Most decentralized finance (DeFi) projects on the blockchain space are built on the Ethereum network. While it offers a more innovative way of developing new use cases for the financial technology industry, it confronts a problem in terms of scalability and transaction throughput. Acala was conceptualized around those issues.
Acala is a project founded by two active members of the Polkadot network: Laminar and Polkawallet. The objective behind the project’s collaborative nature is to build a foundational layer for Polkadot DeFi platforms without any single entity dominating its over-all operation.
Backed by a grant from the Web3 Foundation and the investment from firms such as 1confirmation, Arrington XRP Capital, Parafi Capita, and Pantera Capital, Acala worked on a Polkadot-based DeFi startup that can provide more use cases for the decentralized market today.
“Polkadot empowers an ecosystem of … domain-specific parachains optimized for their use cases. Acala is a parachain optimized for DeFi,” Bette Chen, COO of Acala said.
What Is the Acala Project?
Acala is a decentralized finance project on the Polkadot blockchain. The main product of the protocol is a cross-chain compatible stablecoin called the Acala Dollar (aUSD). As of late, Acala has launched the testnet for its lending and decentralized exchange platform.
The main purpose of Acala is to enable easier financial transactions through the Polkadot blockchain, going around the concern with Bitcoin and Ethereum chain on transaction throughput and scalability. Users can conveniently send, borrow, and lend USD to other users who are on different blockchains as long as they are linked to the Polkadot network.
Right now, there are already 14,500 accounts that registered throughout the duration of its testnet launch. Three weeks upon its testnet run, it has already processed 142,000 transactions and holds a little over $52 million in total value locked. Looking at these figures, it appears that the project has attracted the interest of DeFi enthusiasts, especially Polkadot participants.
There are two main protocols powering the Acala Network. They are:
- Honzon – This protocol allows users to make cryptocurrency deposits despite blockchain differences in creating collateralized debt positions, or CDPs. CDPs can be used in making loans, such as the aUSD, which can be spent across different networks as long as they are connected to the Polkadot chain.
- Homa – This protocol enables the staking mechanism of Acala. This allows for the exchange of Polkadot tokens (DOT) into liquid DOT (L-DOT) that serves as the network’s liquidity token usable across other chains.
In summary, Acala is a cross-chain stablecoin network that features the following traits:
- A stablecoin that allows for inexpensive, cross-border value transfer for blockchains that are partnered with the network;
- A liquidity pool that can be supported by assets from the Polkadot chain and other connected networks to support high collateral supply;
- Secure network backed by Polkadot’s shared security model; and,
- System reliability with forkless and non-disruptive updates enabled by the parachain innovation and on-chain governance.
Acala’s native token is called ACA. These tokens can be used as a medium of exchange within the network, payment for stability fees accrued by users for closing CDPs, representation of their voting rights on important protocol decisions, as well as collateralization for CDPs to ensure its liquidity.
In cases of under-collateralization, ACAs are diluted and sold to the open market. This is similar to how MKR is burned by MakerDAO in instances where they are forced to liquidate CDPs.
A portion of the ACA tokens are reserved for the development of the platform, this means that these tokens can be redistributed to developers in the form of grants and bounties.
Acala Dollar, or aUSD, is the network’s stablecoin pegged to the US dollar and backed by multiple collateral assets. Users can create aUSD using assets from any blockchain linked with the Polkadot chain, such as Bitcoin (BTC) and Ether (ETH).
The value of aUSD is maintained by the risk parameters set for CDPs, such as stability fees, liquidation ratio, liquidation penalty, and debt ceilings.
To support the liquidity and adoption of other stablecoins on the Acala network, they can be transferred to any chain on the Polkadot network. However, users have to take note that assets held in CDPs cannot be fully-withdrawn by the user unless they have already paid the underlying loan that they incurred from opening such CDP.
Since the platform is built on top of the Polkadot network, it follows the Nominated Proof-of-Stake (NPoS) model. This means that the platform achieves consensus through validator nodes nominated and elected by the stakers.
The Homa Protocol that powers the staking function of the platform is enabled by staked assets such as the L-DOT. Users can participate in staking by swapping DOT tokens for L-DOT to earn interest from it or collateralize their CDPs.
The reward for stakers can be affected by several factors such as the change in value of the DOT, the staking strategy used, and the performance of validator nodes in the network.
The goal of increasing the adoption for DeFi projects beg the important question concerning the blockchain network where the platform will be built. While the total value locked for many DeFi projects is increasing, there is no assurance that the Ethereum chain can keep them running efficiently and as fast as expected. This can cause problems too if the DeFi ecosystem continues to grow exponentially, affecting transaction throughput and network traffic in the short run.
Acala is an interesting alternative to a DeFi ecosystem first built on the Ethereum network. Taking advantage of the Polkadot innovation powering product-specific parallel chains, Acala seems like a promising DeFi project enabled to provide a huge array of financial goods and services. If Acala turns out to be a successful endeavor, it can be one of Polkadot’s biggest use cases in the whole DeFi space.