On the 31st of January, 2023, COTI successfully launched DJED, an overcollateralized stablecoin, to mainnet. To better explain the mechanism of DJED, we’ve collated a list of frequently asked questions from the community and answered them in simple terms.
Section 1- General Questions
What is a stablecoin?
A stablecoin is a type of cryptocurrency that aims to track another asset. Most commonly, people associate the value of stablecoins to be reliant on a fiat currency, such as the U.S. dollar, but their value can also be linked to precious metals or other cryptocurrencies.
There are 3 types of stablecoins:
Fiat Collateralized Stablecoins- They maintain a fiat currency reserve such as the US Dollar as collateral to ensure the stablecoin’s value.
Crypto Collateralized Stablecoins — They are backed by other cryptocurrencies.
Algorithmic Stablecoins- Stablecoins whose reserve is primarily controlled by an algorithm.
$DJED is an over-collateralized stablecoin that is backed by crypto.
What are algorithmic stablecoins?
Algorithmic stablecoins are designed to achieve price stability as well as balance the circulating supply of an asset by being pegged to a reserve asset such as the U.S. dollar for example, gold or any foreign currency. In other words, an algorithmic stablecoin actually uses an algorithm underneath, which can issue more coins when its price increases and buy them off the market when the price falls. The rules for such actions by the algorithm are available in smart contracts in an embedded form.
Crypto-collateralized stablecoins are backed by other cryptocurrencies and can be undercollateralized while over-collateralized stablecoins hold in reserves cryptocurrency value that exceeds the value of the stablecoins that were issued.
What is DJED’s stability mechanism?
DJED is an overcollateralized stablecoin that uses exogenous collateral (ADA) to ensure stability. The protocol is backed by 400–800% overcollateralization and is guaranteed by its reserve coin, SHEN. The stability of DJED is based on overcollateralization, which eliminates the need for trust in a governance token as seen in algorithmic stablecoins. The platform is also fully decentralized and community-driven, allowing for open-source development and community involvement in minting and burning DJED and SHEN.
How does the reserve contract work?
Reserve contracts are built from pools of both ADA equity and liabilities.
To mint DJED, the users need to send ADA to the contract, which will then go to the liabilities pool, following which the contract will send them back DJED.
To burn DJED, the users need to send DJED to the contract, which will burn them and send back ADA from the liabilities pool to them.
To mint SHEN, the users need to send ADA to the contract, which will go to the equity pool, and the contract will send them back SHEN.
To burn SHEN, the users need to send SHEN to the contract, which will burn it and send back ADA from the equity pool to them.
There are two ways in which the reserve can grow: Fees are paid to the reserve by the users for every interaction they have with the contract, and when the ADA value increases.
The equity is simply the reserves minus the liabilities.
This means that for every 1 ADA in the liabilities pool, there are 3–7 ADA in the equity pool in order to keep the ratio between 400%-800%.
How does the reserve ratio affect users’ ability to mint/burn?
If a reserve ratio falls outside the 400% — 800% range, certain mint/burn operations are prohibited as you can see in the following image:
What happens if the reserve ratio is below 400%
In this case, the smart contract will prohibit minting any new Djed. In addition, SHEN holders won’t be able to burn their SHEN at any time while the reserve ratio is below 400%.
- At that point, only 2 actions are allowed:
1. DJED holders can burn their DJED and redeem it for ADA, which increases the reserve ratio.
2. SHEN holders can mint additional SHEN in order to increase the reserve ratio.
What happens if the reserve ratio is above 800%?
In this case, the smart contract will prohibit minting new SHEN. Burning SHEN is allowed and will decrease the reserve ratio.
Why was the 400% ratio chosen for stabilizing DJED?
This ratio was determined by examining the maximum monthly decrease of ADA’s price at all times, which was approximately 66% at the time of the research, which led to the conclusion that the overcollateralization of DJED by around 300%, will help to have enough reserve in case it happened again.
Though a reserve ratio of 300% has proven to be sufficient to cover such a decrease in ADA’s price, in order to keep the platform prudent and ensure stability even in more negative scenarios, it was decided to set the minimal reserve ratio at 400% to provide additional safety to DJED holders, so even in the case where ADA’s price decreases by 66.28%, there will be enough reserve in the contract, and DJED will still remain overcollateralized.
Which fees go to SHEN holders and which fees go to COTI’s Treasury?
DJED’s and SHEN’s mint and burn fees are charged in ADA and sent to the equity pool of the protocol. SHEN holders get a share of this pool as an incentive for their participation in maintaining the DJED peg ratio.
In addition, users are also subject to operating fees that are paid in ADA and deducted from the initial deposit and operational costs. These fees are converted into $COTI and streamlined into the COTI Treasury to be distributed as rewards to COTI users.
Where are DJED and SHEN listed?
DEX — Minswap, Muesliswap, Wingriders, Sundaeswap
CEX — Bitrue
Is DJED going to be usable on US exchanges?
Several countries, including the US, do not have access to DJED’s platform (djed.xyz).
It will be usable if DJED is listed on a DEX or a CEX that is available in the US.
How can the public tell the amount of ADA that has been locked to mint or burn DJED and SHEN? Can those smart contracts be verified by any 3rd party?
It is already visible through the platform and on-chain.
What makes DJED different from $UST?
Overcollateralization (up to 8X). 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.
When it comes to UST, users could have always redeem LUNA for UST, and vice versa. Therefore, UST can be under collateralized. Every UST in circulation reduces the circulation of LUNA.
Decentralized: Djed is fully 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.
Backed by independent assets: While LUNA and UST had a circular dependency, DJED is backed by independent assets (ADA) with their own utility that is independent of DJED.
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, SHEN (Djed’s reserve coin) holders earn 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.
Why is Djed referred to as an overcollateralized stablecoin, and not an algorithmic stablecoin?
Collateral — Djed uses exogenous collateral (ADA). A typical algorithmic stablecoin that uses endogenous collateral, such as: FRAX, Synthetix and UST.
Collateralization — DJED is overcollateralized by 400% — 800%. Algorithmic stablecoins are usually partially collateralized or undercollateralized.
Centralization vs Decentralization — DJED is fully decentralized, and doesn’t require centralized servers, nor does it involve off-chain partners like banks for transactions. This eliminates censorship risks.
Stability — The stability of DJED is based on overcollateralization. Algorithmic stablecoins usually require trust in a governance token.
Capital Efficiency — Fiat backed stablecoins’ scale factor is 1. This means that if you deposit $1 as collateral, you receive $1 of stablecoin.
Algorithmic stablecoins have a higher scale factor, they have collateral backing on top of redeemable reserves, however, they are much riskier since they require large scale trust in the stability model, which also depends on the governance token.
Normally, overcollateralized stablecoins are less capital efficient, but DJED is different, it fixes that flaw with the addition of the SHEN model, which takes care of the overcollateralization, making DJED capital efficient.
Reimbursement — DJED is always redeemable for its collateral ($ADA). $1 worth of $ADA, always equals $1 worth of DJED. Algorithmic stablecoins depend on the value of the governance token.
How can Djed be accessed?
A. Through the user interface, djed.xyz
B. DJED is open source and users can interact with the contract.
Section 2- SHEN Related Questions:
What is the SHEN reserve coin?
SHEN is the reserve coin of DJED. SHEN’s main role is to keep a healthy reserve ratio in the contract and incentivize users and investors to provide stability to the contract by bringing ADA to the contract. In order to ensure there’s enough ADA in the pool, DJED is over-collateralized by 400%-800%.
DJED holders have the priority to redeem their DJED into ADA. As long as the Reserve ratio is below 400%, SHEN holders won’t be able to redeem their SHEN for ADA, since they cover shortfalls and guarantee the collateralization rate.
Similarly, the smart contract will prevent the purchase of SHEN once a reserve ratio reaches 800% in order to prevent dilution for the SHEN holders
By trading SHEN, users can contribute to the stability of DJED by providing liquidity to keep the peg ratio at a sufficient level. Having a reserve coin is crucial for the success of the stablecoin.
How is the price of SHEN calculated? Is there a minimum price for SHEN?
SHEN’s price is calculated as follows:
Equity divided by the number of SHEN tokens in circulation.
SHEN’s minimal price is 1 ADA, and SHEN’s initial price is 1 ADA.
Is SHEN also used as collateral in the reserve?
No, there is no SHEN reserve, only ADA.
How are the transaction fees paid to SHEN holders and when? Do they need to burn their SHEN in order to get their rewards?
Fees are sent to the contract’s reserve, hence increasing the contract’s equity. In order to get their rewards, SHEN holders need to burn their SHEN.
To protect DJED holders, SHEN holders are not allowed to burn SHEN when the reserve ratio is below the minimum threshold of 400%.
What are the advantages of holding SHEN?
- SHEN holders receive all DJED and SHEN mint/burn fees.
- Delegation rewards: Djed 1.1.1 includes delegation rewards for SHEN holders starting from day one!
- Long ADA: SHEN’s price is correlated to ADA price with an upside multiplier.
- Farming rewards: provide SHEN liquidity to DEXs to farm rewards and receive their tokens as rewards, the APR can vary and depends on the DEX or platform.
- SHEN holders can be limited based on a maximum reserve ratio of 800% (no SHEN minting when the reserve ratio is above 800%).
Is the reserve of SHEN large enough to absorb ADA volatility?
Looking at historical prices of ADA, among other research, to determine the reserved ratio — the 400%–800% ratio gives a large enough cushion to absorb ADA volatility.
What are Djed’s future plans?
Djed has several planned versions including
1.1.1 — Djed 1.1.1 includes Vasil hard fork compatibility.
The code has been audited.
Djed 1.1.1 includes delegation rewards for SHEN holders starting from day one!
1.2 — This version will have Vasil hard fork utilization such as higher scalability. Plutus V2 will also be used in Djed 1.2
1.3 — Extended Djed — which will have dynamic fees and prices. It will also include an extensive delegating support.
We are planning on adding other coins as collateral, in addition to ADA. We envision wrapped BTC, and wrapped ETH, all on Cardano, to be used to mint DJED. We are also planning to build Djed Pay — An App and crypto gateway that allows merchants, e-commerce platforms, and non-profit organizations to receive DJED as a form of payment.
For all of our updates and to join the conversation, be sure to check out our channels:
Technical whitepaper: https://coti.io/files/COTI-technical-whitepaper.pdf