This proposal aims to enhance DJED's stability and increase its adoption within the Cardano ecosystem by allocating 2% of the 20% tax collected every epoch to the Cardano treasury for minting Shen coins. This allocation will directly support DJED's collateralization mechanism, ensuring that Shen reserves remain strong enough to maintain DJED's stability even during periods of market volatility. Additionally, 1% of the tax will be allocated towards offering transaction fee discounts when payments are made in DJED. This incentive is designed to drive DJED adoption by making it a more attractive option for everyday transactions.

To ensure sustainability, the discount system will implement mechanisms such as a dynamic discount rate based on available funds, transaction caps to limit the total amount of discounts provided in a given period, and a priority-based system to ensure fair distribution of discounts. If the allocated funds run low, an automatic treasury replenishment mechanism could be triggered, either temporarily diverting additional funds or adjusting the system's parameters. These changes will collectively strengthen DJED's role as a reliable, decentralized stablecoin while promoting its widespread use within the Cardano ecosystem.

The implementation of this proposal will require coordinated efforts across development, governance, infrastructure updates, security audits, and community engagement. It will involve developing new smart contracts for automatic Shen minting and transaction fee discounts, adjusting Cardano's ledger and node infrastructure, conducting rigorous security audits, and testing the new features on the testnet. Collaboration with DJED issuers (COTI), the Cardano treasury team, and the broader community will be essential to ensure a successful rollout. Education campaigns and detailed documentation will also be provided to help the community understand and interact with the new systems.

DJED, as an overcollateralized stablecoin on the Cardano network, plays a critical role in providing stability and liquidity within the ecosystem. However, its stability mechanism relies heavily on Shen, the reserve coin, to maintain an overcollateralization ratio between 400-800%. If Shen reserves become insufficient during periods of high volatility, DJED's stability could be compromised, undermining trust in the stablecoin.

Currently, there is no direct mechanism within the Cardano protocol to automatically support Shen reserves during these critical moments. This proposal introduces a solution by dedicating 2% of the treasury tax collected each epoch to automatically minting Shen coins, thereby maintaining strong reserves and enhancing DJED's stability.

Additionally, while DJED has strong potential as a stablecoin, its adoption for everyday transactions is limited. One way to encourage broader use of DJED is by offering transaction fee discounts for payments made in DJED. By allocating 1% of the treasury tax towards these discounts, this proposal incentivizes users to adopt DJED as a preferred payment method, driving greater utility and liquidity within the ecosystem.

However, to ensure the sustainability of this discount mechanism, certain precautions must be taken. If the 1% allocation for discounts is exhausted too quickly due to high transaction volumes, the intended incentives could fail. Therefore, this proposal includes several mechanisms to manage the discount system sustainably:

Dynamic Discount Rate: The discount rate will be dynamically adjusted based on the remaining funds from the 1% allocation. If the funds run low, the discount rate will decrease to prevent depletion. Transaction Caps: A daily or epoch-based cap will limit the total amount of discounts provided. Once the cap is reached, no further discounts will be applied until the next period. Priority-based Discounts: Discounts will be prioritized for smaller transactions or distributed proportionally based on transaction size, ensuring that a wider range of users benefit from the incentive. Treasury Replenishment Mechanism: If the discount allocation runs low, an automatic replenishment mechanism could temporarily divert additional funds from the treasury or adjust the discount system’s parameters. By implementing these mechanisms, the proposal aims to balance the dual objectives of promoting DJED usage and maintaining a sustainable treasury allocation system.

This proposal seeks to address two key issues: the stability of DJED and its broader adoption within the Cardano ecosystem.

1. DJED Stability: DJED's stability is crucial for its role as a decentralized stablecoin. Its stability mechanism relies on maintaining a collateralization ratio between 400-800% with ADA, backed by Shen, the reserve coin. Without sufficient Shen reserves, DJED’s peg to its intended value could be threatened during periods of high market volatility. This would undermine trust in DJED as a stable asset within the Cardano ecosystem.

By allocating 2% of the treasury tax collected each epoch to mint Shen coins, this proposal directly strengthens DJED's collateralization. The additional Shen minted from the treasury will help maintain the reserve levels necessary to support DJED’s stability, ensuring that the stablecoin remains secure even in challenging market conditions. This mechanism will act as a decentralized safeguard, reinforcing the long-term viability of DJED.

2. DJED Adoption: While DJED has strong potential as a stablecoin, incentivizing its use for everyday transactions is essential to drive liquidity and widespread adoption. Offering transaction fee discounts for payments made in DJED provides a tangible incentive for users to choose DJED over other options. However, this incentive system must be implemented sustainably to avoid depleting the 1% tax allocation prematurely.

The introduction of a dynamic discount rate, transaction caps, and priority-based discounts ensures that the discount mechanism remains flexible and adaptable to varying transaction volumes. By dynamically adjusting the discount rate and placing caps on the total amount of discounts provided, the system can handle high transaction volumes without exhausting its allocated funds too quickly. Priority-based discounts ensure that the incentives are fairly distributed across a wide range of users, increasing the likelihood of DJED adoption across different segments of the community.

In case the 1% allocation runs low, the treasury replenishment mechanism provides a safety net by temporarily diverting additional treasury funds or adjusting the discount system’s parameters. This allows for continued incentivization of DJED adoption without risking the depletion of the treasury.

The combination of these mechanisms ensures that both DJED stability and adoption are strengthened in a balanced and sustainable manner. This proposal leverages Cardano’s decentralized treasury system to address critical issues, enhancing the overall health and utility of the ecosystem.