Acala is poised to become an open finance platform on Polkadot, an inter-connected blockchain ecosystem that provides financial stability, liquidity and accessibility. The Acala Dollar (aUSD) is a stablecoin that represents the first product built as a stepping stone towards achieving this vision. At the end of 2019, the Acala team received a development grant from Web3 Foundation — the powerhouse behind the research and development of the decentralized web including protocols such as Polkadot — to build a decentralized stablecoin platform. Now we are happy to announce that we have accomplished all the aims set out in the grant application, and more! 🚀
At a glance, we have delivered:
- A running network that is ready to become a parachain on Kusama and Polkadot
- The multi-collateralized stablecoin aUSD, a self-service credit facility for stable aUSD. This is capable of using cross-chain or bridged in assets such as Bitcoin as collateral
- A unique user experience. Our web and mobile applications (while still evolving) have made the process simple and delightful
- Risk management mechanisms with more automation, efficiency, liquidity, capitalization and ultimately enhanced stability
- On-chain governance with progressive decentralization from the founding team steering the ship to council governance and democracy with referendums
Acala Network is built on Substrate, a customizable and upgradable blockchain framework, allowing us to implement sophisticated financial and technical innovations to improve the resilience, usability and adoption of stablecoin systems.
Multi-Collateralized Stablecoin aUSD
The ability to inter-connect currently isolated crypto asset classes such as Bitcoin and Ethereum, and to add them to the liquidity pool is immensely valuable. With Polkadot, an inter-chain protocol, stablecoins such as aUSD will no longer be bound by assets available on a native network. The collateralization risks will be more diversified, the supply ceiling of the stablecoin will be raised and aUSD can be transacted across all connected chains.
Acala uses over-collateralization as an instrument to mitigate credit risks, namely in the event of a default. The protocol can liquidate the collateral as pledged assets to pay back the outstanding loan. The Honzon stablecoin protocol is implemented as a set of runtime modules and is live on the Mandala Test Network. Read more on the implementation here and interact with the protocol here.
We have launched a web portal that makes the self-serviced stablecoin and decentralized finance (DeFi) experience simple and seamless. The Acala open finance suite is also available on mobile (beta version) powered by Polkawallet. We are constantly improving the user experience to make DeFi more accessible to the masses. Try it now.
Acala’s protocols/runtime modules and SDK are open-sourced with technical and financial primitives to power more cross-chain open finance applications and a rich ecosystem. There are several pathways and many benefits, specialist financial chain with customizable fee schedules, optimized performance and oracle services, to name just a few. To build with us and Polkadot, feel free to reach out and discuss.
The stability of aUSD is guaranteed by the value of the underlying collateral stored on-chain in a trustless and transparent manner. When the value of pledged collateral assets cannot cover the aUSD debt and fees e.g. when the asset price plummets to a point where the loan is under-collateralized, the liquidation process is triggered to ensure aUSD is solvent.
The continuous monitoring of loan positions and the triggering of liquidations when they become unsafe, no longer rely on external actors, and can now be automated to become an integral part of the protocol using Substrate’s off-chain worker. This ensures Acala can respond almost instantly (e.g. every block) when markets rapidly fall.
Diversified Liquidation Strategy — DeX + Auction
Acala uses a hybrid liquidation strategy of liquidating collaterals on decentralized exchange alongside with collateral auctions. Similar to a mortgage sale using auctions and reverse-auctions, this might be an effective way to make the most of the collateral sale and debt repayment. However, it might not be the most efficient way to safeguard system stability in times of swift market downfalls with insufficient liquidity, as was the case in March on black Thursday. Hence Acala supplements the process by liquidating assets on the built-in decentralized exchange (Acala DeX) within acceptable slippage limit first, before entering into collateral auctions.
Acala Dex is a Uniswap-inspired exchange based on the constant-product mechanism, where a liquidity pool is established for each token pair, and the exchange rate is simply the amount of one token divided by the other. Users enjoy instant (no order book) token swaps, while token holders can provide liquidity into the pools to earn exchange fees, plus an additional reward (as profit share from stability fees) to almost guarantee their yield. The strong incentives aim to attract more liquidity to support Acala’s stabilization mechanism. Read more here.
Gradual Execution of Risk Parameters
Risk parameters such as loan interest rates, liquidation ratio and collateralization ratio are important instruments for stabilizing aUSD. When the network governance decides to increase the interest rate from 5% to 20% due to skyrocketing demand, instead of applying the rate instantaneously, we have implemented a gradual update module to increase the interest rate on every block over a designated period to soften the blow intrinsically. Read more on the implementation here.
Robust Oracle Infrastructure
Oracles provide critical pricing information for assets on the Acala Network. We built a quality of service that prioritizes oracle operations to ensure reliability and minimize delays. This is critical when the network experiences high levels of demand or a crisis event. Meanwhile, we can provide custom and favorable fee schedules to these critical services, thanks again to the flexible Substrate framework that keeps it cost-efficient. The oracle infrastructure is flexible enough for us to integrate external oracle providers such as Chainlink. Read more on the oracle implementation here.
Governance — Progressive Decentralization
Since Acala’s inception in September 2019, we have intentionally chosen a progressive decentralization pathway towards our ultimate goal of making ourselves redundant while the network thrives. As outlined in a16z post earlier this year, progressive decentralization works well, and we are pleased to not only be able to live by this ethos but also execute it on the blockchain.
Phase I: Start-up
During this initial phase like right now leading into initial mainnet launch, there is no pretense of decentralization, but competency trumps. The research and development of the Acala Network are led by the Acala Foundation. This is the era of appointed councils who manage various aspects of the network on-chain. For example changes to risk parameters such as interest rates can be proposed and voted on by the Honzon Council, and if passed will be executed on-chain automatically. Read more on governance implementation here.
Phase II: Community Participation
In the next phase of community participation, we will see a significant portion of the network token gradually distributed as incentives to network participants, the network will be upgraded to elected council governance giving more power to the community as it matures. The surplus of the network will be managed in Acala’s decentralized Sovereign Wealth Fund (dSWF), which will invest in foreign crypto-asset reserves that have value, yield, and utility. This will ensure Acala’s economic sustainability and access to critical services like shared security and consensus in the long run. This is a truly autonomous DAO in the making.
Phase III: Sufficient Decentralization
Ultimately we achieve sufficient decentralization by moving into a democracy with on-chain referendums and collective governance by stakeholders, as well as economic sovereignty via wealth accumulated by the decentralized Sovereign Wealth Fund. Read the whitepaper here.
With the launch of Polkadot mainnet its canary network Kusama may soon be ready for parachains (inter-blockchain connectivity), Acala is preparing to launch its canary network Karura which will connect to Kusama and mainnet.
Delivering the stablecoin protocol checks off an important milestone towards Acala’s vision of becoming a multi-chain open finance platform. We are expanding our Ecosystem Program, so stay tuned for updates. Meanwhile, if you are also excited about building a fairer, more open and abundant financial future together, please get in touch.
Acala is a first-of-its-kind decentralized finance consortium with a vision to create cross-chain open finance infrastructure for the Polkadot ecosystem. The Acala Network is a dual-protocol network: a decentralized cross-chain capable multi-collateralized stablecoin protocol, Honzon, and a trustless tokenized staking liquidity protocol, Homa. Acala aims to bring stability, liquidity and accessibility to the mainstream retail financial services market.
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