The on-chain proof-of-reserves and overcollateralization of the stablecoin project Djed are supposed to make up for Terra’s shortcomings, but that hasn’t stopped crypto advocates from criticizing it.
In light of the recent disclosure that Cardano plans to launch an algorithmic stablecoin in 2023, a number of community members have raised their concerns and compared the project to TerraUSD (UST), which significantly hurt the cryptocurrency market in 2022.
The stablecoin project Djed would, according to its creators, be backed by Cardano and be anchored to the US dollar. In addition, it will use a different token as its reserve currency. The initiative emphasized that it will have on-chain proof-of-reserves and will be overcollateralized.
Despite the team’s assurances, a number of community members voiced their worries, some of whom brought up the recently collapsed UST.
A community member expressed confusion over the release of yet another algorithmic stablecoin, given Terra’s demonstration of their potential for failure. They wrote, “I thought we already knew this, algorithmic stablecoins, not the best solution.
Another Twitter user stated that they preferred to continue using Tether. The community member claimed that algorithmic stablecoins have already demonstrated their instability.
The largest stablecoin projects have been asked on whether algorithmic stablecoin initiatives still have the chance to flourish despite the success of TerraUSD in light of the impending release of Djed.
Tether said in a statement that while Terra and other stablecoin initiatives had procedures to attain stability, they ultimately failed. The team explained:
“Unlike collateralized stablecoins where each coin is fully backed by collateral, algorithmic stablecoins attempt to maintain their value via various market operations that have frequently been broken down dramatically.”
Algorithmic stablecoins with intricate collateralization schemes and technical stabilization mechanisms do not have the same utility value as full-reserve, regulated dollar assets, according to USD Coin issuer Circle. It was also noted that the collapse of Terra earlier this year demonstrated that not all stablecoins are created equally.