Shahaf Bar-Geffen, the CEO of COTI, said Djed is an overcollateralized stablecoin and not an algorithmic stablecoin.
During COTI’s first update of 2023, Bar-Geffen took the opportunity to make clear that the soon-to-be-launched Djed stablecoin is to be referred to as an overcollateralized stablecoin, despite it operating on an algorithmic design.
How does Djed work?
Algorithmic stablecoins use an automated or sometimes incentivized method to achieve price stability.
In instances of the price being above the peg price, tokens are minted to increase circulation and reduce the price. While pricing below the peg price requires burning tokens to reduce circulation.
Djed is backed by Cardano’s ADA token, meaning users wanting the stablecoin send ADA to the smart contract and receive minted Djed in return. These transactions build up the value and holdings in the Djed pool.
By contrast, selling Djed requires users to send the stablecoin back to the smart contract, which then burns the token and returns the amount of ADA equivalent on a $1:$1 basis.
To accommodate instances of ADA price fluctuation and the possibility of insufficient ADA in the smart contract to pay Djed sellers, COTI has incorporated the Shen reserve coin, which acts as liquidity to maintain the peg ratio.
Overcollateralized stablecoins have advantages, says Bar-Geffen
Despite a general belief that differences between overcollateralized and algorithmic stablecoins are a matter of semantics, Bar-Geffen thinks it is crucial to categorize Djed as the former.
The COTI CEO said Djed obviously uses an algorithm, but using an algorithm to maintain price stability is not necessarily a reason to categorize it as such.
In listing the differences between overcollateralized and algorithmic stablecoins, Bar-Geffen said Djed uses external collateral in ADA, which is unconnected to the protocol. In comparison, algorithmic stablecoins use internal collateral.
Four times the amount of ADA overcollateralizes Djed at a minimum. In contrast, algorithmic stablecoins tend to be partially collateralized. Likewise, Djed is always redeemable for ADA, while algorithmic stablecoin redemption sometimes “depends on the value of the governance token.”
“Djed’s stability depends on overcollateralization and not on the trust in the governance token.”
Summing up, Bar-Geffen said Djed does not suffer the centralization and regulatory risk of fiat-backed stablecoins. Similarly, Djed is advantageous over algorithmic models in that no trust in the algorithmic model or governance token price is required.