The world of decentralized Finance keeps evolving, and several projects keep coming up to meet the needs of various users. These projects are equipped with distinct qualities and provide diverse services within the business. However, the Acala Protocol has grown as a notable entity in the field of blockchain technology, solidifying its position as the primary liquidity center inside the Polkadot network. This article will cover what Acala is, its origin, how it works, what makes it special, and its native token.

What is Acala (aUSD)?

Acala is a Financial service platform built on the Polkadot network with a liquidity hub built specifically to aid the Pokadot ecosystem. It provides borrowing, lending, and stablecoin functionality to the Polkadot ecosystem. Acala was the first De-Fi protocol developed with Polkadot parachain auctions, and because of that, it is used as the Polkadot De-Fi hub.

The Acala network is based on Web 3.0 and is EVM-compatible, so developers can easily transfer their projects from Ethereum to the Acala network. The network functions on a dual-token system comprising the network’s native decentralized stablecoin called aUSD and ACA, the network’s governance token. Alongside ACA, several tokens are used for transaction fee payments on the network.

Acala has deployed three products to facilitate secure parachain staking, create cross-chain liquidity, and issue the algorithmic stablecoin, aUSD, collateralized by multi-chain assets.

History of Acala

The network began developing in 2019 after receiving development grants from the Web3 Foundation. After that, the network gained additional funding from crypto investment firms Pantera Capital and Polychain Capital. Together, these two firms could generate $8 million by August 2020, and the network was officially launched in 2021.

Acala is a project developed by the Acala Foundation, a partnership between two De-Fi development groups, Polkawallet and Laminar, within the Polkadot blockchain ecosystem. The Foundation aims to develop De-Fi markets across different blockchains linked by the Relay chain.

To achieve their goal, the Acala network was created to be a Polkadot Substrate framework that is community-owned and governed. The platform offers financial services, but its main focus is improving development capabilities and interoperability initiatives.

How does Acala Work?

The Acala platform incorporates significant features: stablecoin functionality, lending, and borrowing. The platform’s built-in decentralized exchange (DEX), AcalaSwap, is powering these functions. Like many others, the DEX relies on liquidity pools to facilitate trades. Users who wish to earn fees on tokens they possess must provide those tokens as liquidity to a pool. The X*Y=K formula powers the pool. The value of K stays constant, and it is obtained by multiplying the value of token X by the value of token Y. If the value of one token changes, the value of the other can be obtained by dividing K by the value of the token that has changed.

Acala calls the polkadot network home, making it interoperable with other blockchains using Polkadot as its foundation means that Acala users can easily transfer assets, funds, and data to other projects in the Polkadot ecosystem.

Also, Acala boasts of a custom-built Acala Ethereum Virtual Machine (EVM). This new addition to the Polkadot ecosystem gives users a seamless, full-stack experience for developers familiar with Solidity, Substrate, and Web3.

The Acala EVM supplies Acala developers with outstanding tooling support by bringing protocol composability between EVM and Substrate runtime environments. Smart contracts deployed with Acala EVM gain access to native and cross-chain assets such as DOT, aUSD, PolkaBTC, and XBTC. ERC-20 tokens can also be used at the runtime level. The tokens can be listed on the DEX or be used for gas fees through governance approval.

Main Features of Acala: AcalaSwap, Honzon, Homa and more

Acala is an Ethereum-compatible smart contract platform comprising a decentralized finance (De-Fi) network and liquidity hub for the Polkadot Network. The Acala ecosystem is powered by some of its unique features as follows:

AcalaSwap (AMM)

AcalaSwap is an automated market maker with the standard swap interface, allowing users to trade several crypto assets in the liquidity pool. Investors who possess the native token of the protocol can earn fees by placing the token into the pool.

Another feature of the Acala network DEX is the ability to natively trade between cryptocurrencies spanning several blockchains linked through the Polkadot network. The popularity of Polkadot and its Canary network Kusama ensures that the amount of cross-chain liquidity available through the DEX will always be constant.

AcalaSwap is much more affordable than other Ethereum-based DEX platforms, giving it a big advantage. This advantage is gotten through Polkadot, which enables micro gas fees to be paid with the aUSD token and a wide range of other cryptocurrencies.

Honzon (Stablecoin Protocol)

Honzon is Acala’s stablecoin protocol that functions within the network. Acala is a cross-chain interoperable network powered by the aUSD stablecoin, an algorithmic stablecoin pegged 1:1 with the USD but backed completely by other crypto collateral.

The platform’s stablecoin is able to function due to the Honzon protocol, which was developed for minting stablecoins that crypto users deposit as collateral. Once the protocol was launched, the Ethereum native token (ETH), the Polkadot native token (DOT), and Bitcoin (BTC) were acceptable on the protocol, with other tokens possibly getting added to the roster.

To mint aUSD, individuals must provide collateral and establish a Collateralized Debt Position (CDP) with approved reserve assets. These assets can operate across many blockchain networks and encompass Polkadot, Acala, Ethereum-native assets, and Bitcoin. The crypto collateral’s market value must consistently surpass the value of the aUSD loan, and it is impermissible to withdraw the collateral until the loan is fully repaid to the protocol.

After the collateral debt position is paid, the Honzon protocol burns the same amount of aUSD stablecoin, reducing the amount of aUSD stablecoins circulating the ecosystem. This system ensures that the aUSD remains pegged to the USD.

Homa (Liquid Staking Protocol)

The Polkadot ecosystem uses a process called bonding, similar to staking. With staking, tokens are locked up and cannot be touched or used for any other purpose. Homa addressed this limitation by allowing users to retain ownership of their staked tokens while gaining from the reward generated through staking.

The Homa protocol ensures liquidity through strategic staking based on an adjusted algorithm. The protocol enables the staking of Acala and the exchange of Polkadot tokens (DOT) into liquid tokens (L-DOT). The liquid token can be used across other networks, increasing the efficiency of the token and reducing the security risk.

Developers, projects, and investors with DOT crowd loans can compound their crypto capital without placing their DOT tokens directly in the market. This is a way for the protocol to resolve the illiquidity issues that arise through staked DOT tokens.

What Makes Acala Unique?

The Acala hosts various benefits and features to boost the user experience and ensure the platform’s success. They include:

Collateralized Lending and Borrowing

Acala network users, through the platform, can now borrow assets by providing collateral. With this feature, users can access liquidity without selling assets, making it a better choice for traders and investors seeking short-term funds. To mint USD, a technique known as Collateralized Debt Positions. The value of aUSD is tied to the US Dollar thanks to a system of incentives, demand, supply mechanisms, and risk management plans inside Acala’s aUSD stable protocol.

The USD provides an on-chain liquidator, eliminating centralized risks from third-party bodies and Oraclke quality service to ensure that Oracle price feeds are included in each block. With this, the aUSD protocol can manage risk more efficiently and independently.

Users looking to borrow aUSD will have to deposit the collateral into the collateral debt position (CDP) mechanism, which is overcollateralized, meaning it is above the value of the debt. When opening a CDP, the user pays a stability fee, which is used to pay liquidity providers on AcalaSwap for providing liquidity. The collateral can only be released once the aUSD is repaid, unlocking the CDP and making the collateralized asset available to the owner.

De-Fi Optimization

Acala Network offers De-Fi customization to users and developers. Developers on the platform are treated to several features that enhance their experience. Developers who plan to integrate new features into their projects do not have to fork the system to make that happen. The on-chain keepers automate protocol execution to contain risks and enhance the user experience.

Ethereum Compatibility

Acala being built on Polkadot makes it compatible with Ethereum and Substrate for Polkadot. It is also compatible with popular tech stacks and wallets like metamask. This greatly reduces developers’ obstacles, opening the doors to more innovative ideas.

Micro Gas Fees

Acala uses a weight-based fee model. Users can calculate the micro gas fees that depend on the type of transaction and how complex it is. The fees are paid using the ACA tokens.

Karura

Kurara is an all-in-one DeFi hub of Kusama. It was founded by the Acala Foundation and is a scalable, EVM-compatible network optimized for DeFi. The platform provides a plethora of financial applications, such as a trustless liquid staking token protocol (liquid KSM), AMM DEX, and an EVM-compatible app that can be customized to meet the user’s needs at micro gas fees that any token can cover.

The protocol was built on Kusama to push the limits of what can be done on the protocol, giving the Acala Foundation team a platform for new financial innovations. Karura has access to Kusama’s plug-and-play security while enjoying incredible processing speeds, micro-gas fess, and interoperability with several networks, all connected to Polkadot. Karura

The Karura network is powered by the utility token called KAR, and it serves as the token that powers the DeFi hub of Kusama. The token serves multiple functions in the Karura ecosystem, such as staking, incentive distribution, governance process, transaction fees, and security.

Acala 2.0

The new step for Acaal is the protocol’s upgrade to Acala 2.0, also known as the Exodus Upgrade. The Exodus Upgrade is designed to upgrade the Acala Network protocol for long-term self-sustainability and growth. The new upgrade will provide a path for the aUSD product line and address the challenges of liquidity and adoption while proposing a new product roadmap and tokenomics to build sustainable liquidity and boost the protocol’s success.

This upgrade means Acala can finally realize its vision of unbiased prosperity by building infrastructures and protocols crucial to the ever-changing crypto ecosystem, the new global economy, and better financial chances for every member.

The next step of the upgrade includes:

• The launch of aUSD Seed (aSEED) with the option of exiting existing positions or securing future growth.
• Launch the Universal Asset Hub (UAH). This will initially be equipped with several LSD-centered liquidity partners and dApps compatible with Acala and share the same goals.
• Yield farm ACA, LSD project tokens, and dApp tokens to liquidity providers, dApp participants, and ACA holders participating in staking and governing.
• Utilizing farming rewards to drive adoption, and engagement, and boost ACA utility.

What is ACA (Acala Token)?

ACA is the native token of the Acala Network and serves different uses on the platform, including governing purposes. It can be used to pay network transaction fees, stability fees as interest rates on aUSD loans, and penalty fees during liquidation. These fees can be paid with the aUSD token, which is later exchanged for ACA through AcalaSwap, the built-in exchange feature. After receiving the ACA token as a payment, it is burnt and permanently removed from the token supply.

The ACA token is also important in the governance process of the protocol. The protocol applies a gradual decentralization process that moves it from its on-chain centralized council via the Acala Foundation to a more decentralized form of governance led by the ACA token holders. ACA is used to propose network amendments and potential risk parameter adjustments, and can be used as a solution in cases of sudden price collapse of assets in under-collateralized collateralized debt positions (CDPs).

Also, The token can be used for network recapitalization in a scenario that causes under-collateralized CDPs. ACA tokens are injected into the network to restore financial health and stability. Another way it is used in cases of under-collateralized CDPs is by automatic dilution and sale of ACA assets. Dilution involves injecting more tokens into the system, increasing the token’s total supply. These new tokens are then sold in the market to raise funds, and the revenue generated from the sale of these assets is used to recapitalize the network and make up for losses incurred due to the under-collateralized positions.

Tokenomics

The Acala token has a fixed market supply of 1,600,000,000 (1.6 billion). 1,000,000,000 (1 billion) of the total supply is minted at the network launch. The remaining emission will be released at the release of Acala 2.0, the network’s upgrade. The tokens’ current supply circulating supply is 799,979,166. The Acala token is to be distributed in the following way:

• Founding Team: 20.25%
• Early Backers: 18.33%
• Backers: 11.66%
• Community: 49.76%

Is Acala a Good Investment?

Most projects have compatibility and interoperability issues with other chains on their blockchain, but Acala solves that issue by adding EVM, greatly increasing its scalability. This greatly aids the project’s long-term goals and places it as a link between Polkadot and Ethereum.

Where to Buy ACALA

ACA is available on a few crypto exchanges. It can be gotten on exchanges such as Gate.io. To start trading, users must sign up on the platform, create a gate.io account, complete the KYC procedure, and then go over how to buy the token once they have funded their accounts.

Take Action

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• ACA/USDT