The world's first public blockchain, Bitcoin , disrupted monetary transactions by killing third-party processes. The second blockchain, Ethereum, set the stage to disrupt the broader financial system. Ethereum enabled an open financial system that is available to everyone, regardless of their geographic location.
The name given to this revolutionary financial system is Decentralized Finance (DeFi) . Ethereum remained DeFi's superpower until recently. But as DeFi activity grew rapidly on Ethereum, issues with scalability and high gas fees gave other blockchains an opportunity to share their share in this exponentially growing DeFi market.
Furthermore, Ethereum's lack of cross-chain communication capabilities has brought down its position as a reference platform for new DeFi gear. This allowed other next-generation blockchain platforms such as Solana, Tezos, Algorand, and Polkadot to go head-to-head with Ethereum in the DeFi revolution.
Among these new blockchains, Polkadot is considered the true rival of Ethereum due to its unique architecture that offers high scalability and cross-chain communication capabilities.
The stable currencies tied to the USD are also a new sense of crypto industry. So a team made up of the best minds at Polkawallet, a mobile wallet for the Polkadot ecosystem, and Laminar Protocol decided to take over the land of DeFi and stablecoins using Polkadot.
The result of their work is Acala Network , a cross-chain DeFi hub and Substrate-based stablecoin for Polkadot and Kusama. Let's take a look at this much-talked about DeFi project in the Polkadot ecosystem.
What is Acala Network?
The whitepaper describes Acala as a decentralized finance network (DeFi) for stablecoins and staking liquidity. The founding members of two Polkadot ecosystem teams, Laminar and Polkawallet , began development in 2019, and the project is currently available on the Polkadot parachain testnet Rococo.
Acala is Polkadot's all-in-one definition center that will allow users to bet, exchange, borrow, lend, win and more with micro gas rates. Acala brings a host of defi services to Polkadot, including an automated market maker (AMM) decentralized exchange (DEX), bet liquidity (Liquid DOT (LDOT)), and even an algorithmic stablecoin, to USD.
Acala's project is both a parachain platform that other teams can build on, and an application layer that provides a set of applications that offer the aforementioned financial products.
Cross-chain communication is now an undeniable need of the blockchain industry and thus Acala is an Ethereum-compliant platform for financial applications to use smart contracts or integrated protocols with out-of-the-box cross-chain capabilities and a solid security. .
Unlike Ethereum, which requires gas fees to be denominated in ETH, Acala allows any blockchain platform to participate and pay for the calculation in any currency in what the team calls "bring your own gas."
Acala is based on Substrate, an SDK for building interoperable blockchain from Polkadot called parachains. Additionally, the Acala engineering team has also implemented a custom Acala EVM, a novel contribution to the Polkadot ecosystem that provides a seamless and comprehensive experience for Solidity, Substrate and Web3 developers.
The main goal of Acala Network is not to re-implement Ethereum on Polkadot, but to create an environment that supports cross-chain innovation and interactions between distributed applications over interoperable blockchains.
As we know, Acala is a DeFi network for stablecoins and betting liquidity. Therefore, there are two protocols in Acala for providing these services: Honzon, the Stablecoin protocol, and HOMA, the token-holding liquidity protocol.
Honzon - The Stablecoin Protocol
As the name suggests, Honzon Protocol manages activities involving its decentralized stablecoin Acala Dollar (aUSD) . The Acala Dollar stablecoin is a multi-collateral-backed cryptocurrency with a stable value relative to the US dollar (1 to USD ≈ 1 $ US).
As Acala Dollar is a multiple collateral, it can be created using blockchain assets connected to the Polkadot network, including Bitcoin (BTC) and Ether (ETH) as collateral. It can be used by any blockchain on the Polkadot network, as well as applications on those chains.
Honzon manages all these activities. Anyone who owns the type of crypto assets supported by the Acala network can take advantage of them to generate aUSD tokens by creating a Collateralized Debt Position (CDP) through the Honzon protocol. It is a cross-chain stablecoin system in which each aUSD is excessively backed by a cryptocurrency asset and stabilized against the US dollar.
In other words, the Honzon Protocol is a dynamic system of secured debt positions (CDP), chain governance, and incentivized key players. The protocol is available in the main DApps of Acala, Acala Mandala and Polkadot UI.
Each CDP contains the collateral assets deposited by the user who opened the CDP that created the USD tokens, along with his debt position associated with USD. Active CDPs are always overcollateralized with collateral with a value that exceeds the value of the debt. Assets locked in a CDP are locked and cannot be withdrawn by the user until the associated USD debt is repaid.
Unlike Ethereum-based protocols that use external liquidators to settle under-collateralized positions , Honzon uses off-chain workers, an automated scheduler service, to automate this process and inherently increase the security and stability of the stablecoin. .
Homa: the liquidity protocol
Homa is the second groundbreaking DeFi protocol from Acala Network and focused on staking. According to Acala, the Homa Protocol is the answer to the next question for proof-of-stake (POS) strings.
"Can we have security and liquidity at the same time?"
POS blockchain uses stakes to protect your network. But there is always a competition between stake and liquidity. The problem is, 'if DeFi's loan apps outperform gambling, it could motivate the collective movement of funds from gambling to loans, causing a' bank run 'and putting the security of the entire network at risk. «.
Therefore, the Homa protocol solves the challenge of the illiquidity of the staked assets. According to the whitepaper, the Polkadot network targets 50% of the DOT wagered, the rest in circulation would be used for binding, paying transaction fees and others.
Users can bet DOT, the native token of the Polkadot network, without trust with the Homa betting group and in return you receive Liquid DOT (L-DOT) which represents both the DOT amount and the continuous wagering reward obtained. These L-DOT tokens are fungible, can be traded, used for payments and in DeFi, e.g. Eg as a guarantee to generate a stable currency in USD. It can also be used in other blockchain-based applications.
Once DOTs are wagered, there is a 28-day untying period which, in principle, reduces liquidity and improves the security and stability of the assets at stake. But Homa also allows users to withdraw their DOT assets from the Homa Staking pool at any time. For this, users must pay a higher premium for a shorter waiting time to compensate for the free loss of liquidity reward. Fees paid for immediate or shorter withdrawal are paid in L-DOT and are administered by the Homa Treasury.
L-DOT holders are also entitled to vote for their favorite validators using a selection mechanism similar to Phragmen's choice to choose a maximum of 16 validators. L-DOTs are required to lock their L-DOTs on the Homa Council for voting rights and power.
Acala DEX
In addition to two fundamental protocols, Acala also offers an Automated Market Maker (AMM) Uniswap-inspired decentralized exchange (DEX) that is implemented as runtime modules, thus better integrating with other protocols. Acala DEX is accessible through its Acala Mandala dapp testnet.
Users can provide liquidity in two tokens in liquidity pools. At Acala DEX, there are markets for bridged assets like BTC and ETH, as well as DOT, ACA, and aUSD.
Traders can instantly trade tokens without the need for an order book, while liquidity providers can earn a fee for their liquidity.
They earn an exchange fee and an additional reward of participation in the profits of the stability fee, as the liquidity in Acala DEX not only serves the users for the exchange of tokens, but also serves the protocol of the stablecoin. Honzon for clearance.
Token Acala (ACA)
ACA is the native token of the ACALA network substrate chain . ACAs serve two key functions in Acala Network: network utility token and network governance.
As a utility token, it is used in native fee token transactions and smart contracts, and is also used for classifier stake, oracle stake, and other network activities.
According to Acala Token's economic working document :
“As a governance token, ACA tokens give their holders voting rights in the governance of the Treasury, the election of Council members, the referendum, the network update, risk management and more, p. Eg adjustment of key risk parameters, such as the stability fee, the settlement index and the type of collateral «.
According to the document, the total supply of a unit of ACA tokens will be minted at the launch of the mainnet and stored in the ACA reserve pool. In the group, 20.25% will be reserved for the Acala team, 5% for the development of the ecosystem and 11.62% for the Acala Foundation Treasury.
29.13% will be distributed to strategic investors. 18.33% and 10.8% will go to seed investors and companies, respectively. 34% will be distributed as rewards to IPO participants and network contributors, including liquidity providers, early entrants, Oracle operators, and collectors.
Red Karura
Acala is also building an Acala Canarian network, Karura Network , in Kusama, a Polkadot Canarian network. Karura will run on the Kusama Relay chain and has pretty much the same code base as Acala.
Karura provides its own algorithm, the kUSD stablecoin. In addition to kUSD, it will allow liquidity risk for KSM through the L-KSM liquid token, which will have the same qualities as Acala's L-DOT.
Project links
Website: https://acala.network/
Acala Mandala: https://apps.acala.network/
Documentation: https://wiki.acala.network/learn/acala-introduction
Twitter: https://twitter.com/AcalaNetwork
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