Djed Keeps Its 1:1 peg to USD Throughout the Market Turbulence — How is Djed Different From Other Algorithmic Stablecoins?
Originally posted by Shahaf Bar-Geffen via his Twitter account
The recent volatility in the market is a battle test for the robustness of algorithmic stablecoins.
As of Tuesday, May 10th, $UST lost its $1 peg for the second time in three days, falling as low as $0.65 according to CoinMarketCap, while at the same time, $Djed kept its 1:1 peg to USD.
To better understand how the Djed mechanism works, watch the video below:
How did $Djed manage to keep its peg? The short answer is that $Djed is very different from any other algorithmic stablecoin in the way it’s built. $Djed has an algorithmic mechanism that is unique and that is specifically designed to protect its value in different scenarios.
The long answer is as follows:
$Djed’s algorithm is based on a collateral ratio in the range of 400%-800% for $Djed and $Shen. ADA prices fluctuations are offset by Shen, covering shortfalls and guaranteeing the collateralization rate.
The ADA reserve pool is not managed by market makers, but by users who mint the $Shen reserve coin and add ADA to the pool. This provides a decentralized aspect to the $Djed mechanism. $Shen holders are incentivized to provide liquidity through fees.
As $Djed can be over collateralized (up to 8x), the risk of $Djed being unpegged decreases. This means that for every 1 $Djed minted, there are 3–7 dollars worth of $ADA in the reserve pool. If the ratio falls below 400%, users will not be able to mint $Djed, and $Shen holders won’t be able to burn their $Shen. So in the event of a market dip there is a security blanket for $Djed holders that ensures its sustainability. The minting of new $Shen is also supervised in order to maintain the balances stabilized, and ensure there will always be enough ADA in the pool to provide a dollar equivalent value to the $Djed when burning it.
Please read $Djed’s white paper to learn more.
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Technical whitepaper: https://coti.io/files/COTI-technical-whitepaper.pdf