Cardano DJED Depegging Reawakens Stablecoin Support Controversy

The de-pegging of the crypto-backed Djed stablecoin raises further doubt on non-fiat-backed stablecoins.

Cardano’s newly-launched stablecoin Djed lost its peg to the U.S. dollar earlier this week, highlighting the significance of legal frameworks managing stablecoin reserves.

“overcollateralized” The Djed stablecoin momentarily fell below the $1 threshold to around 97.5 cents. When issuers do not maintain adequate liquid assets to satisfy withdrawals, stablecoins lose their $1 worth.

Stablecoins are digital assets that utilize fiat currency, other cryptocurrencies, or commodities in order to maintain a $1 value.

During times of market turmoil, currencies like Djed attempt to prevent a bank run by over-backing their coins with liquid assets. The present value of the Djed supply in circulation is $1,8 billion, backed by $12 billion worth of ADA.

Djed’s temporary decline might have been triggered by a sudden reduction in collateralization ratio and inadequate liquidity from SHEN holders, given its over-collateralized character. This scenario permits redemptions but prohibits further minting until further collateral is provided.

According to COTI, the collateral for Djed must remain between four and eight times the quantity of Djed minted. To get one Djed, a user must transfer $1 of ADA to a smart contract address. Users that desire to manufacture a reserve currency SHEN must transfer ADA to the same smart contract, so raising the total amount of ADA and the collateralization ratio of Djed. As long as Djed’s collateralization ratio is below 400%, SHEN holders cannot redeem their coins for ADA, nor can they manufacture new SHEN when the ratio hits its maximum value.

By submitting their coins back to the smart contract, Djed owners may exchange them for dollars. The smart contract destroys the Djed and issues 1 ADA.

Layer-1 blockchain technology Recently, COTI and Cardano IOG released Djed on the Cardano mainnet. The inventor of Cardano, Charles Hoskinson, accused the former CEO of FTX, Sam Bankman-Fried, of undermining Cardano via the media. Hoskinson, a co-founder of Cardano, stated in a 2022 vlog that crypto news publication The Block launched a smear campaign against Cardano, while Bankman-Fried’s Alameda Research issued loans to The Block’s former CEO Michael McCaffrey.

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