Understanding Role of Shen in Djed

The introduction of nonsynthetic stablecoins on the Cardano (ADA) network has been highly anticipated, and the wait has come to an end with the launch of Djed, a stablecoin developed in partnership between Coti and IOG. This decentralized stablecoin aims to maintain its value close to $1 through the use of cryptocurrency reserves.

To ensure stability in a volatile cryptocurrency market, Djed has a minimum collateral requirement of 400% of its issued value. This substantial cushion of collateral protects against market fluctuations, avoiding a situation similar to the Terraform Labs stablecoin collapse in 2022 that resulted in billions of dollars being lost from the cryptocurrency market in just a few days.

The stability of Djed will be supported by the use of an asset known as SHEN.

Get to know SHEN

SHEN reinforces the reserve rate of Djed’s smart contract, providing added stability to the stablecoin. When purchasing Djed, the smart contract automatically converts the deposited ADA into the stablecoin, turning it into a liability.

However, the value of ADA can fluctuate, potentially resulting in a loss if the token is sold back to the smart contract. This is where SHEN steps in, providing additional equity and reserves compared to the initial deposit of ADA. The token serves as an indicator of the stability of the reserve index, with a higher reserve index providing greater protection for Djed.

In addition to maintaining Djed’s parity with the dollar, users can earn rewards by buying and selling SHEN. The price of SHEN is tied to the price of ADA, meaning that if the value of ADA increases, so does the value of SHEN, and vice versa if the value of ADA decreases. By participating in the market for SHEN, users can not only help to stabilize the protocol but also earn additional rewards.

The decentralized nature of Djed and other stablecoins like it, based on blockchain technology, contributes to their transparency, as all transactions are publicly recorded and verifiable. This makes them less prone to censorship compared to centralized, third-party controlled stable assets.

However, it is important to note that there are still risks associated with stablecoins such as Djed. While it offers protection against price fluctuations, it can still be impacted by external factors that may affect its stability. As with any investment, it is crucial to exercise caution and thoroughly understand the potential risks involved.