies we use today went through a lot of trials before they went mainstream. We depend on the internet for a lot of things nowadays, but there was a time that it was considered to be a fad. The developers of DJED have presented a possible future wherein money is controlled by algorithms and smart contracts instead of people who can be manipulated. The question is if we are willing to give it a try.
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