Yesterday ADA and COTI had an AMA regarding concerns about the stable coin DJED. DJED is the new stable coin for the Cardano network and will be the stable coin behind their DeFi.
DJED means stability in Ancient Egyptian and represents a pillar.
Ever since LUNA and UST crashed the focus turned onto how stable are stable coins and what is guaranteeing they hold their peg. The same concerns are obviously being had by the Cardano (ADA) community as they don't want to see their investments disappear to zero.
There are some really big differences thankfully when you start comparing DJED to other stable coins. Firstly DJED is decentralised with no human contact making decisions and is run solely on a smart contract. This is important as having no human intervention it allows the contract to run as it was programmed, unlike other stable coins.
One has to understand that there are 3 types of stable coins and that is how they are backed.
FIAT Collateralised (USDC, USDT)
Crypto-backed (DAI)
Algorithmic (USDD, UST)
DJED will be Crypto backed and even though it is algorithmic will be 4 x Collateralised. This is important as printing of DJED will only happen as long as there are enough funds to cover the DJED that is minted. Even if ADA fell by more than 75% in value there are no risks as the reserve coin Shen covers the DJED. LUNA with UST and Tron's USDD don't have this fail safe in place and why they were and are a high risk.
Tron and Luna allowed their tokens to burn to create their stable coin. This allows for one price to become much higher than the the other in the case of Luna where UST reached a 4 x market cap of LUNA. When the fall happened and UST de pegged LUNA had no chance and is called a death spiral as once it starts it wont stop. The more I read up about this the more I see USDD having a similar experience to UST and is a ticking time bomb.
What is important to understand the safety is even with ADA dropping by 75% as that is the 75% of 400% collateral and DJED will remain stable. ADA price has no influence on DJED as it is separate away from SHEN and is thus protected. Tthe reserve coin SHEN can only be minted and burned when their is enough collateral which will then allow more DJED to be minted. This is complicated as the protocol will only allow for minting and burning under the right conditions as per the smart contract.
There are fees in place for minting and burning DJED which will be distributed to SHEN and COTI holders via the COTI treasury. I am just happy the team has put the time and effort into developing a stable coin that will remain stable as it just shows that this is seriously complicated and is far from easy.