Acala Crypto Interview | Polkadot’s DeFi Network


For anyone not familiar, what is Acala?

Acala is a decentralized finance network on Polkadot. Acala powers the aUSD stablecoin ecosystem and a DeFi-focused application platform. Acala is the top engineering team in the Polkadot ecosystem by Github commits, and was the first team to win a parachain auction on both Polkadot and Kusama. Acala is working to enable mass market participates to use Web3 without the difficult user experience and, if needed, a compliant enterprise-grade permissioned environment. To achieve this goal, Acala is already working with US Fintech to provide a DeFi backend for their 4 million customers to be able to enjoy the benefits of Web3 without complex tools or new apps. Acala is also working with Alluvial, Coinbase, and Figment to provide enterprise-grade permissioned DOT liquid staking to institutions.

It was recently announced that Acala is launching a 250 million dollar ecosystem fund, what is the aim of this?

Acala’s primary goal is to grow the usefulness, impact, and issuance of the aUSD stablecoin. With that in mind, we launched the $250 million aUSD Ecosystem Fund along with 9 other Polkadot parachain teams and over 25 venture funds to support early-stage startups building applications with strong aUSD use cases on any Polkadot or Kusama parachain. The fund participants are looking for Solidity or Substrate-based applications driving yield or utility for aUSD, including money markets, DEXs, derivatives, asset management, DAOs, payments, and other use cases.

What is EVM+?

Just like Ethereum can do things Bitcoin will never be able to do, which subsequently inspired many new innovations, Substrate (Polkadot’s software development kit – SDK) and Polkadot are categorically different from Ethereum in a way that will empower many new innovations outside of the legacy EVM technology. We are firm believers in the power of Substrate and built the Acala EVM+ to also optimize for Substrate’s full potential and longevity, rather than simply redeploying Ethereum on Polkadot and inheriting all the same problems Polkadot was built to solve.

The Acala EVM+ provides a development environment fully compatible with Ethereum while using Substrate’s customizability, flexibility, and upgradeability. Developers will now be able to innovate outside the restrictions of the EVM, meaning existing EVM-compatible applications can be developed but can be improved with new features from Substrate.

The EVM+ is now live on Acala’s experimental parachain Karura, and will launch on Acala and Polkadot in the very near future.

Tell us about aUSD?

aUSD is an over-collateralized, decentralized, multi-collateral stablecoin that is the native stablecoin of the Polkadot ecosystem. In terms of a comparison, you can think of it like a multi-chain version of DAI with improvements to stablecoin mechanism and peg stability by using Substrate. aUSD can be minted with decentralized crypto assets like DOT, KSM, or ACA.

What mechanisms are in place to maintain its peg?

aUSD uses various methods to maintain its peg. First, aUSD is over-collateralized, meaning in order to mint, for example, $100 in aUSD, you would need at least $200 to deposit as collateral, similar to a down-payment on a traditional loan with a bank. If the price of the collateral were to drop, putting the protocol at risk, the protocol will automatically sell the collateral either in AcalaSwap DEX or to liquidation bots run by the community. AcalaSwap was built to improve upon the DAI model since DAI has run into issues in the past with their off-chain liquidation bot method during high-pressure events like ‘black Thursday’ where the Ethereum network was too congested for liquidation bots to make their purchases of collateral, causing DAI peg to temporarily de-peg. aUSD’s on-chain liquidation bots and built-in DEX allow two options to ensure liquidations can happen at any time. 

In addition to liquidation mechanisms, aUSD’s peg and protocol health is also maintained using interest rate adjustments and arbitrage. Interest rates can be adjust up to increase price (by decreasing supply) and interest rates can be decreased to increase aUSD price (by increasing supply). In addition, aUSD is listed on different exchanges and will continue to be available in more venues, causing a large network of arbitrage opportunities which naturally help to continuously bring aUSD as close to $1 as possible at all times.

Is there any risk of what happened to UST happening to aUSD?

There is a 0% chance of the same thing that happened to UST happening to aUSD because the two stablecoins are completely different. UST was an algorithmic stablecoin backed by nothing and used an unproven, experimental algorithm of minting and burning a sister token (LUNA) to maintain its peg. aUSD is backed by crypto assets in an over-collateralized manner, meaning there is always more collateral backing aUSD than there is aUSD issued in the market. aUSD uses a similar model to DAI which has been live since 2017 and has weathered several ups and downs in the market.

What have you done / will do to bring aUSD into the crosschain world?

Cross-chain is in aUSD’s DNA from day 1 since it was built as the native, decentralized stablecoin of Polkadot. Polkadot is a blockchain of blockchains, connecting and securing up to 100 application-specific blockchains. aUSD is already on various parachains within the Polkadot and Kusama ecosystem and will continue to be used by nearly all parachains and DApps on Polkadot. Over time, aUSD will also be exported outside of the Polkadot ecosystem via bridges to other layer-1 ecosystems.

If you’d like to learn more about Acala and what they’re doing we’ve recently published a research paper on the Acala Network HERE.

Acala Crypto Interview | Polkadot's DeFi Network - - 2024

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By Lark Davis

Combining cutting edge insider insights and done-for-you market analysis to deliver crypto investors the best opportunities to grow their wealth, stay ahead of the curve, and avoid costly mistakes! We cover DeFi, NFTs, Altcoins, Technical Analysis and more!