Acala is a full-fledged, customizable blockchain optimized for finance and aims to be the hub for decentralized finance (“DeFi”) on Polkadot. If you’re not familiar with Polkadot, Polkadot is a heterogeneous blockchain protocol that connects multiple specialized blockchains into a single, unified network. These specialized chains are called parachains. I won’t go into all of the reasons why Acala chose to build on Polkadot, but a couple quick reasons include higher scalability (~1,500 tps on Polkadot vs ~14 tps on Ethereum) and the bank-grade security enabled by Polkadot’s shared security design. Tldr; Acala aims to be the DeFi parachain on Polkadot. Building on Polkadot provides several key technical advantages to other popular Layer 1s like Ethereum and Cosmos.
Stablecoin: Stablecoins are the cornerstone of any DeFi ecosystem and Acala seeks to bring the first stablecoins to Polkadot. Acala’s stablecoin, aUSD, is cryptocollateralized rather than fiat-backed. This makes it more similar to Maker’s Dai than to something like Circle’s USDC. Anyone who owns any of the following Acala supported assets: Acala (ACA), Polkadot (DOT/LDOT) and Bitcoin (renBTC/XBTC), can borrow against those assets through a collateralized debt position to mint aUSD.
DEX: After stablecoins, decentralized exchanges are critical for users to trade and gain exposure to new assets. The Acala team has created a DEX to easily swap supported tokens (ACA, DOT, LDOT, renBTC and XBTC). There’s also an opportunity for users to earn fees by providing liquidity pairs to the trading pool. This type of setup (an automated market maker DEX) is similar to the popular DEX Uniswap which took off earlier this summer.
Liquid Staking: Most folks may not be familiar with liquid staking (LDOT), but it’s a important feature of the Acala platform. Users can stake their DOT via Acala’s Homa protocol allowing them to earn staking yield. While the ability to stake is nothing new, in other staking protocols like Tezos or Cosmos, the economic value in the staked tokens is locked and can’t be accessed for other things. However, with the Homa protocol, stakers lock their DOTs and receive a derivative of their yield-bearing DOT known as LDOT. For those familiar with Compound, this is similar to how you receive yield-bearing Compound USDC when you lend USDC. In other words, with LDOTs, your money can be in multiple places at once. You can stake your DOTs, mint LDOTs and borrow against those LDOTs for all sorts of applications. The ability to unlock the value of the staked DOT also benefits the broader Polkadot ecosystem because token holders no longer have to choose between staking, a lack of which compromises the entire chain’s security, and using their DOTs for other things.
Parachain Bonding Derivative: Parachain slots are awarded via an auction. In order to secure the parachain slot, community members must bond their DOTs for the duration of the parachain lease. This is a requirement of Polkadot’s architecture and not unique to Acala. However, similar to staking, Acala seeks to remove the opportunity costs for users that bond their DOTs to secure the Acala parachain. Their solution is basically LDOT, but for the bonded parachain (PDOT).
Laminar: Laminar is the sister project to Acala building DeFi on Polkadot. In fact, both projects share the same set of co-founders. Laminar is primarily focused on bringing the liquidity available on traditional centralized financial exchanges and bridging that to decentralized finance. They plan to do this by creating synthetic assets like the S&P 500, AMZN, EUR/USD, etc. and offering margin trading. This is powerful because it allows anyone in the world access to the entire suite of today’s traditional financial products in a decentralized and permissionless way.
Acala has done a wonderful job executing on their roadmap thus far and is well positioned to seize the first-mover advantage for DeFi on Polkadot. Acala will be imminently launching its canary network called Karura on Kusama. This will allow Acala to further stress test its system and design with real economics at stake. From there, Acala will begin the process of securing a parachain on Polkadot, which is tentatively scheduled for Q1 2021. I’m excited about the next several months and look forward to watching the team execute their vision.
Disclaimer: I own DOT. Nothing within this post constitutes (or should construed as being) investment, legal, tax or other advice.