The New Frontier of Restaking and Yield-Bearing LP Pools on Acala

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Acala

5 min readAug 16, 2024

Acala is breaking new ground in decentralized finance (DeFi) by expanding the popular concept of restaking and introducing a compelling new narrative: yield-bearing liquidity provider (LP) pools. Acala has long been at the forefront of innovation within the Polkadot ecosystem, most notably by creating the first liquid staking token (LST) on Polkadot — LDOT. This token has withstood the test of time, remaining one of the most prominent LSTs in the Polkadot ecosystem. However, Acala’s ambitions do not end there. The platform’s founders have consistently viewed liquid staking tokens as a potential new base layer for the crypto ecosystem.

“Liquid staking just makes sense as the direction of DeFi evolves. Building on yield-bearing assets opens up so many more possibilities for developers and opportunities for users,” — Bette Chen, co-founder of Acala.

Before diving into Acala’s vision 2.0 vision, it’s essential to explore the concepts of restaking and yield-bearing LP pools.

Understanding Restaking

Restaking, a term that has gained traction in the crypto community, can be interpreted in two primary ways:

Tokenized Staking for Supplementary Rewards: The simpler and more widely accepted definition involves taking a staked or yield-bearing asset, tokenizing it, and then staking that token in another protocol to earn additional rewards. This process could theoretically continue indefinitely as long as there is a receipt or token for the staked asset that would be used in another protocol. This reflects the exceptional composability inherent in crypto.
Security as a Service: The second interpretation, popularized by Eigen Layer, involves using the security of staked assets within another protocol. In this model, stakers restake their LSTs to join pools that sell the security of these assets as a service. The revenue from these security sales is then distributed to the restakers as rewards.

Acala’s approach will focus on the first definition, emphasizing token compatibility and unlocking new financial opportunities for users both within and beyond the Acala ecosystem.

Yield-Bearing Liquidity Providing: A New Era in DeFi

Acala is poised to launch yield-bearing LP pools that will introduce a new level of complexity with potential economic rewards and risks. These pools, which are not yet live on the Euphrates, will include two types of liquid staking tokens. Each token will have its own annual percentage yield (APY) based on network inflation and reward rates, along with the dynamic price action of the underlying assets.

For instance, consider a pool containing Solana and Polkadot LSTs. Polkadot typically offers a 15% APY, while Solana provides around 7%. However, in the past year, there have been asset performance differences between the two underlying assets. Due to the differing price movements of the two LSTs, liquidity providers (LPs) are likely to experience impermanent loss — ending up with more of the underperforming token and less of the outperforming one. However, the APY on these assets could potentially offset these losses, making it crucial for users planning to partake in providing liquidity of these pools to have a clear strategy before participating.

Integration of JitoSOL: The First Step Toward New DeFi Possibilities

The integration of JitoSOL marks a significant milestone in Acala’s journey to bring new DeFi opportunities to its platform. Achieving an impressive $1 million in total value locked (TVL) within the first week of launch, it’s clear that LSTs are gaining traction in the Acala ecosystem. Currently, restaking JitoSOL rewards users in ACA tokens, with potential future rewards in JTO, DOT, or other JitoSOL integrations within the Polkadot ecosystem.

With sufficient liquidity on Acala, Polkadot parachains can integrate and diversify their LST offerings across decentralized applications (dApps), whether they be lending protocols or other advanced DeFi solutions.

The next phase for JitoSOL involves launching a dual LST LP pool with LDOT. This liquidity pool will require governance approval to launch incentives and will serve as Acala’s first dual LST pool with two distinct underlying assets. Keep an eye out for updates on the pool launch and related governance proposals.

Upcoming Integrations: Expanding the LST Ecosystem

Acala’s roadmap includes integrating Rocketpool’s rETH and the highly requested LKSM from the Kurara Network. These LSTs will undergo a similar integration process as JitoSOL and will further diversify the LST offerings on Acala. The team is in active discussions with multiple top-tier liquid staking protocols for further integrations and remains open to community suggestions. Acala’s vision embraces a multi-chain, interoperable future that surpasses siloed liquidity communities.

In addition to expanding its LST offerings, the Acala team is actively engaging with parachain and project leaders who are interested in integrating JitoSOL into their platforms, alongside other LSTs they may already support. These discussions around technical integrations are poised to unify user bases and communities across various ecosystems, fostering deeper connections and collaborations within the broader DeFi landscape.

The Acala Liquidity Layer

Acala envisions a new base layer that leverages the diverse and high-quality LSTs available in the crypto market, paving the way for a new wave of composable, interoperable, and decentralized financial solutions. With the proliferation of proof-of-stake blockchains, the potential for channeling liquidity through a central hub like Acala is limitless.

Acala has coined this vision as the “liquidity layer X.” Unlike traditional layers, which are confined to specific layer 1, 2, 3, or 0 protocols, Acala’s liquidity layer can interact with and adapt to all layers, serving as the central source of liquidity. This approach promises to enable the development of more robust applications, enhance user experiences for both newcomers and veterans, and unify the crypto ecosystem.

Currently, users can experience the benefits of this liquidity hub through Euphrates, Acala’s boosted liquid staking platform. Euphrates not only serves as the gateway to Acala’s innovative liquidity solutions but also offers users an opportunity to participate actively in shaping the future of DeFi.

As Acala continues to innovate and expand its offerings, it stands at the forefront of this new era in DeFi, driving the industry toward a more connected, efficient, and inclusive future. Join the movement and explore what Euphrates can offer — your entry point to the next level of decentralized finance.