What is Acala?
Acala Network is the financial hub of Polkadot and their team aims to focus on decentralized finance protocol, mechanism design, parachain economic modelling as well as governance. This project supplies users with key financial primitives including decentralized stable coin, staking derivatives and DeX, Acala Network powers cross-blockchain open finance (DeFi) applications on Polkadot and beyond.
With the empowerment of Polkadot, it is looking quite promising tha Acala Network can enable true interoperability, economic and transactional scalability. Acala was the first decentralized financial corporation to offer a set of protocols: a stablecoin protocol to play the role of Polkadot's DeFi building.
The project aims to issue Acala Dollar (aUSD) which is a decentralized stablecoin. Users can redeem 1 aUSD for each US dollar, Acala uses DOT, BTC, or ETH as collateral assets. People can send or receive USD easily across any blockchains connected to the Polkadot network. The project also designs to release staked assets (DOTs) as fungible & liquid assets (L-DOTs), extracting the derivative value of staked assets to fuel DeFi without sacrificing the security of the whole network. Acala Network is secured under Polkadot's shared security model, ensuring high resilience and forkless upgradability.
Problems that Acala solves:
To really understand what problem that Acala is trying to solve, we will walk through what Proof-of-stake and Stablecoins are and their disadvantages:
1. Consensus Mechanisms:
When Satoshi Nakamoto was building the first-ever cryptocurrency, Bitcoin, he had to find a way for transactions to be verified without the need to use a third party. This he achieved when he created the Proof of Work system.
Essentially, Proof of Work is used to determine how the blockchain reaches consensus. In other words, how can the network be sure that the transaction is valid and that someone isn’t trying to do bad things, such as spend the same funds twice?
Proof of Work is based on an advanced form of mathematics called 'cryptography'. This is why digital coins like Bitcoin and Ethereum and called 'cryptocurrencies'!
Cryptography uses mathematical equations that are so difficult that only powerful computers can solve them. No equation is ever the same, meaning that once it is solved, the network knows that the transaction is authentic.
Lots of other blockchains copied the original Bitcoin code and as such, also use the Proof of Work model. Although Proof of Work is an amazing invention, it is anything but perfect. Not only does it need significant amounts of electricity, but it is also very limited in the number of transactions it can process at the same time.
As a result, other consensus mechanisms have been created, with one of the most popular being the Proof of Stake model. Proof of Stake was first created in 2012 by two developers called Scott Nadal and Sunny King. At the time of its launch, the founders argued that Bitcoin and its Proof of Work model required the equivalent of $150,000 in daily electricity costs. Since then, this figure has increased to millions of dollars.
The Proof of Stake model uses a different process to confirm transactions and reach consensus. The system still uses a cryptographic algorithm, but the objective of the mechanism is different.
While Proof of Work rewards its miner for solving complex equations, in Proof of Stake, the individual that creates the next block is based on how much they have 'staked'. To make things simple for you, the stake is based on the number of coins the person has for the particular blockchain they are attempting to mine.
So, to clarify:
- Proof of Work requires ALL of its miners to attempt to solve a complex sum, with the winner determined by the person who has the most powerful/quantity of hardware devices.
- Proof of Stake model randomly chooses the winner based on the amount they have staked.
Other advantages of Proof of Stake compares to Proof of Work:
- Proof of Work blockchains give people who purchase powerful hardware devices a greater chance of winning the mining reward.
- What this has resulted in is centralized organizations buying thousands of devices (known as ASIC’s) which generate the highest mining power. This type of operation is known as a 'mining pool' and it allows people to 'pool' their resources together to give them the greatest chance of solving the cryptographic sum first.
- Consequently, just four mining pools (of which the majority are located in China where electricity is cheap) control more than 50% of the total Bitcoin mining power.
- This is an unfair system as it means that the average person has no chance of ever winning the mining reward. This is where Proof of Stake is different. This model prevents groups of people joining forces to dominate the network just to make a profit. Instead, those who contribute to the network by freezing their coins are rewarded proportionately to the amount they have invested.
Less Electricity Consumption:
- Some Proof of Work blockchains like Bitcoin use large amounts of electricity. This is because the cryptographic sum that miners must solve is incredibly difficult.
- A recent study found that the total amount of electricity required to keep the Bitcoin network functional is more than the amount used by more than 159 individual countries!
- Not only is this bad for the environment, but it also slows down the rate at which cryptocurrencies can increase their real-world adoption. This is because electricity bills must be paid using fiat currency!
- On the other hand, Proof of Stake does not need highly complex sums to be solved, meaning that the electricity costs to verify transactions are substantially lower.
Prevent 51% Attack:
- A 51% attack is used to describe the unfortunate event that a group or single person gains more than 50% of the total mining power. If that happened in a Proof of Work blockchain like Bitcoin, it would allow the person to make changes to a particular block. If this person was a criminal, they could alter the block for their gain.
- A recent example of a 51% attack happened against the Verge blockchain, which allowed the hacker to walk away with 35 million XVG coins. At the time of the attack, this amounted to a real-world value of $1.75 million!
- When using a Proof of Stake consensus mechanism, it would not make financial sense to attempt to perform a 51% attack. For this to be achieved, the bad actor would need to stake at least 51% of the total amount of cryptocurrency in circulation. The only way they could do this is to purchase the coins on the open market.
- If they decided to buy an amount this substantial, then the real-world value of the coin would increase along the way. As a result, they would end up spending significantly more than they could gain from the attack. Not only this but once the rest of the network had realized what had happened, the bad actor would lose all of their stakes!
- Now that you have understand what is Proof of Stake and how it works, but Proof of Stake (Nominated Proof-of-Stake in case of Polkadot) consensus mechanism still have a problem: Polkadot network targets 50% active DOT staking with a 20% annual return. Effectively this creates an opportunity cost for using DOT in other applications versus staking. Ethereum as it currently stands as a PoW network has no such barrier, and in fact, has an incentive for ETH holders to participate in DeFi applications like MakerDAO or Compound. On the other hand, if DeFi lending applications provide a better yield than staking, it could motivate the collective movement of funds from staking to lending, causing a 'bank run' and risking the security of the entire network. This problem can be solved by using the Homa Protocol of Acala. We will explain it in more detail later on.
Stablecoin since its inception to widespread popularity (at least in the crypto world), has proven its utility beyond speculation: they have been used in alleviating economic and political hardship, and as a hedging mechanism for traders.
The existing USD stablecoins are most prevalent on the Ethereum platform, just to name a couple of USDC (centralized stablecoin) and DAI (decentralized stablecoin). In the decentralized stablecoin realm (using an over-collateral mechanism for securing the stablecoin), single network assets are fundamentally limited by its underlying ledger and the assets available on that platform as collaterals, hence limiting their usage and adoption.
The significance of cross-chain communication to the blockchain is like that of the internet to the intranet. Polkadot empowers a network of public, consortium and private blockchains, and enables true interoperability, economic and transactional scalability. Acala is a first-of-its-kind decentralized finance consortium delivering a set of protocols e.g. a stablecoin protocol to serve as Polkadot's DeFi building block
The Most Characteristic Features of Acala and how Acala use them to solve current problems:
- Multi Collateral Type CDP:
Every aUSD is backed in excess by a crypto asset through Honzon Protocol, it follows the mechanism known as an over-collateralized debt position (or CDP). Together with a set of incentives, supply & demand balancing, and risk management mechanisms, the price of aUSD will be stabilized. The CDP mechanism design is inspired by the first decentralized stablecoin project MakerDAO, which has become the DeFi building block in the Ethereum ecosystem. However, in comparison with Ethereum, the Honzon Protocol can use Off – chain Worker to automate the process and increase the security and stability of the stable coin.
- Price Stability Mechanisms:
The value of one aUSD token is designed to peg to US Dollar at 1:1 ratio at all times through an automatic risk management algorithm within the Honzon Protocol together with community governance.
- Automatic Liquidations of risky CDPs:
The value of collateral in every active CDP is constantly monitored by the Honzon Protocol to ensure that the associated outstanding debt in aUSD can be recovered anytime by selling the collateral. The Honzon Protocol will trigger the liquidation if an active CDP is considered to be too risky. And after the liquidation is triggered, it will run a special auction mechanism to cover the outstanding debt by selling the minimum proportion of the collateral as possible.
- Acala DeX:
The Acala DeX protocol is inspired by Uniswap, but built as a runtime module as part of the Acala Substrate chain to serve the aUSD community. Each liquidity pool contains a balance of two tokens, and the exchange rate is simply the amount of one token divides that of the other. Users enjoys instant token swap without the need for an order book, whereas liquidity provider could supply liquidity of the two tokens in a pool to earn a fee.
Auctions are one of the stability mechanisms employed by the Honzon protocol to maintain a strong peg between aUSD and US Dollar.
- Surplus Auction: When business as usual, the Honzon protocol through the CDP Treasury would accrue interests in aUSD from each loan. This surplus will firstly cover any outstanding debt in the system. Whenever this surplus reaches a predefined limit, the surplus in aUSD will be auctioned off for ACA which will then be burnt.
- Debt Auction: The CDP Treasury also keeps account of the system debt, that is if unsafe loans cannot be fully liquidated and debt cannot be fully repaid. If system surplus cannot cover the debt, then the Debt Auction will be triggered, and additional ACA could be minted to auction off to pay back outstanding aUSD debt.
- Collateral Auction: Each aUSD loan is created with a required collateral ratio, and its collateral ratio needs to be above the liquidation ratio to stay safe. The liquidation ratio is lower than the required collateral ratio to create a safety zone for each loan and avoid immediate liquidation upon creation. If the price of a collateral drops to a point where a loan's collateral ratio is less than the liquidation ratio, then a Collateral Auction is triggered to sell off the collaterals to pay off the aUSD debt.
- Staking Liquidity Protocol:
In a Proof-of-Stake (PoS) network, there will be natural competition between assets being used in staking (for yields) and assets being invested in DeFi (for returns). This results in a tension between security and liquidity. For example, Polkadot intends to have 50% of the DOTs staked, the rest in circulation would be used for bonding, paying transaction fees and other. Can we have both security and liquidity at the same time? The 'Homa' staking liquidity protocol solves this dilemma.
- Liquid DOT
Users can stake DOTs trustlessly with the 'Homa' staking pool, and in return you receive Liquid DOT (L-DOT) accounting for both the DOT amount and on-going staking reward earned. L-DOT is fungible, can be traded, used for payment, in DeFi e.g. as collateral to generate aUSD stablecoin. L-DOT as a derivative of DOT would extract residual value of it without compromising or competing for network security. Meanwhile it releases much liquidity for other use cases of a PoS network token.
Homa is designed as a generic staking liquidity protocol, and firstly implemented for Polkadot and DOT as staking asset.
Note: user would transfer DOTs from Polkadot Relaychain account to Acala via a bridge, this is being mocked until cross-chain message passing (XCMP) facility is ready.
- Early Unbonding
Once DOTs are staked, there is a 28-day unbonding period which in principle reduces liquidity and improves security and stability of assets at stake. Yet some users may want to have their DOTs back earlier. Homa fills this need by providing immediate withdrawn and early unbonding services in addition to the standard 28-day bonding period. Users are required to pay a higher premium for a shorter wait time (or NO wait time!) to compensate the loss reward of free liquidity.
- Immediate Withdraw: a rather high premium is required, as it draws DOTs from the Free Pool where liquidity is reserved by foregoing staking rewards.
- Targeted Unbonding: user can specify when (in unit of Era) the DOTs need to be released, where a relatively lower fees are charge. The protocol maintains a targeted range of DOTs being unbonded to meet the demands.
Fees are paid in L-DOT and managed by the Homa Treasury.
- Staking Pool
The protocol uses the Maximum Bond Ratio and Minimum Bond Ratio to gauge how much of the deposited DOTs should be staked and how much should be kept in liquidity. The re-balance happens every Era. In addition it manages balances, rewards, slashes, unbonding claims on Relaychain via the bridge, this again is being mocked until cross-chain message passing facility is ready.
- L-DOT Holder Voting for Validators
L-DOT holders have rights to vote for favorite validators using a selection mechanism similar to Phragmen election to choose (for now) maximum of 16 validators. L-DOTs are required to lock their L-DOTs for voting rights and power.
- Acala EVM:
Acala and all Substrate-based chains are fundamentally different from Ethereum. If they are trying to emulate an Ethereum node, they will suffer from the worst of both worlds. It will be a step backward for them to inherit all the restrictions from a legacy blockchain platform.
Acala sees EVM as one part of the Acala/Substrate/Polkadot, together the Acala network will provide a categorically different experience. Acala EVM will try to achieve these design goals
- Enable users to have a complete full-stack Acala (and Substrate) experience seamlessly with a single wallet.
- Enable protocol composability for EVM and runtime
- Enable developers to develop and deploy DApps on Acala with great tooling support
Utilities Of ACA Tokens:
ACA is the native token of ACALA Network, its total supply will be minted at the launch of the mainnet and stored in the ACA Reserve Pool. Their token has three main functions in ACALA Network. First of all, ACA Tokens will be used as network utility tokens in order to pay transaction fees, stability fees as well as penalty fees in case of liquidation. Secondly, when holding ACA tokens, users will have the right to propose network upgrade and parameter adjustment, which will be approved or declined by the elected on – chain General Council. Finally, in case there is a price collapse of a collateral asset resulting in under – collateralized CDPs, ACA tokens will be automatically diluted and sold on the market for system recapitalization.
The roadmap of Acala development is very detailed and nearly all of their target has been achieved:
- 2020 Q1: Web3 Foundation Grant, Release decentralized Sovereign Wealth Fund (dSWF) whitepaper, Testnet Candidate #2 Launch with Stablecoin & DeX.
- 2020 Q2: Staking Derivative LDOT Launch, Web3 Foundation Grant Completion .
- 2020 Q3: Testnet Candidate #3 Launch - Code Complete, Parachain Candidate #1 Launch on Polkadot Testnet Rococo.
- 2020 Q4: Implement EVM & Smart Contract, Launch Karura Campaign, Security Audit (SRLabs & SlowMist), Testnet Candidate #5 Launch.
- 2021 Q1: Launch Acala EVM testnet - Composable & Innovative Stack, Security Audit - Trail of Bits, Parachain Candidate #2 Launch on Polkadot Testnet Rococo, test crowdloan and parachain launch, Economic Audit, XCM Fungible Token Implementation and Test, Testnet Candidate #6 Launch.
- Upcoming: Karura Parachain Auction, Karura Mainnet Genesis, Enable Karura Council Governance, Enable Stablecoin, Staking Derivative & DeX + Respective Liquidity Mining,....
Partner and Cooperator:
Acala has partner with many different projects to help Acala brings DeFi closer to Polkadot Network, also they are backed by many big ventures and investors, especially Web3 Foundation. This can be a key point that helps them win the Parachain Slot Auction.
Core Team & Advisors Of Acala Network:
The Acala Network core team is made up of many popular and potential people in the blockchain industry:
- Ruitao Su, Acala Co-Founder & CEO
- Bette Chen, Acala Co-Founder & COO
- Bryan Chen, Acala Co-Founder & CTO
- Fuyao Jiang, Acala Co-Founder & Polkawallet Founder
- Jack Platts
- Ashley Tyson
With all the features that Acala has. Acala will be a project that can fill in the gap of Proof of Staking consensus mechanism. Also, the stablecoin aUSD of Acala might play an important role inside Polkadot ecosystem in the future.