Are algorithmic stablecoins going to fail regardless the different models? (Djed-Shen)

In light of what happened with Terra Luna and UST, there are major concerns with algorithmic stablecoins. Although the upcoming Djed stablecoin on Cardano is a way different type of stablecoin, it is still an algorithmic stablecoin.

The Djed Stablecoin is an algorithmic protocol that is pegged to a target price ($1USD). It maintains this peg by having a reserve token (Shen) that can be bought or sold to maintain the pegged value of Djed. Djed is collateralized with a reserve of ADA.
A result of this is that Djed can be viewed as both collateralized and non-collateralized (ADA is the collateral reserve but it is also pegged by an algorithm) this means that Djed is a stablecoin that is tied to an external digital asset (Shen) to help provide stability whilst also being backed by ADA (the collateral).

If the value of Djed climbs above its peg of $1USD (e.g. $1.02), the algorithm uses Djed to buy Shen, which results in Djed returning to its $1USD peg.
If the value of Djed falls below its $1USD peg, (e.g. $0.99), the algorithm buys Djed from the open market with Shen to raise the Djed price back up to the peg value of $1USD.

The question isn’t “will it hold the peg” the question is: will it scale, and is it a good deal for SHEN?
The way you make it a good deal for SHEN is you charge high fees to mint.
If it’s a good deal for SHEN, is it a good deal for DJED?
That natural tension between both sides is the real problem here.

Note: The above topic is created with the help of Mr. Matthew Plomin.

That is not correct. “The algorithm” will never buy or sell Djed or Shen proactively. The contract just changes the value of Shen (in ADA) based on the current liabilities to Djed holders.

In fact, the reserve does not hold any Djed or Shen, they are minted and burnt only if someone else wants to buy or sell them (and the conditions for that are met).

As long as you believe in ADA rising compared to USD mid-term, it is a very good deal, because you will get more ADA for your Shen. Even after a temporary fall, many could be inclined to hold instead of realising losses.

Even if ADA/USD will not be rising spectacularly in the future, but just remain more or less stable (if it were totally stable, we wouldn’t need a stablecoin), the fees give some incentive for holding Shen.

The incentive for holding Djed – stable value compared to USD – is quite different, so I don’t know if there is so much tension, there.

If the whole thing is scalable is a good question, nevertheless. It, for sure, needs lots of ADA locked in this contract – 4× to 8× the value of the Djed in circulation. There can only be lots of Djed if there are people who want to buy even more lots of Shen.


Thanks for the feedback and for correcting me.

I invite everyone from the Cardano community to add to this article. Every suggestion, opinion, and correction is welcomed.

I haven’t understood Luna very well, but I have read the Djed paper at some depth, and I think there is another difference here:

The peg has nothing to do with direct trades between Djed and USD. The ADA/USD exchange rate goes into the Djed system via an oracle and that is used to fix the ADA/Djed price. So, it can never go above its peg ever. And it can only go below its peg if the reserves are not enough, anymore.

It is much less of a market thing than in Luna, I think.

Read blogpost here:
Or paper here:

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Thank you for the feedback