We held an AMA about Djed, the over collateralized algorithmic stablecoin on Cardano. The AMA took place on the COTI Telegram group. If you weren’t able to join, here is the full recap:
Lidar:
The first question is: How will the Djed required by DEXes be minted and subsequently distributed?
Testa:
So far we have closed different partnerships with DeFi protocols throughout the Cardano community, many of those protocols are indeed DEXs but not exclusively.
We also have different Marketplaces, borrowing/ lending protocols, subscription platforms, launchpads, etc.
All DJED that will be distributed in the market will be minted by the DJED platform by providing ADA to the contract, whether it is to open a liquidity pool in a DEX, or to provide collateral for a loan.
Who will be the DJED minters? The answer is everyone. For example, if a DEX would like a considerable amount of DJED to open different pools, they will be minting DJED. If a DeFi protocol wants DJED to pair their token with a stablecoin in a liquidity pool, then they will probably mint DJED. If an end-user wants a considerable amount of DJED to put as collateral for a loan, then he/she would prefer to mint DJED directly in the platform. So as you guys can see, depending on the use-case for DJED, it’s the end-party would be minting the stablecoin.
Lidar:
Thank you, Yair.
The next question is: Why did you decide on a 4:1 ratio?
Costa:
As we have mentioned before, the reserve ratios were not decided by chance, there was a team of data scientists and researchers that looked into the historical data of the ADA token and analyzed the price fluctuations based on different parameters such as volume, dates, time periods, velocity, among others and they concluded that having a minimum over-collateralized ratio of 400% would be sufficient to release a stable and secure protocol in the long term.
Lidar:
Thanks Costa.
It’s important to recognize that Djed is over collateralized, unlike other stablecoins. Since we are on the subject of other stablecoins, and we all aware of recent events that occurred with other stablecoins, the next question is:
Please elaborate on Djed’s mechanism and why it is different than UST? Can you help us better understand?
Costa:
The main differences between UST and DJED are:
Overcollateralization: Djed is fully backed and overcollateralized with a reserve ratio significantly greater than 1. The Djed contract has enough money to buy back all the Djed stablecoins in circulation for 1 USD worth of the backing asset, thus maintaining the peg and would still have a lot of money left.
If the current reserve ratio is, let’s say 4, Djed can tolerate an instantaneous crash of 75% in the price of the reserve asset and still maintain a reserve ratio greater than 1 and hence its ability to buy back every stablecoin for 1 USD worth of the reserve asset.
Revenue model: While Terra LUNA holders earn money from seigniorage and have an incentive to encourage projects like Anchor, that artificially keep stablecoins out of circulation, promising future yield, Djed reservecoin holders earn money through mint/burn fees and thus have an incentive to encourage stablecoins to remain in circulation and to be burned and minted frequently through the contract.
Backed by independent assets: While LUNA and UST had a circular dependency, Djed is backed by independent assets (ADA for example) with their own utility that is independent of Djed. Even if Djed’s stablecoin lost its peg, the effect on the price of the backing asset would not be as severe as the effect of UST’s de-pegging on the price of LUNA.
Zero governance: Djed has zero governance. It is fully algorithmic and autonomous. Unlike LUNA, where the network was halted at some point and the BTC reserves were managed manually, Djed operation doesn’t depend on decisions by a group of people or its CEO.
Lidar:
Thanks for the detailed answer Costa! The next question is:
What are the minting kyc requirements for Shen, if any? Does the djed.xyz block on USA locations prevent Shen minting for US persons, and will Shen be tradeable on any secondary markets?
Testa:
We have a professional legal team constantly monitoring the international regulatory framework and advising on how to proceed regarding KYC and geolocation restrictions, among other parameters.
At the very beginning, indeed, we were going to proceed only allowing accredited investors to be able to mint SHEN, but after extensive research, our legal team gave us the green light to open the minting for every user or DeFi protocol to mint SHEN in case they would like, as long as they are in a country that is allowed.
Currently, the DJED app is restricted in 30 countries, including the US, Israel, Canada, Albania, and other sanctioned countries. This was a necessary step to be able to open the minting of SHEN to everyone.
Now, these restrictions are for users interacting directly with the smart contract via our application and we can’t control or restrict the users to swap, buy or hold DJED in a protocol that is not related to us (secondary markets).
Lidar:
Thanks Yair. Can you answer the next question as well:
The community was wondering if the fee structure can be expanded on a bit. Will all transactions associated with DJED generate fees that will go back to COTI, or only the act of minting/burning?
Testa:
So, in regards to the fees associated with the contract, I’ll try to explain it as clearly as possible.
There will be three fees within the contract:
- Minting Fees
- Burning Fees
- Operational Fees
The minting and burning fees of both DJED and SHEN will be collected in $ADA and allocated to the reserve (increasing the reserve ratio) and later distributed to the SHEN holders, where SHEN holders will be able to harvest them at the moment of burning their SHEN.
The operational fees will be distributed to COTI, who will swap the $ADA received to $COTI and distributed to the COTI Treasury users.
The exact percentage will be announced soon, the numbers are being decided by researchers and data scientists, and they are going to be market competitive.
Lidar:
Great, now we will take one more question from our pre-submitted questions and then open it up to the community to take a few live questions.
The last question is about Shen: Will the locked $ADA used to mint $SHEN & $DJED be staked? If so, what happens with those $ADA rewards? If not, why not? Could $ADA rewards be used to help with collateral for Djed.
Costa:
The locked ADA in the contract is the reserve of the contract, so it won’t be moved out of the contract for security reasons.
Having said that, the Cardano network allows for delegations of the ADA at the moment of staking, which means you can delegate your ADA to different stake pools without moving the ADA out of the contract or locking it. Therefore, to create another revenue stream for our SHEN holders, we will delegate the ADA in the contract to specific stake pools, and 100% of the rewards received will be transferred to the reserve (increasing the reserve ratio) and later distributed to the SHEN holders.
Very important to clarify that the stake pool operators that we will be working with will be screened and very carefully picked according to different parameters to ensure the stability, security, and functionality of the contract is not affected.
Lidar:
Thank you guys for answering those questions. Now we are going to unmute the chat to take some live questions. Once there are many questions we will mute the chat to give the team time to answer.
Community:
Will you have a tier based minting fee to encourage large minting?
Joachim:
In the minimal djed protocol, which is the currently implemented one, the fee is fixed.
In the extended djed protocol the fee is dynamic and depends on how far the minting/burning action takes the reserve ratio closer or further from an optimal reserve ratio.
Community:
When will the contract be open-sourced?
Yair:
Since the creation of DJED we have always had this in mind: Creating an easy-to-understand economic model that will ensure the stability required by a stablecoin protocol to encourage community adoption.
According to the above, it makes total sense to make open source the DJED code and that’s precisely what we will do. The research paper is written in the most detailed way possible because we want users not only to use it but also to understand it, and part of that process is seeing the code as well.
DJED’s vision is becoming the go-to stablecoin of the Cardano community, and we expect that many (to not say all) of the DeFi protocols would be supporting it in their different operations; to make that happen, we would love everyone to understand the logic and the code behind the protocol as well.
Community:
Do you implement Minimal or Extended Djed? Admins here said Extended.
Costa:
We are going to implement minimal Djed, but we are exploring the possibility of implementing the Extended Djed in the future
Community:
Could Djed add any risk on the ADA ecosystem, given a lot of ADA liquidity could get locked up in the reserve pool? We’ve seen a lot of liquidation cascades on various lending platforms, could this cause a massive dump on ADA price (as ppl are defaulting) and as result, hurt the reserve ratio due to the cascading effect?
Joachim:
We typically see only a small percentage (around 3% in the case of SigmaUSD on Ergo) of the total supply of the base coin (e.g. ADA) being deposited into crypto-backed or crypto-collateralized stablecoins. Therefore, the impact of what you described would be small and negligible. If, however, Djed became so popular that a significant proportion of ADA’s total supply got deposited into the Djed reserve, then the impact wouldn’t be negligible anymore.
Another risk that occurred to me today, as I learned about how operational fees are going to be managed, is that the sale of ADA for COTI will naturally create some downward price pressure on ADA w.r.t. to COTI. Again, this should be negligible if the volume of these operational fees is small. But it could become non-negligible, if the volume grows.
Community:
Can u give list of differences between USDD, which is claimed also overcollateral and Djed?
Yair:
As you can see in many different places around the blockchain world, people are starting to categorize stablecoin based on three main categories:
- FIAT Collateralized (USDC, USDT)
- Crypto-backed (DAI)
- Algorithmic (USDD, UST)
According to the categories below, we would be entering into the Crypto-backed category as per how DJED pegging mechanism works.
In comparison with FIAT-backed stablecoin, of course, we are very different in terms of pegging mechanisms as we are using ADA (a cryptocurrency) instead of actual FIAT, and therefore we are also over-collateralized (a minimum ratio of 400%) in the case of FIAT-backed stablecoins they publicly state (but not publicly audited nor corroborated) they are collateralized in a 1:1 basis.
We are very different than the classic algorithmic stablecoin works such as UST and USDD, which work pretty similar, meaning these stablecoins are based on a two-token model (UST & LUNA or USDD & TRX) in which the algorithm allows the mint and burn of one token using the other one, and it allows the stablecoin to be undercollateralized as it allows the market capitalization of the Stablecoin to be higher than the second token (which was the case with LUNA/UST where UST reached an x4 market cap in comparison to LUNA).
Community:
What’s downsides of $DJED and what will be done in the long term to find solutions?
Costa:
There are a few minor issues of Minimal Djed described in the whitepaper, and many of them are addressed in the Extended Djed version
Community:
When we speak about falling 75 % from the price of ADA and depegging, it means from the price when it will be $DJED in mainnet or from the actual price (which changes with time)?
Costa:
Yes, from the moment Djed goes live on mainnet
It’s important to point out that the 75% crash is from 400% reserve ratio, if the reserve ratio is higher, Djed will not depeg even if ADA crashes by more than 75%
Community:
1 ADA = 0.5$ => 2 ADA = 1 DJED
2 ADA are sent to the reserve contract and i get 1 DJED
THEN 1 ADA = 2.5$ => ADA increases 5 times
Those 2 ADA still remain in the reserve contract? What happens when ADA increases so much that the reserve gets more than 8 times?
Joachim:
Yes, the 2 ADA will remain in the contract.
If the reserve ratio goes above 800%, nothing happens with the ADA in the reserve. It remains there. The only thing that happens is that people are not allowed to mint more SHEN (which would increase the reserve ratio even more). The reason for this is to protect previous SHEN hodlers from dilution.
Community:
I’m sure everyone wants to know ‘when #Djed mainnet’ are we still on course for Q2 this month? I take it all the bugs have been addressed?
Yair:
The technical roadmap is on schedule in the sense that we have already deployed the code to tesnet and we are tracking and gathering data points on the performance of the token. We are so far pretty happy with the results and data we are receiving.
We are now waiting for the Vasil hard fork to take place, and test the performance of the network and protocol as well, which should only improve the overall experience.
We are also conducting 2 security audits as well to make sure the business logic of the code is clear and all the potential vulnerabilities are correctly addressed. We are spending a lot of resources to analyze and examine all aspects of the contract to deploy a great protocol that will benefit the blockchain community as a whole, we do not want to rush things out.
Community:
Reposting this question in case it’s overlooked: How are the operational fees converted to COTI? Is it through a smart contract? Which exchange or price oracle is used to do this?
Yair:
Apologies, here it goes:
We are going to release soon both the specific percentages of each fee and how the operational fees mechanism will work in regards to the exchange of ADA to COTI native, which would later be distributed to COTI native holders through the treasury.
Jean-Frederic:
In the open source djed implementation, the major part of the operational fees is sent to a RewardFee contract upon order processing and may be collected only after a certain deadline has expired and that no cheating complaint has been submitted. In the latter case, the operational fees are sent back to the Djed reserve and a portion of it is sent as retribution to the user filing the complaint. There is no oracle whatsoever involved here. Note that the operational fees are a parameter to the contract.
Community:
How are the operational fees converted to COTI? Is it through a smart contract? Which exchange or price oracle is used to do this?
Yair:
We are going to release soon both the specific percentages of each fee and how the operational fees mechanism will work in regards to the exchange of ADA to COTI native, which would later be distributed to COTI native holders through the treasury.
Community:
How safe is your platform? So you have AUDIT certificates?
‘’or’’
Are you working to AUDIT your project, to make it more secure and reliable ?
Yair:
The on-chain code has been audited to guarantee the absence of security vulnerabilities and to ensure that the specification/code is of good quality both, in terms of understanding and maintainability.
We have also internally performed safety analysis to make sure that we have captured all the potential vulnerabilities/errors that can lead to reserve draining/stealing of funds locked in pending orders or even stealing of rewards fees from the reward fee contract + protecting against sandwich/front-runner attacks. From this analysis, we have identified a set of high-level properties from which we are performing extensive property-based testing.
We have already applied any corrective measures according to the audit remarks and are in the process of submitting a new version of the code for a final audit.
Joachim:
In addition to the audits and tests, which check the implementation, we have also used two different formal methods (interactive theorem proving and bounded model checking) to check the abstract mathematical protocol itself. To the best of our knowledge, this is the only stablecoin protocol where this has been done.
Сommunity:
Quick question, In the past ADA has lost more than 75% a couple of times over time, is there any mitigation that could be done in the long term?
Costa:
While it did lose more than 75%, it was not an instant crash. it also depends on the reserve ratio in the contract, the higher the reserve ratio, the greater basecoin (ADA) crash DJED can sustain without losing the peg. If ADA loses 75% over a long period, the reserves can recover when people buy more SHEN.
Community:
Bear markets do 75–90%?
Costa:
Correct, but you will agree with me that the 90% instant crash is highly unlikely. And even if it happens minting Shen and Burning Djed will still be available under 400% reserve ratio and will bring the reserve ratio up
Yair:
Correct, the 400% reserve ratio is to protect the contract when the price of ADA decreases at such a fast pace that the contract doesn’t have the time to react against it. The higher the reserve ratio, the bigger the instantaneous price decline.
If the ADA token depreciates by more than 75% within a specific period of time, in this case, the contract does have time to react and increase the reserve ratio; this can be done by (1) accumulating additional ADA by people investing in SHEN, (2) accumulating in reserve the staking rewards which are gathered every APOC, (3) accumulated fees by people minting or burning DJED.
So as you can see the contract is designed in a way to not only increase the reserve ratio by minting SHEN, but we also incorporated additional passive methods to increase the reserve ratio
Сommunity:
Can you please stop saying 75% drop. 400% reserve ratio protects against 80% drop.
Eli:
It protects against 75% drop because ratio is Reserve/Liability
Сommunity:
There’s $1 of ADA in the DJED pool, and $4 of ADA in the SHEN pool. $5 total. A drop of 80% makes the $5 of ADA worth $1 and DJED keeps the peg.
Costa:
$1 of ADA in the DJED pool and $3 of ADA in SHEN pool, equals 400% reserve ratio
Сommunity:
When you say “restricted to 30 countries” do you mean minting DJED and SHEN is unavailable in 30 countries, or ONLY available in 30 countries? “restricted to” is vague
Yair:
So to be crystal clear, the DJED application is available worldwide for people to mint and burn both, DJED and SHEN, except for 30 countries worldwide.
Lidar:
That is all the time we have today folks. Thank you to everyone for tuning in and thanks to the COTI and IOG teams for making this AMA happen. We will share the AMA recap soon. Have a great day!
Stay COTI!
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