Djed: An Algorithmic Stablecoin on Cardano

Djed is the first stablecoin to use formal verification to remove price volatility. Cryptocurrency volatility is a large deterrent to mass adoption. When a crypto asset can drop or rise a significant amount. It scares businesses from paying or receiving payments with crypto because their payments can fluctuate greatly in minutes. This makes it near impossible to use cryptocurrency as a unit of exchange in our daily lives.

A stablecoin is a cryptocurrency that is pegged to a more stable fiat currency like US dollars or the Euro. Stable coins can also be pegged to commodities like Gold, Silver or other crypto assets. Stable coins main goal is to eliminate volatility so everyday business can take place in a decentralized, transparent, immutable and secure way.

Djed is another huge part of Cardano’s vision of “Realfi”. Some other stable coins in the industry lack transparency of their issuance and the liquidity of their reserves. Tether( Crypto’s most used stablecoin ) claims that their stablecoin is backed 1 to 1 with dollars in a bank. Well, Djed needs no bank. Djed is mathematically verifiable, we know exactly how the protocol will behave. Djed is based on an algorithmic design, meaning a smart contract is in charge of market buying or selling A Djed to maintain the stable value. This stablecoin is run in a transparent way on the blockchain, where anybody can verify what’s happening.

Djed essentially acts as a decentralized bank and uses formal methods that can be verified. It works by keeping a reserve of base coins, and mint and burning stablecoins and reserve coins. A smart contract maintains the peg to a stable asset like $USD by buying and selling stablecoins, using the reserve, and charging fees which accumulate in the reserve.

Djed Benefits From Formal Verification

  • Peg upper and lower bound maintenance:

The price will not go above or below the set price. For example, A Djed smart contract pegged to USD will automatically market sell if the price $1.01, it’ll also market buy if the price falls to $0.99 working to maintain a stable price at $1.00. 

  • Peg is robust during market crashes:

Up to a set limit that depends on the reserve ratio, the peg is maintained even when the base coin price falls quickly

  • No insolvency:

There no bank involved in Djed, therefore there cant be insolvency 

  • No centralized banking institution:

If a Djed loses its peg users aren’t incentives to race to a bank. Instead a smart contract fairly pays out users looking to trade back to their base coin.

  • Monotonically increasing equity per reserve coin:

Under certain conditions reserve coins are guaranteed to increase and holders of reserve coins profit.

  • No reserve draining:

Under certain conditions it would be impossible for bad actors to steal reserve coins from the smart contract.

  • Bounded dilution:

There is a limit to reserve coin holders and their profit can be diluted due to the issuance of new reserve coins.

Coti and Its Role in Djed

At the Cardano summit in September Charles Hoskinson and Coti CEO Shahaf Bar-Geffen announced that Coti would be the official Djed issuer. Coti will write all Djed contracts and run the front end interacting with funds, enterprises or anyone that wishes to mint reserve coins and stablecoins.  For this service Coti collects fees on both minting and burning stable and reserve coins. Djed is more than a stablecoin, it’s also designed to be the main coin for the Cardano network to pay all its fees. Djed is stable, it makes more sense to pay gas fees with Djed instead of A volatile asset. 

Shahaf said in a interview with IOHK: 

 ”I believe that adding the Djed stablecoin to the Cardano blockchain will significantly improve how transactions are settled on the platform” 

He continues:

“ The stablecoin has matured tremendously over the past few years. Blockchain participants are using stablecoins to engage in everyday transactions because they allow monetary to be exchanged in a seamless manner, regardless of the sender and receiver’s location”

Coti has predicted that Djed accumulated fees will be sustainable as Cardano market cap continues to grow. There is already draft implications of Minimal Djed in Plutus. One of the Coti’s team large goal is dedicated special efforts to stablecoins, they believe:

“ Stablecoins are a killer app that be massively adopted for payments and fees “

Djed formal verification has been proved on an automated theorem prover called Isabelle. This platform allows users to prove mathematical theorems in formal languages. Also Djed has been implemented in the ERGO blockchain as SigUSD. You can read the Djed white paper here or watch the Cardano summit announcement. 

Don’t forget to stake your ADA!

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