The basic principle of the Djed project is to use one digital asset's value to create another. Djed uses the volatile value of ADA to create a stablecoin with a value pegged to the USD. This makes ADA the reserve currency. This only applies to the Cardano ecosystem. However, the concept of algorithmic stablecoins is a way in which we can replace fiat currencies. Before the gold standard was abandoned, money was backed by precious physical metal - gold. A central authority is necessary for such a system to work. The concept of algorithmic stablecoins is the gold standard for the digital age. We are able to use deflationary cryptocurrencies like ADA or BTC as collateral for stablecoins like DJED. Based on the Cardano blockchain and Plutus algorithms, this currency can work without a central authority. TLDR The main problem with today's money is the lack of attachment to a scarce commodity or asset and the presence of a central authority. Algorithmic stablecoins may become the new gold standard. DJED is backed by ADA value that has a limited quantity so stablecoins can't be printed out of thin air. If demand for DJED is high, an increasing amount of ADA coins will be locked in the Djed reserve. Stablecoins may end the era of fractional reserves. The problems of fiat currencies For practical reasons of ease of use, gold coins replaced paper notes. The notes were kept in the bank and backed by gold. People trusted the notes because they could walk into the bank that issued the note and exchange it for gold. If 10,000 gold pieces were kept in the bank at a certain time and 10,000 gold pieces worth of notes were circulating among the people, all the notes were backed by gold. When the currency was pegged to gold, the so-called gold standard was applied. The banknotes used in circulation represented gold and were exchangeable for gold. The money used today is not backed by gold. The amount of money in circulation is then not influenced by the amount of gold, but by the monetary policy of the central banks. If people are given cheap credit, a lot of money is put into circulation and prices can be expected to rise. Excess money in circulation can manifest itself in price bubbles in stocks, commodities, and real estate. The main problem with today's money is the lack of attachment to a scarce resource or asset and the presence of a central authority that decides monetary policy. Central banks can print money indefinitely and are not limited by anything. The members of the Board strive to meet the objectives set and aim for monetary stability. However, this is not always successful. Long-term excessive inflation is an undesirable phenomenon. Algorithmic stablecoins are the new gold standard Algorithmic stablecoins solve both problems that money has today. Smart algorithms can replace central authorities. Cryptocurrencies like ADA and BTC can be used as reserve assets having limited supply. In the digital age, there is no need to use physical resources. Instead, we can rely on digital scarcity. Cardano and other smart contract platforms are decentralized networks that allow the creation of algorithms that, once deployed, can be executed by the network in a decentralized manner. This will dissolve the power of the central authorities. All rules can be written into the source code and become essentially unchangeable. Programmers can take over as central bankers. It is possible to build some form of decentralized governance. It's basically just an implementation detail. If something needed to be decided, all stablecoin users could vote, not just a prominent group. The important thing is that the functioning would be completely transparent. The number of coins in reserve and the number of stablecoins in circulation would be completely transparent and unchangeable. In a broader context, cryptocurrencies and algorithmic stablecoins can be seen as a means of enabling a transfer of trust from traditional financial services toward decentralized solutions. The transition from still relatively stable fiat currencies to volatile cryptocurrencies could take a very long time and may be impossible. One can assume that the volatility of cryptocurrencies will decrease. Yet it may be relatively high for people to become a commonly used medium of exchange. People expect the medium of exchange to have stable purchasing power in the short and medium term. Algorithmic stablecoins can be used as a medium of exchange today. Volatile cryptocurrencies with capped supply and algorithmic stablecoins form a perfect symbiosis to create an alternative digital medium of exchange. ADA as a reserve currency The ADA has a market value. In the context of use, the ADA is not suitable as a medium of exchange due to its high volatility. However, market value is a utility that can be exploited. Djed uses the market value of ADA to create a different value. The value of DJED is pegged to the USD and is backed by the value of ADA. Djed is an overcollateralized stablecoin. This means that a specific amount of ADA coins are required to mint DJED. Simply put, Djed is a stabilizer of the volatile value of ADA coins. Two things are important. First, ADA is a decentralized cryptocurrency just like Djed algorithms. Thus, the system operates completely autonomously without third-party intervention. Second, DJED is backed by another value with a limited quantity so it can't be printed out of thin air. The amount of DJED in circulation will always be limited by the number of ADAs that are put into the system. The amount of ADA is capped at 45,000,000,000. This amount is thus essentially unchangeable by the very nature of decentralization. In other words, Cardano's monetary policy is immutable. If there is a demand for DJED, it is imperative that people put ADAs into the system. ADAs will be locked in the Djed reserve. This makes ADA a reserve currency for DJED which can serve as a medium of exchange. This is reminiscent of the gold standard. The fundamental difference is that, due to high volatility, 1:1 backing is not possible. This is why Djed is an overcollateralized stablecoin. The algorithm is designed to balance market shocks and keep DJED at 1 USD while ensuring that it is sufficiently backed by ADA coins. If demand for DJED is high, an increasing amount of ADA coins will be locked in the Djed reserve. This may create a shortage in the market which will have a positive effect on the growth of the market value of ADA. The higher the market value of ADA, the more DJED can be minted. The market value of the ADA will reflect the success of the Djed project. Of course, Djed is not the only project in the Cardano ecosystem, so this applies universally. Any successful app that gains a high number of users will impact the entire ecosystem in terms of market capitalization. Holders of SHEN and possibly COTI will be the ones who will benefit the most from the success of the Djed, as all fees collected for minting and burning DJED will go to them. Using DJED will generate traffic on the Cardano network. Through fees, Cardano will be an economically sustainable system. It is important to note that the security, sustainability, and reliability of the Djed are provided by Cardano. End of fractional reserves Bankers have noticed that much of the money remains permanently in the bank. It is not usual for all holders of money to demand the withdrawal of their money from the bank at the same time. The portion of the money that the bank estimates will not be withdrawn by the holders in the foreseeable future can be used to make loans. By making a loan, the bank forgoes an agreed amount to the borrower for an agreed period of time, in return for which the borrower is obliged to repay the money and the agreed interest on an agreed date. Let us consider a hypothetical example where 10,000 gold pieces are deposited in a bank and notes, worth 10,000 gold pieces, are in circulation. Suppose that, based on long experience, the bank knows that 8,000 gold pieces are available to the bank permanently. In this hypothetical example, the bank can afford to make loans of up to 8,000 gold pieces. If it does so, it begins to operate in a fractional reserve system and all the money it issues is no longer backed by gold. At this point, there are 18,000 notes in circulation, which are backed only partially. In other words, 18,000 notes are backed by only 10,000 gold pieces. The bank faces a risk. If people decided to withdraw gold coins for banknotes, the bank would not have enough. There will be a so-called run on the bank. The bank would have to borrow gold pieces elsewhere and if it failed, it would go bankrupt. Algorithmic stablecoins may end the era of fractional reserves. Djed will not allow more DJEDs to be minted than the algorithm allows based on the number of ADAs in reserve. The whole system is transparent and very easy to audit. On-chain analysis, which can be done by anyone in the world at any time, reveals how much ADA is in reserve and how many DJED coins are in circulation. Djed by design does not allow taking a portion of the ADA from the reserve and lending it to someone. Banks profit from the money that users entrust to them for safekeeping. The risk is mainly borne by the users. If people get used to using self-custody wallets, they won't need any banks. The Djed would be in the position of a kind of decentralized global central bank. The word "central" is actually redundant here. Some financial services could be completely replaced by decentralized protocols. Conclusion For algorithmic stablecoins to succeed, people need to start using them. There are more similar projects like this on the market, and that's a good thing. Diversity and competition will ensure that only the best projects survive. There may be more algorithmic stablecoins on different blockchains, but the number of BTC and other native coins will always be limited. Out of the thousands of cryptocurrencies in existence, only a small number of them will gain trust. These will certainly include networks on which useful projects will be created. Algorithmic stablecoins honor all the principles of decentralization and we can only hope that they will soon replace USD-backed stablecoins. Djed is still in its infancy and has literally been running for a few days at the time of writing. It's hard to predict how successful this project will be yet. Regardless of the success of one particular project, the reality is that algorithmic stablecoins solve the biggest problem of cryptocurrencies today, and that is the risk associated with high volatility. Store of value is a feature that is arguably incompatible with a medium of exchange. The digital world has been about programmability from the very beginning. The money of the future will be decentralized and programmable. Cryptocurrency volatility is a problem that is solvable through programmability. With algorithmic stablecoins, we will not only have a new form of money, but also decentralized finance. And that is a revolution in the truest sense of the word.
