Acala: the “DeFi Hub” of Polkadot Ecosystem
Acala is positioned as a one-stop Polkadot DeFi hub. As the first parachain (through auctions) for Polkadot, Acala provides DeFi infrastructure for the Polkadot ecosystem.
This article will briefly introduce Acala’s 5 core businesses and how these businesses promote each other to grow the Polkadot DeFi ecosystem and help Acala achieve its vision.
Acala is a DeFi platform and is EVM compatible. Based on this platform, Acala has also developed a number of products as DeFi primitives, including multi-collateralized stablecoin aUSD, liquidity release product LDOT, automated market maker Acala DEX and decentralized sovereign wealth fund dSWF. Users can also use these products directly through the Acala APP.
1. DeFi platform compatible with EVM
Acala is a Layer 1 blockchain platform custom-optimized for financial usecases. Developers can build various DeFi applications on Acala. As a parachain, Acala enjoys the shared security, scalability and cross-chain interoperability of the Polkadot Network.
Easy to Build
Acala provides a series of out-of-the-box DeFi components, such as the decentralized stablecoin aUSD, the staking derivative LDOT, and the decentralized exchange modules (which will be introduced later). In addition, Acala has open sourced many practical modules for the community, such as the first oracle module of the Polkadot ecosystem, cross-chain asset standards, and general monitoring frameworks.
There are three ways to deploy on Acala: deploy as a Runtime module (Pallet), deploy as a Solidity or ink! smart contract, or build a Substrate chain to connect with Acala using XCMP.
Ethereum Compatibility
Since the Ethereum ecosystem is currently the largest and most active DeFi ecosystem, Acala is compatible with the Ethereum Virtual Machine (EVM), so that DeFi products built on Ethereum can be deployed on Acala with only minor changes, so that these products can be brought in to the Polkadot ecosystem.
In terms of compatibility with Ethereum, Acala adopts a self-developed solution — Bodhi. Simply put, it is a JavaScript SDK that simulates a Web3 provider, which can wrap the Polkadot Extension into an extension similar to MetaMask. In this way, the ready-made Ethereum Dapps can also use the Polkadot Extension to interact with the Acala EVM+ after being deployed on Acala.
2. Stablecoin aUSD
Acala USD (aUSD) is a decentralized stablecoin collateralized by a variety of crypto assets. The price is pegged to the U.S. dollar, that is, 1 aUSD is always maintained at about 1 U.S. dollar. Users can send and receive aUSD across chains between any blockchain connected to Polkadot.
The price of cryptocurrencies is often volatile, which creates a high degree of uncertainty in transactions, and stablecoins can act as a medium of exchange to hedge against price fluctuations. This makes stablecoins an important infrastructure for the conversion and circulation of assets between DeFi projects.
Honzon Agreement
The aUSD stablecoin is generated and managed through Acala’s stablecoin protocol “Honzon”. Users can open a collateralized debt position(CDP) and deposit their crypto assets as collateral into the collateralized debt position to mint aUSD. The supply and demand of aUSD can be adjusted by the stability fee rate, so as to adjust the price of aUSD and achieve the stability of the price of aUSD relative to USD.
In order to prevent the price fluctuation of the collateralized assets, over-collateralization is required. For example, if the collateral rate is assumed to be 150%, which means that if you want to mint aUSD worth 100 US dollars, you need to collateralize at least US$150 worth of collateral. If you provide more, your collateral will not be easily liquidated, making it safer.
When the price of the collateralized asset falls below the liquidation line, Honzon will liquidate, that is, put the collateral up for auction. Through Acala DeX, ordinary users can also participate in liquidation and purchase assets in liquidation at a lower price. Acala DeX will be discussed later.
For ease of understanding, you can think of the Honzon protocol as an automated on-chain pawnshop. When you need money, you pawn valuable assets (such as DOT or other cryptocurrencies) at the pawnshop, and the pawnshop will issue a certificate of stable value to you (aUSD), and you need to pay a certain fee(stability fee/interest), after a certain period of time you can redeem the collateralized assets. If the price of your collateralized asset falls rapidly, resulting in liquidation, the pawnshop will auction (liquidate) your collateral on the market (Acala DeX).
3.Liquid realising product L-DOT
In a PoS chain like Polkadot, token holders can get rewards while ensuring network security through staking, but the assets in staking cannot be transferred during the staking and unbonding periods, resulting in limited liquidity.
There may also be competition between staking and DeFi protocols. If the staking rate is too high, no one wants to participate in DeFi protocols. Conversely, if the DeFi interest rate is too high, it will result in a low staking ratio, it will have a serious impact on network security.
Homa Protocol
Acala’s Homa protocol coordinates and balances the relationship between users and network security by creating a pool of staking funds, where users can deposit DOTs in exchange for some freely transferable staking on-chain credentials, L-DOTs. That allows users to get liquidity without losing their staked assets and rewards, and participate in financial services such as decentralized lending, leveraged trading, and crowdloans.
The Homa protocol is Acala’s liquidity release protocol. L-DOT is a DOT derivative generated through the Homa protocol. L-DOT is an asset combination of staking principal plus future staking income. L-DOT can be used to redeem the corresponding assets at any time.
4. Acala DeX
Acala has a built-in decentralized exchange, Acala DeX, which uses the AMM (Automated Market Maker) mechanism for decentralized token exchange, and the trading pair uses aUSD as the base currency.
Acala DeX is created in the form of Substrate Runtime Pallet to better integrate with other protocols of the Polkadot ecosystem.
For the Acala platform and even the Polkadot ecosystem, Acala DeX has the following three meanings:
Provide liquidity to start the ecosystem: DeX allows assets such as BTCs and ETHs bridged to the Polkadot ecosystem, as well as DOTs, ACAs, and aUSDs to have a trading market.
Used for stablecoin liquidation mechanism: When liquidation is triggered, the Honzon Stablecoin Protocol will sell assets on this DeX instead of directly conducting asset auctions. This increases reliability and reduces risk.
Improved usability: DeX enables users to pay transaction fees in multiple currencies instead of only using the platform’s ACA token.
AMM operating mechanism:
Each trading pair has a liquidity pool, each liquidity pool contains two tokens, and the exchange rate between the two tokens is one token divided by the other token.
There are two roles in AMM, Liquidity Provider (LP) and Exchange User.
Liquidity providers provide liquidity by depositing both tokens in the pool at the same time, earning transaction fees and additional rewards(profit sharing from stability fees). Users can exchange A tokens for B tokens from the pool. The exchange rate is determined by the amount of the two tokens offered by the initial liquidity provider, which is then adjusted by arbitrage.
5. Decentralized Sovereign Wealth Fund
A Decentralized Sovereign Wealth Fund (dSWF) is Acala’s innovative form of on-chain fund management.
Similar to the establishment of sovereign funds by some countries to manage foreign exchange, Acala uses dSWF to manage assets in the network to achieve sustainable development.
dSWF funds come from three sources: stability fees paid by aUSD minters, liquidation penalties, and L-DOT liquidity release fees. dSWF will accumulate these funds and buy other network assets such as DOTs. After the first leased parachain slot expires, these reserve assets can be used for renew parachains, etc. dSWF utilizes Substrate’s flexible on-chain governance mechanism to manage the use of funds by Acala’s on-chain governance
