Acala – the world’s first decentralized open financial consortium and Polkadot Eco-Financial Center – aims to join the Polkadot ecosystem to create an open financial framework that brings financial stability, liquidity and accessibility to global crypto assets. In addition to the core Layer 1 modules already available, such as a cross-chain multi-asset collateral lending protocol, a protocol for releasing liquidity from Staking assets, and DEX, Acala has added an EVM-compatible smart contract module that allows Solidity developers to enter the Polkadot ecosystem with minimal migration costs.
Acala is currently backed by official funding from the Web3 Foundation and has received investments from several leading global institutions including Polychain, Pantera, ParaFi, Hypersphere, Digital Currency Group, CoinFund, 1confirmation, HashKey, and Coinbase Ventures, and several other globally recognized institutions.
To better test the functionality of the main network, Acala has also launched an economically valuable experimental first network, Karura, whose underlying code is the same as that of the Acala main network, and all the features of the main network will go live in Karura first. Karura has a faster pace and more flexible style than Acala.
After successful slot bidding
Acala is built on the Substrate framework and will be integrated into the Polkadot ecosystem as a parallel chain, which operates by accessing the Polkadot network through slots
Relay Chain (Relay Chain): responsible for platform security.
Parachain: has its own independent state and business logic, and shares the security provided by the relay chain.
Validator: responsible for the outgoing blocks of the relay chain, as well as validating the proofs from the collectors and conducting consensus voting with other validators.
Collator: Collects transactions and state transfer proofs (collation) of the parallel chain for the validator, so that the parallel chain no longer needs its own consensus mechanism.
Fishermen (phisher): monitor verifiers and collectors, check for invalid candidate receipts, and either verifiers or collectors can act as phishers.
Currently Polkadot has three different networks, Rococo Test Network, Kusama Experimental Advance Network and Polkadot Main Network, each of which has its own existence. Acala also has three different networks based on the Polkadot network go-live process.
(1) Mandala Test Network: Currently the TC6 version of the test network is online, all test network assets are used only to experience Acala network functionality, have no real value and are cleared after the test network is updated.
2）Karura Advance Network: It will participate in Kusama’s parallel chain slot bidding, with the asset name KAR, and prioritize to go online and test Acala’s related DeFi functions under the environment with certain economic value, and its positioning is to become a decentralized financial center on Kusama.
(3) Acala main network: it will participate in Polkadot’s parallel chain slot bidding, and all related functions will be put online one after another after Karura’s pioneering network is stable, and is committed to becoming a decentralized financial center on Polkadot.
Parachain Slot Auction
Parachain Slots are the interface between relay chains and parallel chains. In order to share the security of Polkadot network and interact with other parallel chains for business, it is necessary to use slots. There are two types of slots: Community Beta Slots and Commercial Slots. 20% of the slots are reserved for Web3 Foundation to deploy as Community Beta Parallel Chains for the development of the whole Polkadot ecosystem, and the remaining 80% as Commercial Slots. Since the number of slots is limited (about 100), they will be allocated fairly by auction.
The auction of parallel chain slots will take place every 6 months, releasing only one slot at a time. Slots will be leased in 6-month increments of 6, 12, 18, and 24 months, and participating projects will be free to bid on a single or multiple adjacent leases to the highest bidder. The winning bidder is required to lock its DOT (KSM in Kusama) for the corresponding period, and the DOT will be unlocked at the end of the parallel chain lease period. The longer the lease period, the more stable it is for the network. The bidding module is officially provided by Polkadot.
According to Gavin Wood, once the Rococo V1 test network is stable, the first parallel chain slot auction will be opened on Kusama, the Polkadot pioneer network, and the winning parallel chain will be put up for auction on Kusama before the process is replicated on the Polkadot main network.
Acala designed its network with three different networks based on the Polkadot mainnet go-live process, so that Acala’s pioneer network Karura will first participate in the slot auction on Polkadot’s pioneer network Kusama, and then, after Polkadot’s mainnet goes live, continue to participate in the mainnet’s Slot bidding on the main network will continue after the Polkadot mainnet goes live.
Karura Slot Bidding Program
The Acala team will first access the Acala Pioneer Network Karura on Kusama, and currently plans to allocate 11% of the total Karura volume (100 million) to KSM holders, primarily as an incentive for KSM holders to help bid on Karura slots. Assuming the team plans to bid on Kusama’s 12-month slot usage, if users are willing to lock their KSMs for one year, they will receive at least 12 KARs for every KSM locked, but only 30% will be released immediately and the remaining 70% will be released linearly over 12 months. The KSMs locked by the user do not pass through the project, and all the KSMs participating in the bidding are still locked in the original chain address. There is also a referral mechanism (5%+5%), 6/8-6/11 early bird bonus (10%), and 6/15-6/17 bid launch bonus (5%).
Karura’s go-live process is divided into the following 7 steps.
① Access to Polkadot parallel chain test network Rococo V1 for relevant testing.
② Parallel chain related code will be deployed to Kusama after testing.
③ Announcing the schedule of the first parallel chain slot bidding.
④ Kusama will open a crowdfunding module for slot bidding, where users can select Karura and lock their KSM in the Crowloan module.
⑤ Slot candle auction; (in this phase on June 17)
⑥ When Karura successfully bids on the slot, the Founding Zone is born.
⑦ Distribution of KAR.
- Products|DeFi Hub of Polkadot
Acala, as the underlying infrastructure of Polkadot DeFi ecosystem, Acala will be linked into Polkadot ecosystem as a parallel, sharing the security, interoperability, etc. provided by Polkadot. At the same time, we have built various decentralized financial applications for users, such as over-collateralized lending agreement, DEX and other core infrastructure to create a better user experience; in addition, we also provide a set of Ether-compatible smart contract modules for developers, which can directly interact with the Runtime layer to help developers build various types of decentralized financial applications on the Acala application layer In addition, we also provide a set of smart contract modules compatible with Ether, which can directly interact with the Runtime layer and help developers build various types of decentralized financial applications (such as NFT, prediction market, etc.) on the Acala application layer to help the Acala ecosystem prosper.
The over-collateralized lending protocol maintains the operation of the stable asset system in the Acala network, generating stable asset aUSD with a target price of $1 by over-collateralizing multiple assets. The existence of stable assets ensures low price volatility, thus realizing the value of circulation, and can provide infrastructure services for the entire Polkadot ecosystem.
The lending protocol is mainly divided into CDP module, auction module, feeding module and governance module as shown in the figure. Before introducing the roles of these modules, we need to understand the following points first.
1) Adjustment of stabilization rates: The main means to keep the aUSD price stable is to control the supply and demand for aUSD in the market, and the key factor that affects the supply and demand is the borrowing rate, when the borrowing rate goes up, the higher the interest rate is, then the demand for aUSD borrowing will decrease, and vice versa. So the primary way to keep prices stable is to adjust the borrowing rate, which in the Acala network is referred to as the stabilization rate
2) Emergency Shutdown: The last resort to keep the aUSD price redeemable, divided into single-asset liquidation and global liquidation.
Single Asset Liquidation: Liquidation is triggered when a collateralized asset reaches its debt limit. The liquidation process is.
① Stop accepting the asset as collateral.
② Increase the liquidation rate and close out the position gradually.
③ Forced liquidation after a certain period of time.
Global liquidation: Global liquidation will be triggered when the system is maliciously attacked or the network is upgraded, and the liquidation process is as follows
① Latest snapshot of feed price.
② Stop accepting any assets as collateral and adjust positions.
③ Liquidation of system debts and profits.
④ aUSD holders redeem collateral on a pro-rata basis.
aUSD Generation Process
For example, if the market reference price of 1 DOT is 30 USD, if user A wants to get an aUSD loan, he can only get at most 20 aUSD by pledging 1 DOT, so the collateral ratio is 150%. In order to ensure the security of the collateral, the collateralization rate should be controlled above 150%, the higher the collateralization rate, the higher the security of the asset.
The process of obtaining an aUSD loan is the process of creating a CDP (collateralized debt position), and the process is as follows.
1) Deposit and create CDP: User A connects to the wallet and deposits 1 DOT into the protocol through the portal, 1 DOT will be locked in the CDP as collateral.
2) Create a stable coin: based on the value of the DOT, the user can receive a certain value of aUSD from the CDP, assumed to be 20 aUSD.
3) Closing the CDP: User A can repay the lent 20 aUSD at any time as well as pay the stabilization fee for that period.
4) Withdrawal: the 20 aUSD will be destroyed and the collateral will be unlocked and removed.
5) CDP auction: When the collateral value drops, i.e. 1 DOT now has a market value of 25 USD instead of 30 USD, and User A has lent 20 aUSD, and the collateral ratio is below 150%, then liquidation will be triggered and the system will automatically liquidate and auction the collateral, and the liquidated CDP will have to pay an additional operation fee, which we call liquidation penalty (Mandala test network liquidation penalty is set at 3%).
The CDP module is used to create, manage and store CDPs. aUSD is created by pledging an asset to create a USD-linked stable asset (aUSD). the collateral is locked in the CDP and the value of the created stable asset is usually less than the value of the collateral. The user needs to repay the amount of Stabilized Assets borrowed + the interest to be paid when closing the CDP, at which point the collateral can be retrieved.
The liquidator monitors the ratio of collateral value to debt value for each CDP, and if the collateral price drops too much, the collateral in the CDP is transferred to the auction module and sold at auction to recover the assets to pay off the debt and keep the system healthy. Liquidated CDPs are required to pay an additional liquidation penalty in addition to debt repayment and stabilization fees.
This module will include a set of whitelisted prophecy machines, and each block will store the fair price provided by the prophecy machines to feed to the CDP module and the auction module.
The prognosticators will need to provide feeds to the CDP module to determine the amount of aUSD generated; feeds to the CDP liquidation section to transfer collateral from under-collateralized CDPs to the auction module in a timely manner; and feeds to the auction module to ensure maximum benefit to the system and CDP creators.
The key risk parameters in the main management system, such as the stabilization fee APR, liquidation rate, liquidation penalty, debt ceiling, etc., will vary from collateral asset to collateral asset, liquidation value, etc., in the future, when multiple assets are brought online. The person who determines these risk parameters is the ACA holder, and after the parameters are determined, they will be set in the governance module, and the other modules will divide and collaborate based on the parameters set in the governance module.
Liquidation is designed to incentivize borrowers to remain solvent, and a well-designed liquidation mechanism can prevent debts and delinquencies from occurring on the lending platform. The 312/519 Black Swan event was a big test for the whole DeFi industry, with the platform generating bad debts totaling nearly $10 million, and there were two main reasons for so many bad debts: first, the congestion of the underlying Ethernet network caused the liquidation work to be unable to proceed normally; second, the lack of liquidation efficiency. In response to these problems, the Acala protocol has made the following improvements.
① To address the problem of transaction congestion, the transactions under the Substrate framework used by the Acala network are divided into Normal and Operational classes. About 20% of the space in each block is reserved for Operational transactions as a priority channel for important system transactions (e.g., quote prognosticator, risk parameter adjustment, automatic liquidation).
② There is a triple protection mechanism during the liquidation process. First, Acala plans to sell collateral through DEX to pay outstanding debts after the liquidation is triggered, and then auction it if that is not possible. If there is a winner in the collateral auction, the winning bid is compared to the exchange price at the end of the auction to ensure that the collateral is sold at the best liquidation price. This design allows risky positions to be liquidated more efficiently, as small positions can be liquidated directly on DEX, while large positions can be split into multiple small ones and sold, or liquidated through an auction. Second, it utilizes high-quality surplus assets in Acala Treasury as a safety reserve; and third, it is underwritten through an ACA auction.
DEX (Decentralized Exchange) is the removal of all traditional centralized aspects that can be removed, including aggregation and clearing. A DEX solution that also removes the market maker is called AMM (Automated Market Maker).
Market Makers (MM) are individuals or institutions that provide the market with a large number of pending orders, not to profit from the rise or fall of token prices, but to capture the spread, which is the difference between the highest bid (buy one) and the lowest ask (sell one).
The reason why AMM’s algorithm is able to offer a market price is the presence of arbitrageurs (Arbitrager) in the market. AMM offers prices above or below the market, where arbitrageurs come to trade and receive the difference in return for deviating from the market price, while bringing the price of the AMM pool back to the market price.
The DEX in the Acala network uses a constant product market maker model, which is very simple and has the formula
x and y represent the number of different cryptocurrencies and the product of the two is k. k is a constant constant and the value of k is determined by the liquidity of the first injection: 1) anyone can create a new trading pair; 2) whatever the value of k is initially set to, it makes the value of k eventually adapt to the market price due to the presence of arbitrageurs in the market.
To illustrate the DEX trading process using the DOT-aUSD example, let the initial price be 1 DOT=30 aUSD, the pool DOT reserve be 10, aUSD be 300, and the value of k be 3,000. The process for a user to buy aUSD with 1 DOT is (ignoring transaction fees)
1) The user sends 1 DOT to the DEX Pallet.
2) The number of DOTs in the pool is updated to 10+1=11.
3) the number of aUSD in the pool is updated to 3,000/11=272.73.
4) the quantity of aUSD received by the user is 300 – 272.73 = 27.27, i.e. the price of aUSD purchased by the user using DOT is 1 DOT = 27.27 aUSD.
5) At this point, the new value of k is 11*272.73 = 3,000.03.
The constant k exists to calculate the exchange rate, i.e. how much aUSD needs to be given to the user, i.e. when x*y=k, where x changes, only k does not change in order to find y. This constant is calculated before a transaction occurs, and depending on the new injection of different amounts in order to calculate the number of assets that can be exchanged. After each exchange, a new liquidity pool is created (new x, y) and a new constant is created.
The problem with AMM is that when a pool of assets with little liquidity is faced with a large order, slippage is created. Slippage is the difference between the price at which an order is placed and the price at which it is finally filled. Slippage depends on the algorithm, the order amount and the liquidity size. The larger the order amount, the larger the slippage, and the greater the liquidity, the smaller the slippage. The better the algorithm, the smaller the slippage for the same order amount and liquidity pool size. acala currently chooses to set a slippage limit for users, the smaller the slippage, the less can be exchanged out but the lowest cost, conversely the larger the slippage, the more can be exchanged out but also the higher the cost.
Liquidity Release Protocol
Polkadot uses the NPoS (Nominated Proof-of-Stake) consensus mechanism, where any user holding a DOT can choose to participate in the Staking (pledging) and governance of Polkadot as a verifier and nominator. In this process, the whole system needs to secure the network by locking the DOT pledged by the verifier and nominator. Assets under pledge status have pledge proceeds and voting rights, but assets under pledge status cannot be circulated, and when users want to withdraw from pledge, a period of unbinding is required, which makes the assets illiquid and the value of assets cannot be fully applied.
The liquidity release solution for Polkadot is to create a Staking Pool that aggregates the DOTs supplied by each user, and then the Acala network selects multiple reliable verifiers (evaluated in terms of technical strength, operation and maintenance capabilities, and whether they provide guarantee services) to pledge the assets. At the same time, L-DOTs are issued to users as pledges at a ratio of 1:1. So, essentially the DOT is still in a locked status and it is the L-DOT that has liquidity and can be bought and sold in the secondary market or participate in other DeFi agreements, for example, pledging to generate aUSD for additional liquidity.
Users can use L-DOT to redeem the underlying DOT at any time, as some of the pledged assets are retained within the agreement. When a user redeems a DOT, there is a 28-day unbundling period and the redemption fee is paid in ACA. The agreement is the actual executor of pledging and unbundling of DOTs on the Polkadot network, and is responsible for the generation of L-DOTs and redemption of DOTs. The principal and proceeds are distributed uniformly.
- Network Governance｜ Governance
The Acala Network is governed by a General Council, which manages specific areas of the network, and a Specialized Council, which exercises oversight to ensure the overall health of the Acala Network. For example, the Liquidity Release Agreement Council is dedicated to managing liquidity agreements, and L-DOT holders and ACA holders are entitled to vote on proposals related to liquidity agreements, which include exchange rate models, fee structures, compounding strategies, etc.
- Open Prophecy Machine｜Oracle
Acala plans to build a decentralized, open prophecy machine system designed to allow anyone to contribute price data, and entities that need the data to be free to choose their preferred data. The system will maintain a feed price whitelist, and each prophecy machine provider will need to be approved by governance to access the whitelist. Currently, the system is operated by Acala’s own multiple nodes, accepting multiple node data sources that will be aggregated into a fair feed based on the Default Oracle Pallet to provide off-chain data for the network and to assess on-chain capacity and system liquidation risk.
06.Smart Contracts｜Acala EVM
There are currently three ways to become part of the Polkadot ecosystem: deploy as a parallel chain, a parallel thread, or become a Dapp on a parallel chain or parallel thread. Acala plans to become a Polkadot parallel chain, so that projects that want to access the Polkadot ecosystem but do not want to incur the high cost of doing so can deploy on Acala and become a Dapp on Acala. Acala already offers a series of out-of-the-box DeFi ecosystem components, such as an over-collateralized lending system, a protocol for releasing liquidity from pledged assets, and a decentralized exchange, in addition to building application-layer related smart contract modules to help other projects deploy on Acala.
What the Acala Smart Contracts module aims to achieve.
1) Allow users to be able to interact with Substrate’s runtime, EVM contracts or WASM contracts using only one wallet.
2) Allow the protocol to be compatible with EVM as well as the Runtime layer.
3) allows developers to get out-of-the-box support for tools when developing and deploying decentralized financial applications (e.g. DEX, stablecoins, etc.).
- Acala Treasury
Acala will actually create multiple on-chain councils, of two types: general councils and specialized councils. The general council members are elected by the ACA holders and can vote to rotate the general council members for the management of Acala Treasury. The assets in this fund are controlled by an on-chain account, and the revenue comes from three sources: (i) CDP stabilization fees; (ii) liquidation penalties; and (iii) L-DOT agreement fees (i.e., fees for redeeming DOTs).
Since Acala plans to lease a parallel chain slot for 6 years with a total of 3 rounds of lease auctions, the fund’s revenue surplus will be used to buy back as many DOTs as possible and build up a DOT reserve. If it has sufficient DOT reserves, the rewards originally set aside for DOT holders who help Acala in the second round of auctions can be deposited into Acala Treasury and used to buy back DOTs, and the DOTs in the reserve pool can also be pledged to the liquidity agreement to receive Polkadot nominee rewards, and at the same time, these proceeds can be deposited into the agreement At the same time, the proceeds will be deposited into the agreement for compounding and preparing for the next round and future parallel chain auctions, ultimately achieving its own sustainable development.
Once Acala Treasury has enough capacity to independently support slot leasing, Acala Treasury will consider using the surplus income to purchase other valuable assets, enriching the platform’s revenue structure and reserve asset types, thus strengthening its risk-resilience.
- Cross-chain messaging｜xTokens
Acala’s cross-chain asset standard “xTokens” has been delivered to the Web3 Foundation’s 5th Grant, which is proposed to provide a unified cross-chain messaging solution for all Polkadot and Kusama parallel chains. In short, XCM and xTokens are the fundamental components of the cross-chain ecosystem and the realization of the Polkadot and Kusama vision. The cross-chain messaging format (XCM) is a very flexible but loosely defined common messaging format. Therefore, we need a use case implementation that allows cross-chain transfers, i.e., spanning assets from one chain to another, as well as sending and receiving interchangeable assets between a relay chain and another chain.
We have launched an implementation guide for xTokens and the guide has been used by Acala, Laminar, plasm, HydraDX, Phala, Bit. Polkadot eco-project teams, all of whom have successfully completed cross-chain transfer transactions with interchangeable tokens on Polkadot’s parallel chain test network.
Posted by:CoinYuppie，Reprinted with attribution to:https://coinyuppie.com/an-article-that-takes-you-through-the-full-range-of-acala-products-and-technology-stack/
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