- There are several key differences between the upcoming stablecoin project Djed and TerraUSD
- Research shows that three-quarters of users (76.5%) would prefer Djed over Emurgo’s centralized USDA stablecoin.
Recent news of the impending launch of an algorithmic stablecoin on Cardano has caused some skeptics to invoke $UST, the dollar-doomed currency hosted by the Terra Network.
Despite the easy comparisons, however, there are many key differences between upcoming stablecoin project Djed and TerraUSD, as the Cardano community itself seems to acknowledge: a CoinTelegraph Twitter poll out of over 12,600 users, 58.6% answered “Yes” to the question “Will you use Cardano’s algorithmic stablecoin?
A separate pollwhich likely enjoyed confirmation bias since it was operated by a member of blockchain-based payment platform COTI, the official issuer of Djed, found that over three-quarters of users (76.5%) would prefer Djed over the USDA stablecoin centralized of Emurgo.
Different strokes: Djed and UST are poles apart
Of course, it is natural to be wary of any algorithmic stablecoin after the implosion of LUNA and UST earlier this year. That crash impacted the entire market, causing an estimated $300 billion in losses and forcing South Korean founder Do Kwon into hiding. But it should also be clarified that not all algorithmic stablecoins are the same.
Unlike UST, which had a fatal symbiotic relationship with its sister token LUNA, as holders could exchange 1 UST for $1 LUNA, Djed can prevent such a death spiral by stopping the burning and minting of coins.
UST, of course, could become under-collateralized and it did: the stablecoin was only as secure as investor confidence in LUNA, an asset whose reputation depended on UST’s integrity. The whole building was a blast waiting to happen, and when demand for UST plummeted, the value of both currencies plummeted like a stone as investors scrambled for exits.
Cardano’s new algorithmic stablecoin, which has been in the works for over a year, is an entirely different proposition. For one, it’s fully supported as well Overcollateralized (as DAI) with a significant reserve ratio of up to 8X. In fact, the smart contract scheduled to maintain the Djed system has sufficient reserves to buy back all outstanding stablecoins worth USD 1 worth of the backing asset, thus maintaining the dollar peg, with plenty of cash left over.
Furthermore, while LUNA and UST had a precarious circular dependency, Djed is supported by a considerable reserve of independent resources (namely $ADA) with their own intrinsic utility. The native token of the Cardano blockchain is used by developers to power smart contracts, stake pool operators, cryptocurrency investors and others. It is a long-standing top 10 cryptocurrency by market capitalization (#9 at the time of writing).
In Terra’s case, the network was shut down and its BTC reserves manually managed in a desperate attempt to save the UST peg. This drastic action saw the BTC reserves of 80,000 drained to just 313, an overflowing bathtub of Bitcoin that had been pulled the plug. Djed, on the other hand, is fully algorithmic and self-contained, which means that its operation is not based on decisions made by a centralized committee.
The other key difference between Djed and UST that is worth pointing out relates to their respective revenue models. In the case of the latter, holders made money from seigniorage and thus had incentives to encourage projects like Anchor, which artificially kept stablecoins out of circulation by promising future returns. Holders of Djed $Shen’s reserve coin, meanwhile, earn through mint/burn fees and thus have an incentive to encourage stablecoins to stay around – and to be burned and minted frequently through the contract.
Perhaps these fundamental points of difference fueled the optimism of the several thousand respondents who gave Djed a firm thumbs-up. The test stablecoin’s combination of on-chain reserves, overcollateralisation, and autonomy — not to mention a recent Vasil hard fork compatibility and audit — bodes well ahead of its launch next month.
Of course, the best way for Djed to prove his worth will be in the wild, and the powers that be at COTI and Cardano are hoping his success helps restore faith in algorithmic stablecoins backed by post-Moon cryptocurrencies.