Launched earlier this week, Cardano’s new stablecoin soon lost its peg peg. The fact that it uses an algorithmic mechanism like the LUNA raises concerns.
Stablecoin Djed spooked by LUNA-like fate
Djed, the stablecoin developed by the Layer-1 protocol COTI and Cardano (ADA) teams, was launched on January 31, 2023. Since the collapse of the TerraUSD (UST) algorithmic stablecoin in May 2022, many users in the crypto space have been harshly critical of the stablecoin type in question. The algorithmic stablecoin market has melted 10x since its peak before the Terra crash.
However, the collapse did not prevent Cardano developers from launching the ecosystem’s overcollateralized stablecoin on January 31. Launched on Cardano, Djed (DJED) is backed by the network’s native cryptocurrency ADA, as is LUNA and UST. The fact that the dollar lost its stability on February 2, accompanied by intensified sales, is frightening that what happened in the Terra ecosystem could repeat itself.
Djed’s assurance was his over-collateralization
Stablecoins are cryptocurrencies that use fiat, other cryptocurrencies, or commodities to maintain their peg to $1. Djed’s circulating supply is currently valued at $1.8 billion and is backed by $12 billion in ADA. Given its over-collateralized nature, Djed’s short-term decline may have been due to the sharp decline in the collateralization ratio coupled with insufficient liquidity from SHEN investors.
SHEN token is one of Djed’s reserve cryptocurrencies. Interested traders can collateral SHEN into their liquidity pool in exchange for helping Djed maintain its stability, then earning a portion of the trading pool. What happened right now was the effect of insufficient liquidity from SHEN investors on Djed. For more details on djed’s mechanism, you can check the white paper.
9. Please read $Djed’s white paper to learn more: https://t.co/n6A1mdJxaR
Stay $COTI !$Djed $ADA @COTInetwork @IOHK_Charles @CardanoStiftung @InputOutputHK
— Shahaf Bar-Geffen (@shahafbg) May 10, 2022
LUNA collapse makes stablecoins first item in crypto regulations
Hong Kong recently announced that it will ban algorithmic stablecoins by 2024 at the latest. Also, upcoming legislation by the European Union mandates auditable financial reserves held in banks for fiat-backed stablecoins. A US stablecoin bill proposed by the House Financial Services Committee aims to introduce a moratorium on non-fiat-backed stablecoins, pending the findings of the Treasury Department report.
Stablecoin companies have committed to publishing regular reports
Recent stablecoin booms have increased regulatory scrutiny. Since stablecoin issuers are not regulated like banks, regulation surrounding minimum capital reserves is insufficient. In addition, no accounting standard regulates the scope of reserve audits. Central publishers Tether and Circle have instead committed to issuing certification reports to provide a window into their backup compositions.
The Paxos Trust, which issues Pax dollars and Binance-branded BUSD stablecoins, issues attestations detailing its reserves at the end of each month. Tether recently reduced some of its reserves held in commercial papers for short-term government treasury bills.
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