Since last November, Cardano (ADA 1.62%) supporters have been eagerly awaiting the arrival of a new stablecoin. And now all signs point to Cardano finally launching this new stablecoin, known as Djed, in the final week of January. This could be big news for Cardano, which has been trading in a relatively flat range of $0.25 to $0.45 for the past two months.
For Cardano, this new stablecoin represents more than just a new product launch — it is the next step of a bold new strategy based around decentralized finance (DeFi), one of the most important niches of the blockchain world. So just how much of a boost will Cardano actually get when Djed launches?
The importance of a new stablecoin
Within the crypto industry, stablecoins are extraordinarily important as a way of transferring value across different blockchains. They also help provide liquidity and stability. If you take a look at the top 10 cryptocurrencies by market capitalization on CoinMarketCap, for example, you’ll see that three of the most valuable cryptos are actually stablecoins. Typically, they are pegged 1:1 to an underlying asset, such as the U.S. dollar, which makes them very useful for moving between crypto and fiat.
Once Cardano’s stablecoin goes live at the end of January, it could immediately lead to an improvement in one of the key metrics used to evaluate cryptocurrencies: Total Value Locked (TVL). This metric is used to measure blockchain activity, and DeFi is typically one of the biggest drivers of TVL. Right now, when it comes to TVL, Cardano currently ranks No. 27 out of all Layer 1 blockchains. This is very disappointing performance, considering Cardano ranks as the No. 8 blockchain by market capitalization. There’s clearly some kind of disconnect, and investors have noticed.
Once TVL starts to rise, though, Cardano will start to look more attractive to investors. We’ve already seen this phenomenon with Tron (TRX 0.55%), a rival Layer 1 blockchain that launched a stablecoin in May 2022. Since then, Tron has seen its TVL soar. Tron now ranks No. 2 in TVL, trailing only Ethereum (ETH 2.84%). So there is a strong precedent to suggest a new stablecoin will be good for Cardano’s TVL metric, which in turn could help to boost Cardano’s price.
So what could possibly go wrong? There are definitely some factors that might eventually derail the new launch. For one, there is the question of the collateralization of the stablecoin. Instead of being backed by fiat currency, the stablecoin will be backed by Cardano. To compensate for this, the creators of the stablecoin say that Djed will be overcollateralized by a factor of 4X or even 8X.
Before 2022, investors might not have paid much attention to these details. However, as we saw with the case of the failed Terra Luna (LUNA 0.75%) stablecoin, it is possible for a stablecoin to lose its peg to the dollar. When that happens, it can literally bring down an entire blockchain ecosystem. So, in a worst-case scenario, if Djed ever loses its peg to the U.S. dollar, it might have the immediate consequence of pulling down Cardano with it.
Moreover, there is some concern — some might call it Fear, Uncertainty, and Doubt (FUD) — about whether the Cardano blockchain is ready for a stablecoin. Cardano is still relatively new to the DeFi game, having launched smart contracts back in September 2021. The first decentralized exchange only went live on Cardano in January 2022. So the initial launch of a stablecoin might be rockier than most people want.
Is Cardano a buy now?
Still, Cardano has a track record of peer-reviewed, rigorously tested updates to its blockchain, so many of these concerns may be overblown. As a result, I’m bullish on Cardano finally being able to regain the $1 mark, a level it hasn’t seen since April 2022.
Ideally, a new stablecoin leads to new DeFi growth, which leads to more people using the Cardano blockchain, which leads to an increase in the value of Cardano. As a result, if this new stablecoin launches as planned, it could provide a huge boost to Cardano’s long-term value.
Dominic Basulto has positions in Cardano and Ethereum. The Motley Fool has positions in and recommends Cardano and Ethereum. The Motley Fool has a disclosure policy.
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