DJED is a stablecoin backed by ADA and SHEN that uses an algorithm to maintain its peg. For every 1 DJED minted, there is 3–7 dollars worth of ADA in the reserve pool. Whenever the price of ADA dips below 1:1, the algorithm automatically mints more DJED to cover the shortfall. SHEN is used as collateral for these shortfalls and covers any excesses in price fluctuations.
Let's say 1 ADA is worth $0.50.
To mint 1 DJED, the user will need to send 2 ADA to the smart contract.
If you want to sell some of your DJED, just send them back to the smart contract address to be burned. In return, you'll get back the same value in ADA coins.
If the price of ADA fluctuates, there might not be enough in the smart contract to pay out to DJED holders. But don't worry—you're covered! They created a "reserve" coin called SHIN that is not pegged to a specific asset and can fluctuate in price. This means that SHIN is not guaranteed to keep its value like DJED is. However, if there isn't enough ADA in the smart contract, it will use SHIN as collateral for extra funds, so DJED holders can be sure to get back their $1.00 peg in the form of ADA. To maintain stability, there are some rules in place:
- If the reserve ratio is below its minimum amount, then SHIN can't be redeemed for ADA. The DJED holders have priority over anyone who wants to redeem their stable coins for ADA.
- The smart contract won't allow the minting of new SHEN tokens once the reserve ratio gets to its maximum amount defined by the smart contract. This prevents the dilution of rewards for SHIN holders and ensures that they stay incentivized to maintain their participation in the system.
- A fee will be collected every time someone mints or burns DJED or SHIN tokens. This is to maintain liquidity, ensuring that there are always enough reserves available for all transactions on the platform. This fee will be paid in ADA and deducted from the initial deposit made by users who wish to convert their coins.
And now that the Cardano network expands further with DJED becoming the official Stablecoin of IOHK's RealFi Start-Up, COTI will become the official DJED issuer!
DJED Algorithmic Stablecoin Explained:
