The model, which includes a mint and burn mechanism using DJED and SHEN, has been made available for preserving the peg of Cardano’s stablecoin Djed.
Djed, a stablecoin that Cardano will shortly introduce, will keep its peg through an algorithmic mechanism that alternates minting and burning operations to preserve the stablecoin’s collateral ratio with the Shen token, which serves as Djed’s official reserve coin.
To keep DJED’s peg to the USD, COTI introduced SHEN as the reserve coin in February.
Cardano Daily, an unauthorized Twitter account devoted to Cardano-focused updates, recently revealed that DJED would maintain its peg through a collateral ratio with SHEN that varies between 400% and 800%.
DJED and SHEN will alternate between mint and burn exercises to maintain this collateral ratio.
How the Model Works
The smart contract will prevent the creation of any new DJED tokens and disallow the burning of already-issued SHEN tokens when the reserve ratio drops below 400%.
The network’s efforts to boost supply to raise the reserve ratio will not impact the creation of SHEN tokens.
Additionally, holders of DJED tokens will be able to burn them, which should help raise the reserve ratio.
However, DJED and SHEN minting and burning will be allowed on the network when the reserve ratio is between 400% and 800% because the collateral ratio will be within a reasonable range.
The smart contract will, however, halt the creation of new SHEN coins and permit the burning of existing SHEN when the collateral ratio rises beyond 800%.
This should aid in lowering the reserve ratio. At this stage, users can mint and burn DJED.
COTI Seeks to Reassure Investors that DJED can Maintain the Peg
To win investors’ trust, COTI must explain how they intend to keep the stablecoin’s peg to the dollar.
This is especially crucial in light of Terra’s UST’s recent de-pegging, which resulted in a worldwide contagion and the loss of billions of dollars in investor assets.
In mid-May, DEI, another algorithmic stablecoin from Deus Finance, lost its peg to the dollar following the collapse of UST.
The asset is now trading at a value of 0.2 versus the dollar, below its fixed price.
These cases have tested investors’ faith in stablecoins as assets that can shield them from the volatility of other cryptocurrencies. COTI is reassuring investors that DJED is capable of maintaining the peg.
Remember that DJED will be introduced to the mainnet in January 2023, according to a recent report from COTI.
On its way to a potential launch, DJED has been forming multiple agreements with various FinTech organizations.