Analysis

DeFi Project Spotlight: Acala, Polkadot’s DeFi Hub

Key Takeaways

  • Acala is a cross-chain interoperable Polkadot parachain that is aiming to grow to be crypto’s main DeFi hub.
  • Its ecosystem is centered across the decentralized, Maker-inspired, overcollateralized stablecoin, Acala Greenback.
  • Acala is constructed utilizing Polkadot’s Substrate framework, which means sure functions will be constructed into the chain as a substitute of on prime of it.

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Acala Community is an Ethereum-compatible Polkadot parachain aspiring to grow to be an all-in-one DeFi hub for Web3. Its ecosystem is centered across the Acala Greenback (aUSD) stablecoin and hosts an array of monetary functions, together with a built-in decentralized change and a liquid staking service for native tokens of Proof-of-Stake primarily based chains.

Acala Defined

Acala Community is a scalable, Ethereum-compatible DeFi-optimized platform natively interoperable with the complete Polkadot ecosystem.

To grasp Acala’s worth proposition, it’s value highlighting that the undertaking inherits most of its benefits over different Layer 1 protocols by advantage of being constructed on Polkadot utilizing Substrate. The Polkadot community will be described as a scalable, heterogeneous, multi-chain ecosystem with a so-called bedrock “Relay Chain” at its heart. The place most different Layer 1 blockchains are designed with various levels of generality regarding potential functions, the Polkadot Relay Chain has no inherent utility performance in any respect. As a substitute, it’s an uncomplicated chain that serves because the foundational safety layer for a community of interconnected, interoperable blockchains.

In different phrases, the Polkadot Relay Chain will be considered a Layer 0 framework that hosts and connects an increasing, parallelized community of both generalized or application-specific Layer 1 blockchains known as parachains. These are modular and simply customizable impartial blockchains that may have distinctive architectures, tokenomics, and governance buildings. That is the place Acala’s moat lies—it’s a scalable, high-throughput parachain that helps forkless upgradability and customized optimizations.

Relay Chain
Supply: Acala

Whereas there are a whole bunch of DeFi functions on dozens of various Layer 1 chains, they’re all theoretically restricted of their capabilities as a result of they’re hosted on generalized chains. In these instances, decentralized utility builders should adapt to the constraints of their specific environments. In the event that they’re constructing DeFi apps on Ethereum, for instance, there are specific issues that their protocols will and received’t have the ability to do due to how Ethereum is designed.

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Acala turns this precept on its head. As a substitute of the functions adapting to the constraints of fastened, generalized blockchains, Acala can adapt to the wants of the functions by frequently evolve to grow to be extra application-specific. Acala’s Chief Development Officer Dan Reecer sat down with Crypto Briefing to debate the undertaking, and he defined how the community is geared towards DeFi. He stated: 

“As a result of Acala is constructed with Substrate, we’ve been in a position to construct a series that’s optimized for decentralized finance. One in every of many issues that this enables us to do, for instance, is that customers will pay charges on Acala in any token supported by the native, built-in decentralized change. One other distinctive factor is the on-chain transaction scheduling. This permits us to construct native rails for automated and recurring funds supporting subscription companies, automated profit-taking, reinvestment mechanisms, liquidation mechanisms not reliant on exterior keepers, and so forth.”

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The “Substrate” Reecer refers to is a framework developed by the corporate behind Polkadot, Parity Applied sciences. Builders can use it to construct their blockchains after which use pre-built, plug-and-play modules known as “pallets” so as to add customized functionalities on prime. Substrate pallets enable sure functions reminiscent of decentralized exchanges or value oracles to be constructed immediately into the blockchain somewhat than on prime of it, making them considerably extra versatile and environment friendly.

Acala’s Native DeFi Infrastructure

The Acala ecosystem is constructed round a decentralized, Maker-inspired, crypto-collateralized stablecoin known as Acala Greenback (aUSD). It’s constructed utilizing the Honzon stablecoin protocol that leverages a number of customized modules or Substrate pallets to handle a number of facets of the protocol, together with the availability and demand balancing and the danger administration mechanisms.

To mint aUSD, customers have to deposit collateral and open a Collateralized Debt Place (CDP) utilizing accepted reserve property, which will be cross-chain by nature and embody Polkadot, Acala, Ethereum-native property, and Bitcoin. The market worth of the crypto collateral should all the time exceed the worth of the aUSD mortgage, and it can’t be eliminated till the mortgage is repaid to the protocol in full.

The mechanics of the Acala stablecoin protocol are nearly fully primarily based on Maker’s DAI and, in that regard, aren’t groundbreaking by any means. Nonetheless, aUSD itself is considerably distinctive as a result of it’s a cross-chain interoperable asset, which means it may be used throughout the complete Polkadot parachain ecosystem with out counting on cross-chain bridges or needing to be wrapped. Commenting on the vital position aUSD performs within the Polkadot ecosystem, Reecer stated:

“There’s an enormous alternative for Acala to be the primary in offering a completely decentralized, crypto-backed stablecoin native to the Polkadot ecosystem. We opted for this mannequin as a result of algorithmic stablecoins are nonetheless largely an experiment, even at present, whereas collateralized ones are a confirmed mannequin.”

One other in-house DeFi utility that has been constructed into the Acala parachain is the decentralized change AcalaSwap. Like Uniswap on Ethereum, AcalaSwap can also be a continuing operate, automated market maker-based decentralized change. Nonetheless, as a substitute of being constructed as a sensible contract protocol on prime of the blockchain, it’s constructed into the blockchain as a Substrate pallet.

acalaswap 2
Supply: AcalaSwap

As AcalaSwap is built-in into the Acala parachain itself, it might do issues that related decentralized exchanges on different Layer 1 ecosystems can’t. For instance, it offers liquidity and backend performance for different decentralized functions within the Polkadot ecosystem, together with an environment friendly liquidation mechanism for the aUSD stablecoin system, MEV safety for swaps due to integration with a separate in-house Oracle pallet, and the power to pay transaction charges on Acala with any token supported on the change.

The final characteristic is very vital as a result of it significantly lowers the barrier to entry to decentralized finance. As a substitute of being required to personal Acala’s native token ACA (a risk-on, unstable asset) to pay for transaction charges, customers can hold their complete portfolios in, for instance, aUSD and pay for transaction charges with a stablecoin. Within the background, the aUSD can robotically be swapped for ACA by way of AcalaSwap after which paid to the so-called collators chargeable for validating transactions on Polkadot parachains. 

On prime of that, as a result of Acala is natively interoperable with the complete Polkadot ecosystem, customers can use the AcalaSwap change to swap native property from different blockchains with out bridging or wrapping them. Commenting on the significance of AcalaSwap, Reecer stated that the change would doubtless play a central position inside the ecosystem. He defined:

“There’s going to be a ton of liquidity on Acala due to the decentralized change and the liquid DOT staking protocol. So when somebody’s constructing a decentralized utility on the EVM+, they will faucet into the liquidity of AcalaSwap and have composability with some other decentralized utility inside the EVM surroundings there. It’s fully open in that regard.”

Acala has additionally constructed one other protocol known as Homa that focuses on providing liquid DOT staking. Homa is a non-custodial, trustless, and cross-chain liquid staking protocol built-in into the Acala blockchain as a Substrate pallet. It’s designed to unravel the widespread illiquidity of staked property. It lets customers stake native tokens of Proof-of-Stake-based chains in change for liquid tokens representing the precept staked asset plus the repeatedly accruing staking yield. For instance, utilizing Homa, customers may stake DOT in change for transferable yield-bearing L-DOT tokens, then use the L-DOT tokens as collateral for aUSD loans or elsewhere in DeFi on Polkadot.  

Remaining Ideas

As Acala is a stablecoin-focused ecosystem, creating demand for aUSD each inside and outdoors the Polkadot universe is vital to its success. For that reason, the undertaking has launched a grants program that focuses on DeFi improvement that advantages the Acala ecosystem. The concept is to spawn a thriving ecosystem with all the required DeFi primitives, together with cash markets, decentralized exchanges, yield optimizers, and NFT marketplaces.

Past crypto, Acala needs to bridge the hole between decentralized and conventional finance and grow to be the main hub for so-called hybrid finance or “HyFi.” One of many methods it plans to do this is by partnering with fintech corporations and neobanks that would make the most of Acala’s infrastructure to supply higher companies for his or her prospects. As a place to begin, Reecer stated that Acala has already partnered with the U.S.-based fintech firm Current to construct a DeFi backend for his or her Web2 financial savings account. “Present needs to have the ability to provide a high-yield financial savings account the place {dollars} move out of financial institution accounts into DeFi on Acala, earn a yield there, after which that yield is liquidated and despatched again to Present and distributed to prospects in a Web2 utility,” he defined.

Acala’s most compelling worth proposition is likely to be its potential to improve with none forks. This can be a full game-changer. Generalized blockchains that attempt to do the whole lot on a single chain are basically constrained by their design selections and pressure utility builders to churn inelegant workarounds as a substitute of constructing specialised options. “Think about Aave or Uniswap having the ability to inform the core builders what they want from the Ethereum blockchain—after which really get it,” Reecer stated. “Properly, we now have a full wishlist from our app builders and the potential to improve the chain to accommodate them.” The speed of acceleration and potential for enchancment that this characteristic offers is unparalleled.

Disclosure: On the time of writing, the writer of this characteristic owned ETH and a number of other different cryptocurrencies.

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