After the four Acala co-founders evaluated Ethereum, ETH2, Cosmos, and Polkadot, and eventually chose to build on Polkadot, next came the decision on how to build the Acala DeFi ecosystem from scratch. There were very few teams building in the ecosystem at the time, very little knowledge about Polkadot or Substrate, but the team saw one common need amongst all future parachains and DApps in the Polkadot and Kusama ecosystem: a decentralized stablecoin. They anticipated that a decentralized, censorship-resistant stablecoin would be essential to power transactions, provide a medium of exchange, and provide a default routing asset for Polkadot’s economy of economies. The stablecoin (aUSD) protocol at the core of the Acala ecosystem serves as the Decentralized Monetary Reserve for the Polkadot ecosystem, allowing stable currency to be minted using a basket of collateral reserve assets similar to how traditional reserve systems used valuable assets like gold to back national currencies.
After developing the aUSD mechanism, Acala set off to construct an application-specific blockchain to support and grow aUSD, and enable a flourishing DeFi ecosystem with aUSD central to everything. This ecosystem includes DApps built to support and operate the stablecoin, including the Acala Swap decentralized exchange and ‘Homa’ protocol for DOT liquid staking. In addition to traditional DEX use cases, Acala Swap powers the liquidations that help support the health and operation of aUSD. The Homa protocol, for DOT liquid staking, is also a DApp that supports aUSD by unlocking millions in liquidity on staked DOT, creating a totally new DOT derivative to be used as collateral to mint aUSD. This product also allows users to multiply their exposure to DOT while earning staking yield. Finally, the Acala team’s last major component of the blockchain was building the Acala EVM+ to provide an open protocol layer for any Ethereum-compatible DApp to build and leverage aUSD and the liquidity of the Acala DeFi economy.
The oil to run the Acala machine is Acala’s fee, governance, and utility token, ACA. ACA provides a means to transact on the network, an ownership stake in the network’s on-chain Treasury, influence in all governance decisions, and a collateral asset for minting aUSD.
On February 9, 2022, the Acala Dollar (aUSD) has launched and is available to mint using DOT and LCDOT as collateral. The aUSD economy is officially ignited.
How ACA Works
Acala’s stablecoin protocol uses a multi-collateral backing mechanism to create a stablecoin soft-pegged to the US Dollar. The Acala stablecoin protocol serves as a Decentralized Monetary Reserve that mints a stable currency from a basket of reserve assets. This enables people to transact, trade, and facilitate services using aUSD without price volatility and, if desired, while retaining ownership of their reserve assets like ACA, DOT, DOT derivatives, parachain assets, and assets bridged from other consensus networks like BTC, or ETH.
aUSD is minted using a system called Collateralized Debt Positions (CDPs). Together with a set of incentives, supply and demand balancing, and risk management mechanisms within the aUSD stablecoin protocol on Acala, the value of an aUSD token is pegged to the value of a US Dollar. aUSD also offers an on-chain liquidator, removing third party centralized risk, and oracle quality of service, guaranteeing oracle price feeds make it into every block. This allows the aUSD protocol to manage risk in a more autonomous and efficient manner.
Every CDP holds the collateral assets deposited by the user who opened the CDP that created the aUSD tokens, together with its associated aUSD debt position. The deposited collateral assets inside the CDP are locked and cannot be withdrawn by the user until the associated aUSD debt is paid back. Active CDPs are always over-collateralized with the collateral value exceeding the value of the debt. Opening a CDP also involves a Stability Fee, or interest, that goes to the protocol as well as liquidity providers (LPs) of aUSD stablecoin pairs in Acala Swap.
CDPs, or borrowed aUSD, can be acquired by over-collateralizing reserve assets. This means, for example, you could collateralize (locking) $100 in ACA and get $50 in aUSD. This would be a 2x collateral-to-value ratio and how the protocol hedges against price fluctuations. Their partner Gauntlet contributes to Acala by providing risk parameters for its protocols, including aUSD collateralization ratios. These ratios can be adjusted over time, and aim to be as low as possible, allowing users to generate the most aUSD value from their collateral.
Polkadot’s Native Stablecoin
Today’s launch marks the beginning of the initial bootstrapping phases of aUSD. First, aUSD’s liquidity will be built up on the Acala blockchain, then the stablecoin can begin to be integrated into all live parachains and DApps in the Polkadot and Kusama ecosystem. The goal of aUSD is to be the most useful form of decentralized stable currency in the Polkadot ecosystem, serving as the default pair, routing asset, and means of exchange among all users and developers. Achieving this goal will lead to a flourishing ecosystem among the Polkadot parachains, as well as strong value creation for the Acala chain as collateral is locked in the Decentralized Monetary Reserve. As you can see in the diagram below, Acala and aUSD will scale along with the Polkadot ecosystem.
Launch Events
The launch of aUSD minting involves three primary events:
- LCDOT/aUSD Bootstrap on Acala Swap
- Enabling DOT as a collateral for minting aUSD
- Enabling LCDOT as a collateral for minting aUSD
The next steps that you can reference in the governance post are to enable LCDOT/aUSD trading once the Bootstrap is complete, and to begin the ACA/aUSD Bootstrap and trading.
About Acala
Acala is an Ethereum-compatible smart contract platform optimized for DeFi and scaling DApps to Polkadot. The blockchain has built-in DeFi protocols for application developers to leverage, including a decentralized stablecoin (aUSD), a trustless staking derivatives (liquid DOT — LDOT), and a decentralized exchange.
DISCLAIMER: The Information on this website is provided as general market commentary and does not constitute investment advice. We encourage you to do your own research before investing.
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