What is Acala (aUSD) and How Does it Work? | KuCoin Crypto Gem Observer

2022/05/09 10:00:00

Since its launch over a decade ago, the cryptocurrency industry has evolved to become an integral part of the financial space. The nascent sector promises to deliver an open-source future that boasts decentralization, evenly distributed power, more transparency, and less trust. However, the sector faces multiple issues that currently inhibit it from making good on its promise.

One of the most significant pain points in the crypto industry is extreme volatility, which causes wild price swings in digital asset prices. This shortcoming makes it nearly impossible to use cryptocurrencies as a medium of exchange. Hoping to address this issue, developers created stablecoins, which are pegged to a fiat currency in the ratio of 1:1.

By acting as a volatility hedge, stablecoins quickly attained mass adoption in the crypto space despite their non-speculative nature. Nonetheless, most stablecoins run on a single blockchain network. As a result, their adoption is capped, seeing as the assets that serve as stablecoin collateral are limited.

After realizing that cross-chain communication in blockchain technology serves the same role as the internet in an intranet setup, Acala sought to address the collateral issue by offering a stablecoin protocol that serves as the building block of decentralized finance (DeFi) in the Polkadot.

Acala chose to build its stablecoin protocol on Polkadot because it powers public, consortium, and private blockchains. This feature enables true interoperability as well as economic and transactional scalability. Watch the Acala (aUSD) Deep Dive Video and Subscribe to the KuCoin YouTube channel: https://youtu.be/__t4RnDA-Zs

How Does Acala (aUSD) Work?

The Acala cross-chain stablecoin network seeks to develop a stable currency that enables low-cost borderless value transfers for all blockchains that are connected in a network. To increase the collateral supply, the protocol allows the use of assets on Polkadot or any other connected blockchain.

By leveraging Polkadot’s shared security system, Acala aims to offer the highest security. The protocol also plans to achieve censorship resistance through its consortium setup and token release model. Additionally, Acala seeks to use its specialized blockchain network to set up a customized fee schedule while maintaining high security.

The Acala protocol also plans to become a futureproof network that features forkless and non-disruptive upgrades. To achieve this, Acala intends to leverage on-chain governance.

With most crypto platforms facing liquidity issues for staked assets, Acala leverages the Homa protocol, Which establishes a non-custodial trustless and cross-chain staking pool, where users stake their token and receive a L-Token (e.g. stake DOT and receive LDOT) that represents the principle staked asset plus the staking yield continuously accruing.

L-Token are tradeable and liquid across all chains on the Polkadot & Kusama ecosystem. They are also redeemable for the underlying asset.

What Makes Acala (aUSD) Unique?

Acala features a multi-collateral-backed cryptocurrency dubbed the Acala Dollar Stablecoin (aUSD). This cryptocurrency is pegged to the US dollar in a 1:1 ratio.

Unlike other stablecoins, aUSD is completely decentralized. The aUSD stablecoin can be created from blockchain assets connected to the Polkadot network. Anyone that owns Acala-supported cryptocurrencies can use them to create aUSD by creating a Collateralized Debt Position (CDP) through the Honzon protocol.

The Honzon protocol is a dynamic ecosystem of CDPs. Alternatively, users can acquire aUSD tokens by buying the tokens from brokers or exchanges. The aUSD stablecoin can be used on any blockchain connected to Polkadot. Applications on the chains can also leverage aUSD.

To maintain aUSD’s stability, Acala combines an automatic risk management algorithm within the Honzon protocol and community governance.

The Acala network features a governance token dubbed ACA. This token has three use cases. ACA’s first application is serving as a network utility token. Acala users need ACA to pay transaction fees, scalability fees (interest rate on loans taken on aUSD), and penalty fees in the event of liquidation.

ACA holders can propose network upgrades and risk level adjustments, which the elected on-chain General Council can either approve or turn down. It is worth noting that holding ACA does not entitle Acala users to any returns the network generates.

The final use case of the ACA token in solving contingencies. In the event of a sudden plunge in the price of a collateral asset, the Acala system will liquidate and sell ACA tokens automatically to prevent the under-collateralization of CDPs.

Who Created Acala (aUSD)?

Four individuals, namely Betty Chen, 0xThreeBody, Ruitao Su, and Bryan Chen, co-founded Acala. Before Acala, Betty co-founded Laminar and served as its COO. She is also the co-founder of Flowingo. Ruitao also co-founded Laminar and served as its CEO. Additionally, Ruitao founded Less Code Limited.

Bryan previously served as the CTO at Laminar and is a Polkadot ambassador. The Acala team also comprises Dan Reecer as its Chief Growth Officer. He previously worked in the field of Web 3 and promoted the launch of @Polkadot and @Kusama Network.

Closing thoughts

By functioning as a decentralized stablecoin protocol, Acala positions itself as a revolutionary protocol that helps unlock the true potential of the crypto industry. Through aUSD, the Acala network helps minimize the crypto sector’s volatility, allowing for more adoption and use in DeFi.

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