DJED and Why its Game Changing

In today's topic, we're going to be talking about a recently released paper by IOHK on stablecoins, and try and give you a quick understanding of what it's all about. So let's start with a bit of background. What is the problem that stablecoins are trying to solve? It's fairly simple. It's the volatility in the crypto market. If you've been in the space for any length of time, you know the prices can fluctuate dramatically from minute to minute. This doesn't create a good environment for actually using cryptocurrencies as a traditional form of exchanging money for goods and services. Because in a highly volatile market, the dollar value you just paid could be worth 25% less just moments after the business owner accepts it.

One must in turn has to pay their suppliers, and this drop is going to hammer into their margins. Worst case, they might not even be able to have the funds to do so. This is just one of the many examples where volatility in the coin price makes it impossible to adopt crypto in a traditional manner. Enter stablecoins. A stablecoin is a type of cryptocurrency whose price follows a target price. The theory goes that because the value is linked or pegDJED to something else, just like the dollar used to be pegDJED to real gold many years ago, its price is going to be much less volatile. Instead, it won't move or at least will fluctuate in a much narrower range. Now there are a few different approaches to stablecoins, but the most commonly known approach is that a stablecoin is backed one-to-one by its fiat counterpart. In the case of TetherUSD, the biggest stablecoin currently in the space, the idea behind it is that one US dollar is kept in a bank for every one USDT coin, and because of this, the price can stay at a consistent value, because anyone can trade it in at any time for the widely accepted US dollar.

However, we don't know for certain that the company Tether actually has the money in those bank accounts that they claim. Tether is what's known as a centralized stablecoin. One entity controls the system, and because it's a private business, everything isn't fully transparent. It and other centralized stablecoins will never be as transparent as their decentralized counterparts. And so, this introduces the idea of a decentralized algorithmic stablecoin. So now that you know a bit more about stablecoins, let's actually go through the paper itself and I'll explain to you what's being said and how DJED works.

Starting with the opening of the paper and this is basically what I just covered at the start of this video. It's a bit of history on stablecoins. Next comes part two, minimal DJED. Now it's designed to be simple. The more you try and make a coin complex, the more errors that can occur. Put even simpler, it's an automated mechanism that is buying assets through smart contracts. And the smart contract is always willing to buy at 99 cents and always willing to sell at $1.01. And those fees could be higher or lower. So not only is DJED intentionally simple, it's also provably stable, which leads us into section 3 of the paper. Unlike most stablecoins, which don't go through formal verification processes, DJED has undergone this process and has provable theorems that have been mathematically tested.

Let's start with theorems 1 and 2. This is the peg maintenance for both upper bound and lower bound, meaning the price will never go above $1.01 and never below $0.99. The third theorem is peg robustness during market crashes, and this basically says, based on the reserve ratio, how much of a market crash can occur without losing the peg. For example, if the ratio was 3, it could withstand a market crash of 66% without losing its peg. Now you might be wondering more about where these reserve coins come from, and I'll explain that more in a minute, but first, let's continue with the theorems. Theorem 4 is no insolvency, which means the equity of our smart contract can never go negative.

It can never go bankrupt. That means it'll never be the case that if you have a stablecoin, you can't get your money back. However, it might only be partial if the peg is lost and the market crashes, you might lose part of it. Which brings us to Theorem 5, which is no bank runs for stable coins. And what this means is that if you and I both have stable coins and the market crashes and we lose the peg, you don't have to rush to the exchange to cash out first before everyone else. Payouts are done uniformly in a fair way so that everyone gets their money and the contract will adjust to pay everyone equally.

So now let's talk about the reserve and reserve coins. When a user interacts with a smart contract, they can also buy and sell reserve coins. And what reserve coins do is they provide extra reserves for the coin. Picture this. At the very start of this smart contract, there are no stablecoins purchased yet and no reserve coins. One person purchases one stablecoin and deposits one ADA. But with only one ADA in the reserve, if the price of ADA were to drop significantly, the ratio of the reserve coin to stable coins would be below 1 to 1, and so the peg would be lost. This is why it's important to keep the ratio well above 1 so that the peg is always maintained.

And where do we get this extra money for the reserve? We get it from selling reserve coins to the users. So why would you be interested in buying reserve coins? The smart contract is like a bank. As the bank grows by people buying and selling from it, the fees go into the reserve. And as the reserve grows, so does the equity and the price of reserve coins. Now that we know what reserve coins are, we can take a look at Theorem 6, which basically states that as long as the exchange rate remains consistent and stable coins and reserve coins never hit zero, then the smart contract reserves will always increase and never decrease in the stated conditions. Now that we've covered all the formal verification that this paper has undergone, let's take a look at implementation. Specifically, the example of this protocol already running on the Ergo blockchain with SigmaUSD. And this protocol that I'm speaking of now will also be implemented into Plutus and Solidity-based blockchains so that other blockchains can issue stablecoins backed by their native currency. And this brings us to the extended model or extended DJED.

Currently, the minimum DJED model is what the Ergo stablecoin SigmaUSD is using, which is the first ever implementation of a stablecoin in a UTXO-based blockchain. However, in the extended DJED model, the fees become dynamic compared to the fixed fees of the minimal version. And finally, that brings us to model checking DJED's stability properties. Not only have the authors of the papers proved those theorems by hand, but they were also checking those theorems using automated tools. They used not one, but two formal verification techniques. The first being model checking which is fully automated and the other being Isabel which is an interactive theorem prover that makes you have to interact with it to prove your theorem is correct. To summarize all this the paper represents a formally verified crypto backed stablecoin which is the first of its kind and that was built with simplicity as a feature. At the Cardano summit the announcement was made that partners Coti would be issuing the Jed stablecoin on the Cardano blockchain in the not-too-distant future.

So for everyone that's been waiting for a Cardano stablecoin, it's almost here.

Update...

After over a year of hard work, the much-anticipated Djed stablecoin has been unleashed on the Cardano blockchain, thanks to the collaboration between Coti and Cardano's core developer Input Output.

What makes Djed so special? Well, for starters, it's a stablecoin that's backed by a surplus of Cardano's native cryptocurrency ADA, and is designed to maintain its value close to the almighty US dollar.

Djed is the answer to the prayers of anyone who's tired of the wild swings of traditional cryptocurrencies. By over-collateralizing each stablecoin with 400-800% of Cardano's native asset ADA, Djed provides a reliable and secure alternative to the unpredictable crypto market. And with the added layer of protection from SHEN, you can rest easy knowing that your investment is as safe as it can be.

But what sets Djed apart from the rest of the stablecoin pack is its flexibility. Its minting and burning mechanism is similar to other algorithmic stablecoins, which allows for smooth and seamless adjustments to supply and demand. This ensures that Djed remains stable and reliable, no matter how volatile the market may be.

This stablecoin is an absolute game-changer in the world of decentralized finance (DeFi), providing a secure, stable, and flexible tool for investors and DeFi protocols alike. With its strong backing, flexible supply mechanism, and steadfast stability, Djed is poised to revolutionize the world of blockchain-based finance on the Cardano blockchain.