What is Acala Network: An All-In-One DeFi Platform
Launched in 2019, Acala Network (ACA) is an all-in-one decentralized finance (DeFi) platform where users can complete financial operations through smart contracts or protocols. The stablecoin Acala Dollar (aUSD), pegged to USD, powers the decentralized applications (DApps) and DeFi operations on the network. Up till now, the platform has not minted its native token ACA nor launched its mainnet.
What Does Acala Network Do?
Acala Network is Polkadot’s (DOT) cross-chain DeFi hub where users can stake, swap, borrow, lend, earn, and more. Like all DeFi hubs, Acala Network aims to provide an alternative platform to Ethereum (ETH), where users can access DeFi services and DApps without encountering scalability problems. In addition, with Acala’s micro-gas fee system, the network solves the gas fee inflation and network congestion issues. As a result, users need to only pay a small fee when completing operations on the network.
Acala Network provides DeFi services such as a stablecoin currency (aUSD), staking liquidity (through Liquid DOT or L-DOT), and a built-in automated market maker (AMM) decentralized exchange (DEX). The network utilizes two protocols to provide stablecoin services and liquid staking services – the Honzon Protocol and the Homa Protocol.
The Honzon Protocol
Acala Network utilizes the Honzon Protocol to provide stablecoin services. The protocol manages activities involving the decentralized stablecoin Acala Dollar (aUSD). The aUSD is a multi-collateral-backed cryptocurrency pegged to the US Dollar, where 1 aUSD is $1 USD. This stablecoin can be transferred and used on any blockchain connected to Polkadot’s network.
The term “multi-collateral-backed” refers to how users can generate aUSD by using other cryptocurrencies as collateral. Users can use any Polkadot-supported crypto assets to create Collateralized Debt Positions (CDP) to generate aUSDs. A CDP is basically a loan where users would have to pay it back with interest to withdraw their collateralized assets. Once a user pays back their CDP, the protocol burns their aUSD to maintain the USD peg.
The Homa Protocol
Acala Network uses the Proof-of-Stake algorithm to achieve consensus and utilizes staking to secure its network. Prior to liquid staking, once the tokens were staked on PoS blockchains, stakeholders could not use them for other applications causing illiquidity issues. Furthermore, even though there were staking rewards, some DeFi lending applications began to offer higher yields. This motivated users to lend their crypto assets instead of staking, thereby risking the network’s security.
Acala Network’s solution to the illiquidity issue of staked assets is the Homa Protocol. The protocol provides liquid staking services for DOT holders by establishing a staking pool where users stake DOTs and receive L-DOTS in return. L-DOTS are staking derivatives that serve as token staking receipts and provide liquidity. Users can use L-DOTs for applications such as lending to earn interest, acting as collateral to mint aUSD, and asset trading across all blockchains connected to Polkadot’s network.
Acala AMM-based DEX
The Acala Network implemented a built-in AMM-based DEX for users to trade assets in liquidity pools. An AMM provides liquidity to the DEX and ensures that a pool’s total liquidity remains the same through automated trading based on a pricing algorithm. With the DEX, users can swap tokens instantly without requiring an order book while liquidity providers earn incentives by providing tokens to the liquidity pools.
The interesting point is that the Acala DEX allows the trade of any cryptocurrencies across the blockchains connected to Polkadot. As Polkadot is a very popular project, Acala DEX has a large collection of cross-chain liquidity pools. Unlike Ethereum-based AMM DEXes, the trading fees on Acala are also much cheaper than and users can pay the fees with any cryptocurrency.
What Is Acala Network’s Native Token?
Other than aUSD and L-DOT, there is ACA, Acala Network’s native token with a planned total supply of 100 million. According to Acala Network’s whitepaper, the tokens will be minted with the launch of the mainnet. The ACA token will have the following use cases:
- Network utility token: The network will use ACA tokens as payment for transaction fees, stability fees (the aUSD loan interest rates), and penalty fees (in case of liquidation).
- Network governance: Users holding ACA tokens can propose network upgrades and adjustments of risk parameters such as liquidation ratio, stability fees, and liquidation penalty. The on-chain general governance council then decides whether to accept or reject the proposals.
- Contingency solution: If the collateralized assets’ prices suddenly collapse, the network will automatically dilute and sell the ACA tokens.
Who Is Behind Acala Network?
Ruitao Su, Bette Chen, Fuyao Jiang, and Bryan Chen founded Acala through the Acala Foundation in 2019 in a joint effort between Polkadot’s two ecosystem teams, Laminar and Polkawallet. The Acala Foundation currently oversees the network until it reaches complete decentralization. Afterward, ACA token holders will govern the network in the foundation’s stead.
Ruitao Su is the co-founder and Chief Executive Officer of Laminar, a synthetic asset and margin trading platform. He has a Bachelor of Commerce from the University of Auckland and founded Less Code Limited, an award-winning software development studio.
Bette Chen co-founded Laminar with Su and currently serves as Laminar’s Chief Operating Officer. Like Su, she is a University of Auckland alumni and studied software engineering. She also holds a Master of Business Administration and has experience as a project manager and business analyst.
Bryan Chen is the co-founder and Chief Technology Officer of Laminar. Similar to Laminar’s two other founders, he is affiliated with the University of Auckland and studied computer software engineering. He is a software engineer experienced in both front-end and back-end development.
Fuyao Jiang is the founder of Polkawallet, the mobile wallet for the Polkadot ecosystem. He was one of Polkadot’s earliest developers and community builders. He is now an open contributor for Polkadot and Acala Network.
Numerous institutions showed support for Acala Network. In March 2020, Acala Network raised $1.4 million in a seed round with participants such as Polychain Capital, KR1, P2P Capital, and HashKey. In August of the same year, Acala Network raised $7 million in Series A through a simple agreement for future tokens (SAFT) sale led by Pantera Capital, followed by other investors such as 1confirmation, Digital Currency Group, and Arrington XRP Capital. The Web3 Foundation has also awarded Acala Foundation multiple development grants.
What Is the Outlook for Acala Network?
With the rise of DeFi over the past year, there are many established platforms offering stablecoin, liquid staking, or DEX services. As Acala provides all three services, the network has plenty of competition:
- In the multi-collateral-backed stablecoin scene, MakerDAO (DAI) currently dominates. However, MakerDAO suffers from scalability issues as Ethereum is its underlying blockchain technology. Ethereum is slow and handles around 10-15 transactions per second. In contrast, Acala is part of Polkadot, which handles at least 200 transactions per second. Due to Polkadot’s high throughput, Acala Network is more than 10 times faster than MakerDAO.
- As an AMM-based DEX, Uniswap (UNI) is Acala Network’s closest competitor. However, Uniswap does not have a stable medium of exchange (like aUSD) nor a staking derivative (like L-DOT). The Uniswap platform only provides users the ability to trade tokens in a decentralized manner which is only a fraction of what Acala Network can achieve.
- In liquid staking, platforms like StaFi allow users to stake various cryptocurrencies and receive the corresponding staking derivatives. Other than its native token, StaFi also supports many popular tokens such as ETH and DOT, and plans to expand its catalog. Acala only offers DOT staking and provides only one type of tokenized state. On a good note, a report stated that this is a key strength of the network as it provides fungibility and increases liquidity.
Unlike Ethereum-based protocols, Acala does not rely on external liquidators to monitor and close dangerous positions. Instead, the Honzon Protocol automates the process through a unique built-in service, called off-chain workers to increase the stability and security of aUSD.
Another major advantage of the Acala Network is compatibility. The network will deploy a custom Acala Ethereum Virtual Machine (EVM) so that developers can build Ethereum-compatible applications and create crypto assets with similar functions as ERC-20 tokens on Acala. Additionally, the network accepts applications written with popular programming languages (that compiles to WebAssembly) which lowers the entry threshold for app development.
However, most of its features are not online yet. According to its roadmap, the implementation of the EVM and smart contracts has been a work-in-progress since late last year. Also, the platform is still on its testnet and has not minted mint its native token. There is no definitive schedule on when Acala will launch its mainnet but it is expected to go online after Acala has tested all features on its testnet.
Acala Network is an ambitious project seeking to bridge the gap between Ethereum and Polkadot. The platform offers a slew of DeFi services, such as stablecoin, liquid staking, and DEX, that do not require users to pay high gas fees. The next challenges for the network are to deliver its promised features for a complete product, launch its mainnet, and mint its token for decentralized governance. With the funding, grants, and a capable team, Acala Network has huge potential to make major strides within the DeFi field.