- There are many fundamental differences between the upcoming Djed stablecoin project and TerraUSD
- The survey shows that three quarters of users (76.5%) would prefer Djedo over the centralized USDA stablecoin from Emurgo.
Recent news of the imminent launch of an algorithmic stablecoin on Cardano has prompted some skeptics to call out $UST, the doomed dollar-pegged currency hosted by the Terra network.
However, despite the easy comparisons, there are many fundamental differences between the upcoming Djed stablecoin project and TerraUSD, which the Cardano community itself seems to acknowledge: CoinTelegraph Twitter poll of over 12,600 users saw 58.6% answer “Yes” to the question “Would you use Cardan’s algorithmic stablecoin?
Separated pollwhich likely enjoyed confirmation bias since it was run by a member of the blockchain-based payment platform COTI, the official issuer of Djed, found that more than three-quarters of users (76.5%) would prefer Djed over the centralized USDA stablecoin from Emurgo .
Different Moves: Grandpa and UST are different genders
Of course, it’s only natural to be cautious with any algorithmic stablecoin after the implosion of LUNA and UST earlier this year. That crash affected the entire market, causing an estimated loss of $300 billion and forcing South Korean founder Do Kwon into hiding. But it must also be clarified that not all algorithmic stablecoins are the same.
Unlike UST, which had a fatal symbiotic relationship with its sister token LUNA, where holders could exchange 1 UST for $1 LUNA, Grandfather can prevent a similar death spiral by blocking the burning and minting of coins.
UST, of course, could and did become undercollateralized: the stablecoin was only as safe as investors’ faith in LUNA, an asset whose reputation depended on the integrity of UST. The whole edifice was an explosion waiting to happen, and when demand for the UST fell, the value of both currencies dropped like a rock as investors rushed for the exits.
Cardano’s new algorithmic stablecoin, which has been in the works for over a year, is a completely different proposition. First of all, it has full support and overcollateralized (as DAI) with a significant reserve ratio of up to 8X. Indeed, the smart contract programmed to maintain the Grandfather system has enough reserves to buy back all stablecoins in circulation for $1 worth of background assets, thus maintaining the dollar peg – with plenty of money left over.
Moreover, while LUNA and UST had an uncertain circular dependency, Grandfather was backed by a hefty reserve of independent funds (ie $ADA) with its own inherent utility. The Cardano blockchain’s native token is used by developers to run smart contracts, stake pool operators, cryptocurrency investors, and others. It is a long-established top 10 cryptocurrency by market capitalization (#9 at time of writing).
In the case of Terra, the network was halted and its BTC reserves were manually managed in a desperate attempt to save the UST pegged value. This drastic action resulted in BTC reserves of 80,000 being drained to just 313, an overflowing Bitcoin tub with the cap pulled. Grandfather, on the other hand, is completely algorithmic and autonomous, meaning that his work does not rely on decisions made by a centralized board.
Another key difference between Djed and UST that is worth highlighting concerns their revenue models. In the case of the latter, the owners made money from the seigniorage and were thus motivated to encourage projects like Anchor, which artificially kept stablecoins out of circulation while promising future returns. Holders of Grandfather’s reserve coin $Shen, meanwhile, earn through mint/burn fees and thus have an incentive to encourage stablecoins to remain in circulation – and are often burned and forged through contracts.
Perhaps these fundamental points of divergence fueled the optimism of several thousand respondents who strongly supported Djedo. The combination of proof-of-chain reserves, excessive collateralization, and stablecoin autonomy—not to mention the recent overhaul and compatibility with the Vasil hard fork—bodes well for its launch next month.
Of course, the best way for Grandfather to prove his worth will be in the wild, and the powers that be at COTI and Cardan will be hoping that his success will help restore faith in crypto-backed algorithmic stablecoins after Luna.