Cryptocurrencies came with the potential and promise of decentralization and emphasis on more truth and less trust, and eventual redistribution of wealth, but most of these promises haven’t been kept, as volatility is a major concern for most assets on the blockchain.
Price fluctuations and unpredictability of assets keep investors at arm’s length of certain projects. This has led to the invention of the “stablecoin” which has been used as a tool for alleviating some of these concerns.
The stablecoins in existence on the ETH network, (USDC and a few others) fundamentally are single network assets whose underlying ledgers place a limitation on them. Also, these assets are available only on that single platform in form of collateral. This gives them significant limitations in terms of usage and adoption.
With the advent of the Polkadot network facilitating cross-chain communication on the blockchain which enables interoperability and economic/transactional sealability, Acala comes with its unique qualities by leveraging all these.
Acala has created a Decentralised financial network for Stablecoin and Staking liquidity. In this article, we’ll take a look into the Acala ecosystem and its features.
By the end of this article, the reader should be able to understand some fundamentals which include:
- Assets of Acala – Acala stable coin and its mechanism
- ACA token utility
- Trilogy networks
- Governance in Acala network and the treasury
- Acala EVM+
What is Acala
Acala is a tailormade stable coin decentralized liquidity blockchain that is future-proof with forkless upgradability and has cross-chain interoperability.
Alcala’s goals are to:
- Create a low-cost stable coin for blockchains connected to a network for borderless transfer of value.
- Enable collateral from any connected network and not just on the Polkadot network. This will help to attain a higher supply threshold.
- Take advantage of Polkadot’s shared security mechanisms in order to attain adequate security.
- Attain the status of a specialized stable coin that will enable fee customization schedule without compromising security.
- Remain future-proof with forkless upgrades, which are subject to on-chain Governance.
- Serve as a springboard for a more open financial economy.
Acala Stablecoin
The Acala Dollar [aUSD] is the stablecoin of the Acala Network, which is run through the Honzon protocol [ the Acala stablecoin protocol].
It serves as the stablecoin native to the Polkadot and Kusama ecosystems and can be integrated trustlessly by any chain connected to Polkadot or Kusama and also any DApp deployed on the chains.
aUSD is pegged to the US Dollar. The process of minting aUSD is trustless, Sovereign and Liberates the act of minting itself using reserve assets as a means of collateral.
What are the use cases of aUSD
- Minting aUSD enables users to hedge volatility, pay for goods and services, and collateralize their underlying assets without giving up ownership.
- Traders can also ” leverage Long” their underlying assets by depositing them into the stablecoin vault, minting stablecoins, and swapping them for more underlying assets. This is a result of significantly increasing the exposure of the underlying assets.
- Traders have the ability to use assets that bear yields such as LDOT { Liquid staking DOT powered by the Homa protocol} as a form of collateral to further multiply the exposure of the underlying assets, and concurrently earn APR.
- The capital efficiency of Liquidity providers can be increased by making use of Liquidity Pool collateralized Super Loans.
- aUSD is designed to empower ecosystems across blockchains; enabling their growth through the Innovation of new quality products by serving as a Defi building block.
- Most importantly aUSD is meant to be “stable” which makes for the perfect form of a medium of exchange, where users can use it to pay for transactions, trading, and as a means of settlement.
The aUSD Stable coin Mechanism
The Acala stablecoin protocol (Honzon) deploys a number of systems and mechanisms in order to ensure the stablecoin created adequately tracks the behavior of the dollar in various market conditions.
It deploys a system of collateralized debt positions [ CDPs ], Oracle quality of service, Market arbitrage incentives, risk management mechanisms and an on-chain liquidator, and most recently the IADS (to ensure this stability mechanism is foolproof).
Key aspects of risk Management and Stability Mechanisms include:
- Risk Parameter mechanism
- Autonomous Liquidator
- Liquidation Event
- Oracles and
- Emergency shutdown.
Risk Parameter Mechanism
On Acala, multiple reserve asset types that have varying risks profiles are accepted as collaterals of CDPs, this diversifies assets backing the stable Coin and necessitates the protocol to dynamically manage positions and safeguard its solvency using the following risk Parameters:-
- Stability Fee: this is the cost for minting aUSD and is used as an incentive in order to influence the demand and supply of the stablecoin.
- Liquidation ratios:- In order to ensure the solvency of the system, collaterals will have to be sold off to pay the outstanding debt on the stablecoin. The ratio at which this is done is known as the liquidity ratio. Because of price volatility’s effect on collateral risk profiles, the lower the risk of a collateral asset, the lower the liquidation ratio and vice versa.
- Liquidation Penalty: This is the cost of allowing a loan to be liquidated. That is a price to be paid for leaving a vault unsafe.
- Required Collateral Ratio: This is put in place to protect volatile assets from going into liquidation immediately after minting. It is usually higher than the liquidation ratio and is of importance when minting stablecoins.
- Debt Ceiling: This feature is used to control and monitor a portfolio’s diversification and determine the amount of risk that a portfolio can afford to take on.
- Accepted Slippage: To ensure price efficiency, the system automatically liquidates {on Acala swap} when the slippage is still within Accepted levels and before it goes to collateral auction.
Autonomous Liquidator
The Acala stablecoin protocol possesses an autonomous Liquidator that is present on-chain. It checks the safety of the vaults, checks every block, and triggers the liquidation process for vaults perceived to be unsafe.
Vault safety is intact when the Current ratio >liquidation ratio. ( Current ratio is the debt to a collateral ratio based on the current market value of a specific collateral asset).
The autonomous Liquidator is decentralized and its code is guaranteed by the network consensus and is also an essential part of the blockchain routine, as it doesn’t use on-chain resources for its implementation. This makes it to be highly efficient, scalable, and secure.
Liquidation event
Liquidation involves the selling off of some collateral assets of unsafe positions in order to repay aUSD owned { that is one previously borrowed from the vault }.
In order to ensure efficiency and effectiveness of this process, the mechanism uses Acalaswap in combination with the collateral auction;
What is the end result of Liquidation?
- The aUSD is repaid
- The liquidation fee is collected from the vault of the owner and then added to the CDP treasury.
- After settling the debt, the remaining collaterals are returned to the vault owner.
- If collaterals cannot be sold due to extreme market conditions for repaying a debt or for liquidation penalty, they will then be collected by the CDP treasury which can be sold at a later time to repay outstanding aUSD debt.
- If after liquidation all aUSD owned cannot be regained, it will be recorded by the CDP treasury as bad debt.
Liquidation on Acala swap
This way of Liquidation is very efficient if the size of trade to be engaged in is of good quantity and also if there is enough liquidity on the swap.
For the liquidation process to ensue:
- The protocol first calculates the target amount of aUSD {i.e aUSD owned + Liquidation Penalty} to be purchased on the swap.
- The protocol now uses collateral assets from the vault and swaps them for aUSD if the slippage is within an acceptable level.
Liquidation on Collateral auction
To get the best stablecoin price for collaterals, the collateral auction utilizes a combination of two mechanisms.
– Ascending auction: Here, Liquidated collaterals will be auctioned and bidders will have to bid upwards with a preset aUSD target that covers both the outstanding debt + Liquidation Penalty.
– Descending Reverse auction: This occurs after a preset aUSD has been determined as explained above, it is when potential buyers are allowed to bid the minimum amount of a Collateralized asset they are willing to buy by paying the amount of the preset aUSD target.
Part of the collateral sold in the auction is transferred to the winner, and any of the remaining collateral is returned to the initial vault owner.
The auction mechanism helps to create an arbitrage opportunity where potentially discounted collateral can be purchased and resold for a potentially higher value according to prevailing market conditions and prices.
It also helps to safeguard the aUSD protocol as it allows for the price to remain in equilibrium.
Alcala’s Open Oracle gateway
The challenge of providing accurate, decentralized, and reliable Oracles cannot be done by Acala alone.
As Acala is a platform that powers cross-chain Defi Dapps on not just Polkadot and Kusama but beyond, it is imperative that a more open, inclusive, and decentralized Oracle infrastructure is created with the involvement of other leading projects in the industry. This is Acala’s Open Oracle gateway (OOG).
The gateway allows a number of highly functioning Oracle’s to be deployed on the Acala Network and offers the following:
- Multiple Oracle Networks: In addition to Acala Oracle, each contributing party can operate their own Oracle services where they can set up a node operator or integrate with an oracle API.
- Choice of price feeds: Dapps can choose to have price feeds from a single provider or can use an aggregation from multiple providers, they could also get raw data from the individual node operators and then aggregate them to obtain their unique price feed.
- Quality of service: Price feeds that are posted through the oracle gateway fall under operational transactions [quality of service]. These transactions are always prioritized and guaranteed to be included in a Block.
- Fees are free: upon the generation of a valid feed, the transaction fees suffered will then be refunded. This makes the provision of this feed completely free for providers and ensures the integrity of the oracle gateway while preventing spam.
The oracle gateway requires approval from a sitting council for the acceptance of new oracle providers and their node operators, this will later evolve into a democratically voted process.
aUSD Oracle Feeds
This is the aggregation of a number of external prices feeds with the eventual provision of an average reference price by a network of Oracle node operators on the Acala Oracle.
The addition and the removal of operators are managed through governance as previously highlighted. Quality of service is applied for all price feeds, where all valid feeds will be refunded with the incurred transaction fees.
Emergency Shutdown
This is the last line of defense to protect the stablecoin mechanism against substantial security threats.
The shutdown could be applied on a global scale across the whole network or to a particular Isolated collateral. This will ensure that target prices of assets are met and also ensure that vault owners and aUSD owners receive value for what they own.
When the Emergency Shutdown is initiated,
- Users will not be allowed to update their stablecoin positions and the system will automatically set and lock a target price for all collateral assets. But users will be allowed to withdraw any collateral that’s free which haven’t yet been used to mint aUSD.
- The system will stop all auctions and begin the processing of outstanding vaults and debts. Upon completion of this process, the system will now return to the position of zero surpluses and zero debt. Users can now burn the aUSD they hold and reclaim its value in collateral assets.
Acala Network Security
After being launched as a parachain on the Polkadot network, Acala leverages the already established network security and consensus for the validation and finalization of its blocks.
Acala connects itself to Polkadot using the cross-chain message passing protocol [XCM].
Collators have the task of maintaining the Acala blockchain. They collect parachain transactions from users and produce state transition proofs for validators on Polkadot. They do so by aggregating parachain transactions into parachain block candidates and then producing state transition proofs for validators based on those blocks.
Acala blockchain is kept secured by the Polkadot relay chain and kept running by the collators, As the network is trustless and decentralized by default, the Acala parachain only needs a singular honest collator to be resistant to censorship.
The Trilogy Networks
The trilogy networks of Acala is made up of:-
- Manadala test network
- Karura network and
- Acala network.
On these networks, Acala stablecoin [ Honzon ] protocol, Acala swap protocol, and Homa-staking protocol are deployed.
- Karura network is the unaudited version of Acala protocols released on Kusama as a parachain. It is EVM compatible and offers financial applications such as a trustless staking derivative [ liquid KSM ], a multi-collaterized stable coin backed by cross-chain assets [aUSD], and an AMM DEX;
- Mandala test network is a value-free risk-free, Experimental station for Acala where users and developers can test-run the functionalities of Acala.
Fees on Acala
Acala networks have a set of accepted tokens that can be used as transaction fees on the network. But these fees are ultimately settled in the network’s native token [ ACA ].
For this to run seamlessly, a fee token must at all times have a liquidity pool with aUSD, which now automatically creates a route to ACA; the system finds the next available and supported fee token if the token has a zero balance.
For Acala Network:
Default fee token = ACA
Default order: ACA> aUSD> DOT> LDOT.
On Karura Network:
Default fee token = KAR
Default order: KAR> KUSD>KSM>LKSM.
Governance on Acala
The framework of Acla’s governance is based upon Polkadot’s blueprint; they employ a Referenda chamber, a technical committee, and a general council to govern the network.
The approach to governance has been phased, in order to implement the different governance mechanisms that will allow for progressive decentralization and lead ultimately to the majority network stakeholders commanding the duties of governance.
There are however on the Acala network sub-councils that manage specific aspects of the network, these include the finance council and the Homa staking council.
Referenda
On Acala, referenda are a simple, stake-based inclusive voting scheme. It could be started by public proposals or a council proposal, these proposals usually have fixed enactment/delay periods that go along with them.
Emergency proposals can however be fast-tracked to have shorter delay periods. This type of proposal may involve network issues that need to be fixed urgently.
Voting mechanisms on Acala follow Polkadot’s method which includes tallying, voluntary locking, Adaptive, and Quorum Biasing.
Councils
General Council
In the initial phase, Acala will be governed by a collaboration of a Referenda chamber and a General council that is appointed by the Acala foundation.
The General Council is responsible for decisions taken on the network such as routine upgrades which are made transparent on the chain. They also provide oversight and hold veto rights to stop any proposal that is seen to pose a threat to the security of the network.
The referenda chamber’s duties are to vote for or against proposals made by ACA holders seeking to make changes to the protocols and the Acala treasury.
In the later phase of governance which will happen after the network is well established, a Referenda will be initiated in order to take governance into the elected council phase.
Financial Council
They are responsible for overseeing updates of the Honzon protocol [ Stable Coin protocol ] parameters and other protocol fee parameters. They are elected by the general council through a 2/3rds approval rate.
Homa staking council
They oversee updates of liquid staking parameters such as validator selection. They are elected by ACA holders.
The Oracle Collective
To become a member of the Oracle gateway requires approval of the general council through a proof of authority (POA) model where only trusted authorized operators can provide price feeds into the network.
Technical Committee
These are elected by the general council through a 2/3 approval rating, they are responsible for fast-tracking emergency proposals critical to the network’s smooth operations, and also canceling proposals deemed dangerous to the network.
Emergency actions
- to bring forward a scheduled task to ≥12 hours requires ≥ 1/3rd of technical committee consensus.
- to bring forward a scheduled task to < 12 hours requires ≥ 2/3rds of the technical committee consensus.
- to delay a scheduled task for up to 48 hours requires 1/3rd of the technical committee consensus.
- to cancel a scheduled task requires ≥ 3/4 of the general council Consensus.\
The Treasury
The main objective of having a reserve of digital tokens both native and foreign to the Acala ecosystem is to :
- Ensure it can fund itself for a parachain slot on Polkadot for the foreseeable future.
- Ensure there is enough liquidity in the various protocols [i.e providing LKSM, kUSD, etc ].
- ensure protocols and operations are run smoothly on the platform and to make improvements where necessary.
- ensure the network’s security operations are enhanced where and when necessary.
Any funds deemed surplus could also be spared for operations such as
- Software and tool development
- Community funding and marketing events.
- Funding future community Karura treasury proposals.
Treasury reserve funds on Acala are supervised or overseen by ACA holders and are funded from Acala protocol fees and community contribution events, all of which will enable the network’s self-sustainability for now and in the long term.
Acala EVM+
Ethereum Virtual Machine is the most dependable smart contract platform, which allows developers to use its existing tool chains and also migrate existing contracts with minimal effort. This is in spite of how expensive the Ethereum network costs are.
Acala views EVM as a part of the Acala substrate / Polkadot system and Acala aims to provide a different experience with EVM+. The goals of EVM+ are to:
- enable users to have a complete, seamless, full stack Acala and substrate experience with a single wallet.
- Enable protocol composability for EVM and run time.
- Enable developers to develop and deploy various Dapps on Acala with impressive tooling support.
Acala EVMs combine the following benefits and features of both Ethereum and substrate platforms in order to come up with the best possible output:
- A composible defi stack.
- flexible fees.
- An on-chain scheduler.
- keeping nodes lightweight and queryable.
- upgradable smart contracts.
- single wallet, single account experience.
- Compatible developer tooling.
- Avoidance of Dust accounts. for more information on Acala EVM+, click here .
Conclusion
You should now have a high-level overview of Acala and what the ecosystem is all about. For more information, check out their website and their wiki.