Acala is a cross-chain decentralized finance project that builds a DeFi center for the entire Polkadot ecosystem. With Acala, you can mint stablecoin aUSD using collateral from Polkadot-connected parachains and unlock liquidity of staked DOT tokens by converting them to L-DOT.
In 2021, nothing will capture the attention of traders, investors, and venture capital funds like decentralized finance. DeFi applications are primarily built on the Ethereum blockchain, but its poor scalability has resulted in excessive usage fees (gas) rendering many DeFi functions unusable.
Recognizing the inadequacies of Ethereum, in 2017, Gavin Wood, a talented developer and co-founder of Ethereum, founded the Polkadot protocol. Dubbed the internet of blockchains, Polkadot provides DeFi projects with a scalable, secure and inexpensive home to use.
Immediately after launching on exchanges, Polkadot entered the top 10 cryptocurrencies by market capitalization. DOT quickly gained market acceptance, mainly because Polkadot became a competitor to Ethereum and seemed more suitable for hosting DeFi projects.
Acala is the most anticipated decentralized finance project on Polkadot and positions itself as the DeFi hub of Polkadot.
This article will explain the Acala project, how the ACA token works, and why Acala could be the best DeFi project launching in 2021.
In a nutshell, Acala is an extensive DeFi platform that provides modular financial services in Web3. Web3 is the internet of blockchains united by the interoperable Polkadot network.
As the first decentralized finance protocol to launch when the Polkadot parachain auctions began, Acala calls itself the Polkadot DeFi hub. However, since Acala is compatible with Ethereum, it has the potential to be a DeFi platform for all cryptocurrencies.
Here’s what Acala can offer the space:
Cross-chain DeFi infrastructure
Currently, DeFi is stuck on blockchains and can’t get out on its own.
What happens when you want to use SOL as collateral for a loan at Compound Protocol that works on Ethereum? Well, you can’t. At the same time, you cannot make any financial moves between existing blockchains.
DeFi is available on Ethereum, Solana, Binance Smart Chain, Algorand and many more. ERC20 tokens are stuck on Ethereum and the same goes for tokens of other blockchains.
Polkadot is different because it is an interoperable blockchain standard that any chain can connect as a parachain. After moving into Polkadot, all these once isolated blockchains can finally communicate and transact with each other. That is Web3 and therefore called the internet of blockchains.
Accordingly, Acala leverages Polkadot’s blockchain agnosticism by providing DeFi products and services that you can use, regardless of which blockchain assets you own.
If you want to borrow money through Acala, you can collateralize cryptocurrencies from different blockchains. You can also use the Acala automated decentralized exchange to swap native assets from another blockchain without wrapping.
Stablecoin Platform for Polkadot
Just a few years after stablecoins entered the crypto space, they have completely revolutionized the workings of the market. From providing an easy way to keep trading profits to participating in DeFi on protocols like Compound, stablecoins have grown to be as important as Bitcoin.
Since Polkadot is a cross-chain interoperability network, Acala decided to take advantage of that flexibility to create aUSD. aUSD is Acala’s algorithmic stablecoin pegged 1:1 to USD but backed entirely by crypto-collateral.
Acala’s stablecoin platform works through Honzon, an in-house developed protocol for minting stablecoins any time a user deposits an asset collateral. Once launched, the Honzon protocol will accept DOT, ETH, BTC as collateral, and more cryptocurrencies are expected when the parachains go live.
The way stablecoin aUSD works is very simple. When you deposit collateral, aUSD is minted and a Collateralized Debt Position (CDP) is opened. In effect, CDP is just a fancy way of saying you owe money to the protocol and will have to pay back the loan plus interest afterwards.
When you redeem the CDP, the Honzon protocol burns the corresponding amount of aUSD, thereby shrinking the circulating supply to maintain the exchange rate with the US dollar.
Liquidity for staked assets
The Polkadot ecosystem emphasizes bonding properties. Bonding refers to an activity similar to staking, where a smart contract locks your tokens to perform some utility and pays you interest.
Before DeFi appeared, there were almost no staked assets. Until they exist and gradually become popular, it is not possible to mine these assets for liquidity. However, with the advent of staking derivatives like xSUSHI and the protocol that accepts them as collateral for loans, access to staked liquidity is becoming mainstream these days.
Acala takes this to a whole new level for DOT holders by offering L-DOT on top of the Homa protocol. L-DOT (Liquid DOT) is a token representing the liquidity of staked DOT. You can take your L-DOT out of Homa protocol then use them as collateral and get aUSD in Honzon (or any other protocol that accepts them).
Access to staked liquidity is an important aspect of the ecosystem built on the token staking economy. From bonding tokens for parachains to staking them for governance, DOT is designed for locking. Acala provides investors, developers, and projects with DOT loans from the community as a means of aggregating crypto capital without bringing DOT into the market.
The Homa protocol was built to address the illiquidity of staked DOT tokens. While there aren’t many use cases at the moment, Homa can unlock liquidity for other staked assets connected to Polkadot.
Cross-chain decentralized exchange
Like Uniswap, the Acala decentralized exchange (DEX) uses a tried-and-true swap interface that allows for intuitive asset trading in liquidity pools. On the other side of the transaction, the liquidity provider earns a fee for providing tokens to the pools.
The Acala DEX looks familiar because it mimics the architecture of existing decentralized exchanges. What’s new and exciting, however, is that you can make transactions between cryptocurrencies on multiple blockchains connected to Polkadot.
Polkadot has been warmly welcomed by the community. Furthermore, top projects frequently hint at their intention to join Polkadot as a parachain. With these factors in mind, the Acala DEX will likely provide you with a large pool of cross-chain liquidity to trade.
Another major difference from DEXs on Ethereum is that it is less expensive to use the Acala DEX. Polkadot is a high throughput blockchain that makes the low gas fee policy on Acala possible. You can also pay transaction fees in any cryptocurrency you want.
Perhaps, with innovations like significantly lower gas yields, Acala is taking on novelties that build on what’s already there.
Compatible with Ethereum
Currently, Ethereum is the undisputed king of the DeFi market. If you’re building a multi-chain DeFi protocol, compatibility with Ethereum is an important place to start.
Therefore, compatibility with Ethereum is the main feature of Acala. Developers who are used to writing code in Solidity will enjoy a seamless transition with Acala EVM as it supports Ethereum smart contracts.
Acala’s Ethereum-compatible support also means you benefit from compelling viral effects, as well as composability. For example, if you bring wETH into Acala via a bridge, you can pay transaction fees in the Acala app with wETH.
Token method ACA work
The Acala Token (ACA) is an essential utility and governance token in the Acala network. ACA has 3 main uses:
1. Parachain Rewards: To secure a parachain position, anyone who deposits DOT into Acala will receive ACA tokens during the parachain rental period.
2. Governance: ACA is used to participate in governance matters such as proposing network changes, voting in referendums, and fee management.
3. Transaction Fees: Both Honzo and Homa protocols generate fees from CDP refunds, liquidations, and L-DOT transactions.
Currently, you cannot trade ACA because parachain auctions on Polkadot are not active yet. Once it is activated, Acala will almost certainly become the first Polkadot parachain and the ACA token will begin trading on the Acala DEX shortly after.
You can also view the foregoing through Karura, Acala’s canary network designed to be almost 100% complete on Kusama.
The possibility of Acala introducing a decisive change to the decentralized financial exchange is very high, especially for users and investors who have hodl and staked DOT. With DOT’s ranking in the top 10 cryptocurrencies overall, the number of tokens willing to move to and use Acala is substantial.
Will Acala succeed in bridging the gap between Ethereum and other parachains connected to Polkadot? The project is very promising and fortunately, the basic elements of Acala seem to fit very well.
According to Shrimpy
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