Acala Network – The DeFi hub on Polkadot

One of the most anticipated projects in the public blockchain space went live earlier this year – Polkadot. Within the Polkadot ecosystem, there are many unique and innovative projects. Among them, the most popular and the first one to secure a slot in the famous parachain slot auctions was Acala Network. Thus, it will be beneficial to examine the platform’s overall capabilities and applications in more detail.

What is Acala Network?

Acala Network is a layer 1 blockchain network and a Polkadot parachain that aims to become the main DeFi hub within the Polkadot ecosystem. The protocol makes several different DeFi goods and services available, such as lending, borrowing, and staking, which contribute to Polkadot’s user experience, reduce gas expenses and enhance the platform’s capacity for overall scalability. Homa and Honzon are the two primary protocols these various financial apps use. The Honzon protocol is a cross-chain stablecoin system, while the Homa protocol is a tokenized staking liquidity mechanism. Additionally, Acala has created its own automated market maker (AMM), decentralized exchange (DEX), and decentralized governance framework, dependent on a native governance and utility asset known as the ACA token. 

The Polkadot ecosystem is the target environment for the decentralized finance (DeFi) platform known as Acala Network. It is designed to house a wide variety of financial apps, all of which use the technology behind smart contracts and compatible cross-chain capabilities, and stringent security standards. Acala is also compatible with Ethereum, which means that applications built on Ethereum can fairly easy be deployed on Acala Network. Acala Network, much like many of the other independent blockchains that were created using the Polkadot-specific Substrate blockchain development platform, operates as a parachain on the Polkadot Relay Chain. 

The Acala Network is designed to achieve more than one of its objectives. The first is developing an efficient, secure, and borderless method of transferring value inside the Polkadot ecosystem that uses a decentralized digital currency called aUSD. In addition to this, the Acala Network plans to facilitate the development of a stablecoin network that is both extremely secure and interoperable. The functionality of the stablecoin is intended to serve the larger goal of providing Polkadot with a building block for open financial services and an intrinsic DeFi ecosystem that can connect to Ethereum’s own established DeFi ecosystem (and beyond) via cross-chain asset collateralization. This is the intended purpose of the stablecoin functionality. 

Per the objectives mentioned above, the Acala Network was developed to preserve a high level of security by using Polkadot’s shared security mechanism. This design is linked with a commitment to developing decentralization and censorship resistance through the ecosystem’s consortium structure and token release mechanism. Both of these components are referred to as the “token release model.” Acala is focused on equitable governance and increased upgradability, and it leverages governance through its Acala token (ACA), which utilizes forkless, non-disruptive upgrades. Lastly, Acala is committed to improving upgradability and governance.

What is Karura Network?

Karura is Acala’s sister network deployed on Kusama. Similar to Acala, Karura indents to become the DeFi hub on the Karura network. Kusama Network is the canary network of Polkadot that has identical architecture and mechanics.

Kusama is sometimes referred to as the test network of Polkadot where applications can test innovative ideas in a production environment. Considering that it operates in a real environment, it is fair to characterize it more as an innovation hub instead of a testing environment. Karura is for Acala, what Kusama is for Polkadot. A real environment, where the Acala team can test new innovative ideas, before deploying them on Acala.

What is EVM+?

The Ethereum Virtual Machine (EVM) is presently the smart contract platform with the highest adoption. Many blockchains of the next generation will maintain Ethereum compatibility to entice Solidity developers by allowing them to reuse existing toolchains and migrate existing contracts with a minimum effort. These blockchains will claim to be more efficient and less expensive than Ethereum. Although Ethereum has ballooned in size and grown more costly, none of the rival chains has successfully captured a major portion of the market thus far. 

On the Acala chain, DeFi primitives reside, including stablecoin, DEX, liquid staking), liquidity, and users that can be harnessed. Furthermore, other innovations emerge that are not feasible on Ethereum, such as customizable economic policy, flexible fees, and the potential for users to pay transaction fees with any endorsed tokens; native cross-chain functionality; on-chain governance apparatus (no more locked funds); full upgradability (no more contract migrations).

Acala Governance

Acala has a phased strategy to implement a variety of governance structures, which will enable it to gradually move towards decentralization and, in the end, be controlled by the majority of stakeholders in the network. Polkadot’s technology serves as the foundation for Acala’s governance architecture. Polkadot’s technology governs the network via a Referenda chamber, a General Council, and a Technical Committee. 

The Financial Council and the Homa Staking Council are two examples of Acala’s subsidiary councils responsible for managing specific areas of the network.

The governance system of Acala consists of a core council (called the General Council) and a referendum chamber, both of which are associated with feeder councils that regulate various elements of the protocol. The Acala Foundation is in charge of Acala’s development in its early phases, and there are already plans in place to introduce self-upgrading on-chain governance in the future. 

Acala is governed by a total of four councils, which are as follows: 

  • Acala’s administration is driven in part by community-proposed ACA Referendums overseen by the General Council, which is Acala’s highest legislative body. Only the General Council has the authority to propose protocol-level improvements, and it is also the General Council that chooses the members of the other special councils, which are responsible for communicating particular governance requirements to the General Council. 
  • The Financial Council is the entity in charge of the governance of the stablecoin, the decentralized exchange, and any other pertinent DeFi protocols. Every motion is carried out after a pause in order to provide the General Council or the Technical Council the opportunity to provide feedback or overrule the decision. 
  • The Liquid Staking Council is the organization that is in charge of the protocol’s governance at the moment. Every motion is carried out after a pause to provide the General Council or the Technical Council the opportunity to provide feedback or overrule the decision. 
  • The Technical Council is made up of three different parties. It has the ability to veto any “uncontroversially harmful proposals” brought forth by any of the other councils.

aUSD – Acala’s stablecoin

Acala concluded that it would be beneficial to utilize Polkadot’s adaptability by bringing aUSD to the table. The aUSD cryptocurrency is a multi-collateralized, decentralized stablecoin supported by cross-chain assets. aUSD is the de facto stablecoin of Polkadot and Kusama since it is designed to be stable and has a value that is comparable to the US Dollar. Acala is the application-specific blockchain that powers aUSD. 

The stablecoin platform offered by Acala is powered by Honzon, which is an in-house designed mechanism that mints stablecoins whenever a customer submits acceptable collateral. Following its introduction, the Honzon protocol will take DOT, ETH, and BTC as collateral; other cryptocurrencies are anticipated as the rollout of parachains continues. At the point of writing, Acala supports ACA, DOT, LDOT, and LcDOT as collateral on their platform. LDOT represents the tokens received from liquid staking on Acala, while LcDOT represents the liquid crowdloan DOT.

The operation of USD stablecoins is a straightforward process. A Collateral Debt Position is opened for you when you deposit collateral, and a new USD is created. In practice, the CDP is nothing more than a fancy way of stating that you owe money to the protocol and will be required to pay back the loan, together with interest, at a later date. When you redeem your CDP, the Honzon protocol will burn the appropriate amount of aUSD. This will result in the circulating supply being reduced, which will help to preserve the dollar peg.

Acala Network Token Utility – ACA

The Acala network offers a variety of cross-chain decentralized financial (DeFi) services through the Acala Mandala application, which is powered by the Acala token (ACA). In addition, Acala’s sibling network Karura and its native Karura token function as an open-source and permissionless suite of decentralized financial apps (dApps) on the Kusama blockchain. 

The ACA token serves two key purposes on the Acala network. ACA is first and foremost a utility coin on the Acala platform. In the Acala ecosystem, ACA is used for transaction fees and smart contract-based applications. Moreover, the ACA token is used in staking and other core network operations. 

Moreover, the Acala coin (ACA) is utilized for Acala network governance. ACA token holders are awarded voting privileges. This enables token holders can vote on suggestions addressing Acala Treasury governance, council member elections, risk management, and network enhancements. In addition, Acala token holders may vote on changes to critical risk metrics of the Acala network and the decentralized apps (dApps) that comprise the Acala ecosystem. These criteria include suggestions for collateral types, stability fees, and liquidation percentages.

Bottom Line

Acala is the first consortium of its type to supply a collection of protocols, such as a stablecoin protocol, to act as Polkadot’s DeFi building component. Cross-blockchain stablecoin network of Acala will: 

  • Ensure a consistent, stable currency for low-cost, borderless value transfer across all networked blockchains. Collateral may be sourced from Polkadot and other linked networks to obtain a greater supply ceiling. Through its consortium structure and token distribution approach, Polkadot’s shared security mechanism will accomplish genuine decentralization and censorship resistance. 
  • Aims to serve as the foundation for more accessible financial services.
  • Become a specialized stablecoin network with a flexible fee structure that maintains security 
  • Future-proof blockchains with a forkless, non-disruptive update and on-chain governance. 
Aris Ioannou
Aris Ioannou
Aris created Coinavalon with the purpose of helping the average person navigate the decentralized web. Aris has been passively in the space since 2017 and full time since late 2020. Before Coinavalon, Aris worked as a Business & IT Architect in the financial services sector. Aris holds an MSc in Advanced Computing from Imperial College London, a BSc in Computer Engineering from University of Cyprus and currently pursuing an MBA degree from CIIM.

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