Polkadot DeFi: Acala Network overview

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Coinmonks

5 min readMar 31, 2021

Acala is a decentralized Finance (DeFi) consortium. It goes beyond just being a (DeFi) platform and delivers a set of cross-chain protocols.

Unique features of Acala

• Decentralized Stablecoin: A new decentralized stablecoin (aUSD) that can be seamlessly used across all blockchains operating in the Polkadot ecosystem. Eligible customers can earn rewards for every aUSD they own

• Collaterals from any network: Use collaterals from any network (both Polkadot and any other connected networks)

• Connected to the Polkadot Layer 0 network and leveraging the highest security

• Forkless upgrade with an on-chain governance

• Staking Liquidity: Acala provides liquidity to staked DOTs in the form of L-DOTs. L-DOTs have a derivative value and have many use cases.

Acala Dollar (aUSD)

The Acala Dollar (aUSD) is a multi-collateral-backed decentralized cryptocurrency. Its value is pegged to the US Dollar (1 aUSD ≈ 1 $USD). When a person creates a Collateralized Debt Position (CDP) in the Acala Platform he receives aUSD as a loan amount. aUSD can also be purchased from exchanges, once Acala goes live and aUSD circulation starts. Users will be able to use Bitcoin or Ethereum as collaterals to generate aUSD.

The Homa Protocol

The Homa Protocol is a decentralized staking pool, built within the Acala network. It solves the problem of illiquidity of staked assets. Users who stake DOT will receive L-DOT (note the proportion is not 1:1) as a liquid asset. Such L-assets can be used in other applications:

• Users can lend L-DOT to earn interest

• They can also use L-DOT as a collateral

• L-DOT can be traded across all chains on the Polkadot network

Users can return the L-DOT anytime to get back the underlying DOT.

ACA Token

ACA is the native token of the Acala Network. It is not yet minted as of now. The total supply is not yet defined. The entire supply will be minted at launch. The majority of the tokens will be distributed to the founders, seed investors, reserves for future development, the parachain crowd loan participants, etc. The token serves three key functions:

1. Network Utility: Use ACA to pay network transaction fees, stability fees (the loan interest rates), and penalty fees (in case of liquidation). Acala network charges ACA tokens to close any CDP. The system also accepts an equivalent amount of aUSDs or other supported assets for the same. The platform automatically converts them to ACA in the backend and then burns them. This reduces the circulating supply of ACA. In case the collateral-to-debt ratio falls below the liquidation ratio, the system automatically liquidates the collateral in an Auction. The network charges a liquidation penalty in aUSD which will again be automatically converted to ACA tokens, which, then, will be burnt.

2. Network Governance: Similar to Maker (the Governance token of MakerDao), ACA token holders can participate in network governance:

a. Propose network upgrades

b. Propose risk parameter adjustments (Liquidation Ratio, Stability fee, Liquidation Penalty, etc)

The elected on-chain council will then accept or reject the proposal.

3. Contingency Solution: Again, similar to Maker, in case of extreme emergency (sudden price collapse of collateralized assets, resulting in undercollateralized CDPs), additional ACA gets minted and sold in the market.

The above use cases are mostly similar to Maker, and it will be interesting to see if ACA will have more interesting use cases in the future.

Platform Features

Acala Network has the following products

• Borrow: Borrow aUSD by using a number of cryptocurrencies as options for collaterals.

• Swap: Swap between any two network-supported tokens

• Earn: Stake LP Tokens and earn interest in ACA

• Liquid Staking: Stake DOT to receive L-DOT

• Govern: Participate in Acala governance process

I have covered the Acala DeFi platform in detail in my previous article. Read more here (Polkadot DeFi: Testing the Acala Platform)

Parachain Auction

Acala (Karura for Kusama) will participate in both Kusama and Polkadot parachain auctions. They are looking for people to support them with KSM and DOT in the upcoming parachain auctions. Supporters will receive KAR (Karura in Kusama) and ACA (Acala in Polkadot) in case the project wins a parachain slot. Acala plans to lease the parachain slot for 6 years and then switch to their independent blockchain, bridging to Polkadot. In case they fail to win the auction the DOT and KSM will be returned to the owners.

Read the Previous article: Blockchain Basics: Structure of a Blockchain Part 1

Note: This post was first published here for Cryptowriter in association with voice.com.

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