Summary
This proposal seeks to establish an updated risk parameter management framework for DJED and SHEN collateral within the Liqwid protocol.
The proposed framework is driven by the unique structural risks associated with the DJED protocol. DJED is an overcollateralized algorithmic stablecoin backed by ADA reserves, while SHEN serves as the reserve asset that absorbs volatility and provides excess collateralization for the system.
Rather than relying on fixed collateral parameters, this proposal introduces a reserve-ratio-based framework that adjusts collateral risk parameters according to the health of the DJED reserve system.
At a reserve ratio of 150% or greater, DJED and SHEN will retain their current collateral parameters. As the reserve ratio declines from its current levels toward 115%, both Maximum LTV and Liquidation LTV parameters may be progressively reduced. At a reserve ratio of 115% or lower, both parameters will be reduced to 0%.
| Reserve ratio | DJED Liquidation LTV | DJED Max LTV | SHEN Liquidation LTV | SHEN Max LTV |
|---|---|---|---|---|
| Greater than 150% (baseline) | 80% | 69.56% | 55% | 47.82% |
| 150% | 70% | 60.87% | 48.13% | 41.84% |
| 135% | 50% | 43.48% | 34.38% | 29.89% |
| 125% | 40% | 34.78% | 27.5% | 23.91% |
| 115% (extreme) | 0% | 0% | 0% | 0% |
Should the reserve ratio subsequently recover, collateral parameters may be increased proportionally back toward their current values.
This framework is intended to provide users with clarity, notice, and sufficient time to adjust positions while limiting protocol exposure to extreme tail-risk scenarios associated with the DJED reserve system.
A similar risk-management framework may also be introduced for Indigo Protocol’s iUSD collateral listing. However, additional analysis is required before defining the specific parameters and triggers.
Reasoning for updating DJED and SHEN collateral risk parameters
DJED and SHEN possess risk characteristics that differ materially from other collateral assets listed on Liqwid.
DJED is an algorithmic stablecoin whose solvency depends on maintaining sufficient ADA reserves relative to outstanding liabilities. SHEN functions as the reserve asset of the protocol and absorbs fluctuations in collateralization levels. The protocol’s reserve ratio is defined as the total ADA held in reserve divided by the total DJED liabilities outstanding.
The reserve ratio currently stands at approximately 179% (data as of 12 June 2026). While the DJED protocol has operated successfully and remains above its minimum reserve requirements, its collateral structure introduces a unique dependency on the market value of ADA and the resulting reserve ratio.
In an extreme stress scenario where the reserve ratio approaches or falls below 100%, SHEN holders would be expected to absorb losses first as the reserve asset. Under such circumstances, SHEN could lose substantially all of its value. At the same time, DJED could temporarily trade below its intended peg as market participants seek redemption against a constrained reserve pool. If reserves were exhausted, any remaining DJED in circulation could become undercollateralized.
Although such a scenario is not anticipated, the potential consequences for collateral valuation are sufficiently severe that they warrant proactive risk management measures within Liqwid.
The purpose of this proposal is not to express a negative view on ADA, DJED or SHEN. Rather, it reflects the need for Liqwid’s collateral framework to appropriately account for the tail risks associated with algorithmic stablecoin reserve dynamics.
Liqwid Labs also considered alternative approaches to mitigating this risk. One option was a Cardano Treasury withdrawal proposal that would allow treasury-owned SHEN to be minted and held in order to strengthen the DJED reserve ratio while simultaneously diversifying treasury exposure beyond ADA.
While such an approach may warrant further consideration, the governance, implementation, and execution timelines associated with a treasury-based solution are unlikely to provide sufficient mitigation for the near-term collateral risks faced by Liqwid. Consequently, this proposal focuses on improving Liqwid’s collateral risk management framework rather than relying on external recapitalization mechanisms.
Risk parameter framework for DJED and SHEN collateral
If this vote is accepted, the Liqwid Core Team will:
-
Communicate the updated DJED and SHEN collateral framework to users through Discord, X, and other community channels.
-
Authorize the Parameter Committee to manage DJED and SHEN collateral parameters according to the DJED reserve ratio.
-
Apply the following framework:
-
At a reserve ratio greater than 150%, DJED and SHEN retain their current Maximum LTV and Liquidation LTV parameters.
-
At a reserve ratio of 115% or lower, both Maximum LTV and Liquidation LTV shall be reduced to 0%.
-
Between reserve ratios of 115% and 150%, parameter limits shall be reduced proportionally as reserve conditions deteriorate and may be restored proportionally as reserve conditions improve.
-
The Parameter Committee may adjust parameters more gradually than the maximum reduction or increase permitted by the framework, provided changes move in the intended direction and remain within governance-approved limits.
-
Under no circumstances may collateral parameters exceed the levels permitted by the framework for a given reserve ratio.
-
This approach establishes clear risk limits while preserving sufficient flexibility for the Parameter Committee to respond to market conditions, avoid unnecessary liquidations, and provide users with reasonable time to adjust their positions.
Future framework for iUSD collateral (TBD)
As with DJED, a framework for determining iUSD LTV parameters based on objective protocol health metrics may be appropriate for managing collateral risk in a transparent and predictable manner. However and building on the fact that the algorithmic rules behind DJED and iUSD fundamentally differ, additional analysis is required before defining the specific criteria, metrics, thresholds, and parameter-adjustment mechanisms.
- Yes, I support this risk framework
- No, I do not support this risk framework