How the Protocol Works
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The Djed protocol maintains a reserve of BaseCoins (BCs, usually the native currency of the underlying blockchain), which are used to back the StableCoins (SCs) that are issued. In addition to StableCoins, the protocol also issues ReserveCoins (RCs).
A ReserveCoin represents ownership of a portion of the surplus of the underlying reserves of BCs in the Djed protocol. As such, ReserveCoins have a leveraged volatile price that increases when the price of BCs increases and decreases when the price of BCs decreases. Furthermore, ReserveCoin holders ultimately benefit from fees paid to the Djed protocol, since fees are accumulated into the reserve and hence contribute to the reserve surplus.
In a Djed deployment, the SCs can be pegged to anything (e.g. USD, EUR, a particular stock, an index such as the S&P500, ...). For simplicity, the explanations below assume a peg to the USD.
The Djed protocol aims to maintain a reserve ratio significantly above 100% to cushion the value of SCs and maintain the peg even if the price of BCs falls dramatically. For example, when the reserve ratio is 400%, it is able to tolerate an instantaneous BC price crash of 75% without losing the peg.
SC holders are always allowed to sell back SCs to the protocol. The protocol pays 1 USD worth of BCs per SC if the reserve ratio is above 100% or R/S per SC otherwise, where R is the protocol's total BC reserve and S is the SC supply.
Everyone is allowed to buy SCs from the protocol for a price of 1 USD worth of BCs per SC, whenever the reserve ratio is above a specified minimum reserve ratio threshold. When the reserve ratio is below threshold, the purchase of SCs from the protocol is disallowed, because it would reduce the reserve ratio further.
Everyone is allowed to buy RCs, as long as the reserve ratio remains below a maximum reserve ratio threshold. This prevents excessive dilution of previous RC holders. This restriction only applies when the SC supply is above a threshold.
RC holders are allowed to sell RCs, as long as the reserve ratio remains above the minimum ratio threshold. This aims to ensure that all SCs remain sufficiently backed.
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The explanations above are provided for your information, to explain in layman's terms how the protocol generally works. These informal explanations should not be taken as a substitute for the protocol's actual code.
