The model for maintaining the peg of Cardano’s stablecoin Djed has been released, featuring a mint and burn mechanism involving DJED and SHEN.
Cardano’s soon-to-be-launched stablecoin Djed will maintain its peg through an algorithmic model which features alternating mint and burn exercises to maintain the stablecoin’s collateral ratio with the Shen token – Djed’s official reserve coin.
COTI introduced SHEN sometime in February as the reserve coin leveraged to maintain DJED’s peg to the USD. DJED will preserve its peg through a collateral ratio with SHEN that ranges between 400% and 800%, as recently disclosed by Cardano Daily – an unofficial Twitter handle dedicated to Cardano-focused updates. This collateral ratio will be maintained through alternating mint and burn exercises involving DJED and SHEN.
$DJED MINTING AND BURNING RULES $DJED’s @DjedStablecoin algorithm is based on a collateral ratio in the range of 400%-800% for $DJED and $SHEN. Let’s find out the rules behind its operation. #cardano #rules #minting #burning pic.twitter.com/BY98dEEf0n
— Cardano Daily (@cardano_daily) November 24, 2022
When the reserve ratio falls below 400%, the smart contract will forbid the minting of any new DJED tokens while prohibiting the burning of already-minted SHEN tokens. The minting of SHEN tokens will remain unaffected as the network seeks to increase the supply to raise the reserve ratio. Additionally, DJED holders will be permitted to burn their DJED tokens which should also increase the reserve ratio.
Notwithstanding, when the reserve ratio is between 400% and 800%, minting and burning of DJED and SHEN will be permitted on the network, as the collateral ratio would, at that point, be within an acceptable range.
However, when the collateral ratio surges above 800%, the smart contract will suspend the minting of new SHEN tokens while simultaneously allowing the burning of already-minted SHEN. This should help to decrease the reserve ratio. Users can also burn and mint DJED at this point.
Disclosing how they plan to maintain the stablecoin’s peg to the dollar is an important step for COTI to gain investors’ trust, especially considering the de-pegging of Terra’s UST, which triggered a widespread contagion and a loss of billions of dollars in investor funds.
Following UST’s collapse, DEI – another algorithmic stablecoin from Deus Finance – also lost its peg to the dollar in mid-May. The asset continues to trade below its peg, at a value of 0.2 against the dollar. These cases have tested investors’ confidence in stablecoins as assets that can protect them from the volatility of other cryptocurrencies. COTI seeks to reassure investors of its capabilities to maintain the peg with DJED.
Recall that COTI revealed that DJED will be launched on the mainnet in January of 2023, as recently reported by The Crypto Basic. DJED has been picking up numerous partnerships with several FinTech entities on its path to an eventual launch.