Thread by @nazarcapital

$DJED vs $UST, a thread 🧵⬇️

With the crash of $UST / $LUNA, unsurprisingly, much doubt has been cast on #algorithmic stablecoins. #Cardano is launching its own #stablecoin as most of us know - $DJED, which is already on testnet, but how is it different? 🤔

2/ $UST and $LUNA could be burned/minted in exchange for the other such that $UST = $USD, theoretically; one of the dangers here was that as $LUNA price dropped, more would have to be minted to maintain the peg - leading to the dreaded “death spiral"

3/ The algorithm in place to restore the peg couldn't do so at a faster pace than it was dropping, within the contract and blockchain parameters in the #Terra ecosystem, which included caps on on-chain withdrawals, among other contingencies and reserves

4/ Naturally, $UST also banked on $LUNA sustaining a higher market cap to maintain the peg, which everyone thought to be a sure thing - until it wasn't. The longer $UST remained depegged and $LUNA dropped, the more investors made their exits

5/ The algorithm mechanism for $DJED uses a tri-coin system between $ADA $DJED $SHEN. Let's break this down:

$DJED is minted by sending $ADA to the contract, which builds up the contract's pool, and notably does NOT burn it

6/ Upon exchanging it back, $DJED is sent back to the contract to be burned and the equivalent of $USD returned in $ADA

But $ADA fluctuates: what happens when there isn’t enough $ADA in the contract to payout $DJED holders?

7/ This is where $SHEN comes into play as the reserve token for $DJED. It will serve to cover fluctuation, ensure stability, and ensure a certain collateralization rate

Notably, it isn’t pegged to an asset, its price will fluctuate (important for later)

8/ Why would anyone buy $SHEN?

Minting and burning fees associated with $DJED & $SHEN are collected in an $ADA pool, some of which is paid out to $SHEN holders as incentive

Reserves grow with user transactions, serving to increase liquidity and price for $SHEN

9/ What stops people from minting more $SHEN when it appreciates in price or payout?

Per the contract parameters, $SHEN cannot be minted above the defined maximum boundary (800% reserve ratio) to avoid diluting rewards

What is the risk to bear?

10/ $DJED holders have priority to be redeemed to $ADA. $SHEN cannot be redeemed for $ADA below the defined lower bound of the contract (400% reserve ratio). Redemption and subsequent burning of $DJED increases the reserve ratio (as does the minting of more $SHEN)

11/ How did $DJED fair in the recent market volatility and massive selloff of $ADA?

The $DJED contract kept its peg to 1 $USD as can be seen on the testnet, even in lieu of the market volatility - per @shahafbg , CEO of #COTI, in this development update:

12/ Resources to help you DYOR on $DJED:

DJED Whitepaper
eprint.iacr.org/2021/1069.pdf

DJED Algorithmic Stablecoin Explained


COTI Medium Article
cotinetwork.medium.com/what-gives-dje…