Acala Network: Bringing stablecoin to the Polkadot ecosystem
Stability is something that is not certain in the crypto space. Stablecoins came up into this field with the aim of making cryptocurrencies and even the DeFi usable. Without them, it would not be easy to adopt tens of thousands new users and attract them because they fear one thing. Volatility!
I must say that the of cryptocurrencies is reasonable. If you want to make some money on the crypto market, you must face up the risk. You can avoid those, or at least limit them, by using stop-losses when trading. But when you are having some cryptocurrencies not on the open market and want to preserve your profits or protect yourself from a loss? Yes, you need to use stablecoins. And this counts twice in the DeFi space.
Here is why Acala came up with their solution to build the stablecoin and use it in their DeFi application.
What is Acala?
Acala is a DeFi hub with its own decentralized stablecoin called aUSD which will allow users to transfer value pegged 1:1 to USD across any blockchain within the Polkadot ecosystem.
Actually, Acala has two different protocols that we will cover in this article: Honzon and Homa. Those are the foundation for the other applications within the decentralized finances and providing liquidity.
Honzon: The Stablecoin Protocol
Sometimes, Acala is called Polkadot´s MakerDAO. The truth is that MakerDAO inspired the Honzon stablecoin protocol. But it has improved the CDP liquidation process and it fits well in the Polkadot ecosystem.
Honzon enables creating a stablecoin aUSD, which you can imagine as a DAI stablecoin in the MakerDAO structure. It is pegged 1:1 to USD and it facilitates transmitting value borderless for all the chains in the network. Due to its stable nature, it also serves as a building stone for financial services within the Polkadot space and enables a lending business with predictable risk.
aUSD is a multi-collateralized stablecoin, which can be backed with DOT, BTC, or ETH as collateral. When taking a loan from Acala, the user needs to pay interest for his loan, but in comparison to MakerDAO, the Honzon protocol has a set of mechanisms to maintain stability and manage risks from the price fluctuation of the underlying collateral assets.
Stablecoin aUSD will be generated through various collaterals from the Polkadot ecosystem such as DOT, KSM and also Bitcoin, Ethereum and several ERC-20 tokens.
Acala Dollar (aUSD) characteristics:
- Stable currency— multi-collateralized stablecoin pegged 1:1 to US Dollar
- Multi-collateral backed — aUSD will be backed not just DOT and KSM, but also BTC and ETH
- DeFi — earn interest by lending aUSD to several different DeFi protocols across Polkadot protocol
- Trading — by Substrate-based nature of Polkadot parachains, aUSD can be traded cross-chain through various DEXes
- Security — aUSD will be secured by Polkadot’s shared security model
Homa: The Tokenized Staking Liquidity Protocol.
Homa is the second protocol of Acala Network and it focused on liquid staking. What does that mean? Homa protocol enables a user to tokenize the staked cryptocurrency and against it mints L-assets, which could be used for providing liquidity among the DeFi in the Polkadot Network.
L-assets can be minted from the underlying staked coins and they exploit 1:1 value, while staked DOT is still securing the whole network. For DOT, there is liquid L-DOT and for KSM it's liquid L-KSM. The same way as the L-assets are minted could be then redeemed, so the staked DOT is released to the user.
L-assets have several usecases:
- Staking rewards distribution — L-assets holders receive the staking rewards 1:1 to the underlying token (DOT, KSM)
- Trading — L-assets can be traded across all chains on the Polkadot Network
- DeFi — with L-assets, users can provide liquidity or lend it to some Polkadot DeFi platform
- Derivates — can be used in the future markets of the staked asset (DOT, KSM)
Karura — the Canary network of Acala
Similarly, that Polkadot has its own Canary network Kusama, Acala will release its Canary network called Karura. Karura will run on the Kusama Relay chain and it has virtually the same codebase as Acala.
Karura will provide its own algorithm stablecoin kUSD with a value of 1:1 to US Dollar. Besides kUSD, it will enable liquidity staking for KSM by the liquid token L-KSM, which will have the same qualities as Acala’s L-DOT.
Karura will host the first Crowdloan on Kusama and is going to participate in the first round of Kusama Parachain auctions that will start-up very soon.
Due to the fact that Acala is launching its canary network Karura, there will be present various different cryptocurrencies within the network.
- ACA (for Acala) and KAR (for Karura) are the governance tokens — think of them like MAKER for MakerDAO protocol
- L-DOT, L-KSM — it’s the liquid form of DOT and KSM, that can be traded on DEXes while the original token is staked
- aUSD, kUSD — stablecoins in Acala and Karura— similar to DAI for MakerDAO
- Wrapped BTC coins — RenBTC, potentially also PolkaBTC from Interlay (in progress)
Acala is one of the most mentioned projects within the space. It has two main goals to achieve. First is releasing the algorithmic multi-collateral stablecoin aUSD, rated 1:1 to US Dollar. And the second goal is to run Acala DEX, which will use aUSD for trading various tokens, similarly to Uniswap trading using DAI.
Acala is the first project built on Substrate, that will bring the Polkadot ecosystem its own stablecoin. It will also bring liquid staking for DOT and KSM tokens, which will leverage the usecase of them and maximize their utility and reward for its holders and users.
We assume that the Acala project with its own canary network Karura will be positioned in the true heart of the Polkadot ecosystem and will be an essential part of our everyday life in the Polkadot world.
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