Acala: The Defi Hub on Polkadot


The Defi Hub on Polkadot

DIsclaimer: I am not a certified accountant, lawyer or financial advisor. Everything I write is for educational purposes. Before conducting on any of the information, please be sure to consult an expert.

The core of acala is to be the premier stablecoin protocol of the polkadot ecosystem.  We are seeing the trend for every cryptocurrency smart contract platform is going to need a decentralized stablecoin system.  The first we had seen of this kind was MakerDAO, responsible for the DAI stablecoin.  While stablecoins such as Tether(USDT) and USD Coin(USDC) have been the main liquidity providers of the overall cryptocurrency ecosystem, there are some liabilities to this system.  The fear of USDT losing its peg against the US dollar and the uncertain collateral source of USDT leaves some people unwilling to hold it.  Then there have been talks from DollarCostCrypto on how USDC is essentially a cryptocurrency with ties to the large banks and the federal reserve.  There are some who do not want to have those close ties to the federal reserve and central banks.  For reasons such as this, we can expect to see a lot of decentralized stablecoin protocols to be created.

Overall features of Acala

As of writing this, Acala has 6 core features: Asset Bridging between blockchains, a vault for minting AUSD, a built in dex, a staking protocol, a yield farming platform and a governance feature currently under development.  Compared to Karura, Acala is clearly underdeveloped, which should be expected given that Karura is the live testnet for Acala.  Whatever features you see in Karura, you should expect Acala to have similar features further into the future.

Bridging into Acala

This is where most people are likely to get started.  Given how Karura is developing, you can expect Acala to be the platform in which you are likely to swap tokens between different ecosystems.  This is a function very similar to what Osmosis is to the Cosmos ecosystem.  If you understand the essential importance of onboarding people through a dapp like Osmosis, dapps like Acala and Karura are going to be killer apps within polkadot as the central dex for the Polkadot and Kusama ecosystems.

Minting aUSD

As I mentioned before, the prime purpose of Acala is to create stablecoins similar to how MakerDao mints the DAI stablecoin.  This works by putting up collateral in exchange for aUSD.  You pay a “stability fee” to borrow against your assets.  Should the value of the assets you borrowed against reaches a certain threshold, your position will be liquidated.  I personally have very little interest in this part of the app.  I have very little interest in risking the value of my portfolio to own some stablecoins.  If I read the white paper correctly, it looks like the stability fee compounds overtime.  I have very little interest in having time compound against me.


Compared to Karura, Acala currently isn’t as fleshed out.  In Karura, you can swap coins from other parachains inside its dapp.  Acala currently only has the following assets available to trade: ACA, aUSD, DOT, LDOT, LCDOT.  You also have a choice to add liquidity for some yield farming opportunities.  I will discuss that a little later.  In the future, I expect more assets to be available on the swap.  The importance of the swap feature is to provide a place to liquidate your assets in the event that the value of the collateral you provided to mint aUSD falls by too much.

Liquid Staking

I discussed this earlier in a previous post,  It is possible to stake your DOT without having the full minimum required to stake your DOT.  Your staked DOT is represented in the form of LDOT which can be traded.  What is cool  about LDOT is that you can stake it for additional rewards beyond the staking rewards your staked DOT provides.


This part of the post should be the most interesting part.  However, compared to the yielding oppurtunities else, I consider it to be relatively boring.  As I’ve said before, the Polkadot ecosystem is underdeveloped along with Acala.  You should still be paying attention in the long run on this project.  This section is divided into two sections, LP staking and Collateral staking.  

LP staking is simply providing liquidity for the trading pools and yield farming ACA coins as a reward for providing liquidity to the trading pool.  Unfortunately, there isn’t actually much going on this system right now and most of the current yields will be ending by august 11, 2022.  None the less, if for whatever reason you need more ACA for any purpose, this may not be a bad place to scoop some extra coins.  Unfortunately, most of the pools available are paired with aUSD.  If you are worried about your impermant loss, I would recommend the DOT-lcDOT pool.  In order to become a liquidity provider, do the following:

  1. Go to the swap tab

  2. In the swap tab, go to liquidity.

  3. Select the pool you want to join.

At the moment, I don’t think most of the pools are worth it at the moment.  Just take a look at the farming opportunities.  

Sometime in the future, assuming more assets are added to their dex, we will likely have more options available.  However, all new additional tokens to be added require a governance vote by the acala community.

I think collateral staking has far more to offer.  First and foremost, the current offering is the choice between more tokens(LDOT staking) versus higher yield(tDot staking).  Both offer different strategies.  For simplicity purposes, I’ll discuss tDot first.

tDot represents a liquidity pool pair on Acala; DOT and LDOT.  tDot does the following according to the Tapio protocol:  

“Maintains a stable value peg against DOT powered by the Stable Asset system, Maintains the underlying effective yield of LDOT and standardizes the process of yield aggregation and distribution amongst tDOT holders, Liquidity for traders to trade between DOT-LDOT.”

When you look at the current yields in tDot, it is far higher than the staked DOT offering.  As of writing this, the tDot yield is 23.74% versus 16.99% apy. That is a difference of 6.78%.  Because tDot consists of DOT and LDOT as its underlying assets, this is a reasonably similiar risk to staking your DOT with greater upside reward.

With LDOT, you get a different trade off.  Unlike tDOT, you do not receive additional LDOT.  You get a lower overall APY(currently a total of 20.83%) versus tDot. You also do not receive additional LDOT for staking your LDOT at the moment.  Instead you receive ACA and aUSD.  This can lead to a different strategy compared to the tDot position.

The tDot yield can only assist investors in increasing their position in terms of DOT.  There can be certain advantages to increasing the different positions you have in your portfolio.  DOT at the moment is a large market capitalization coin.  This can make it a little harder to get some extra ROI on your money compared to smaller market capitalization coins.  However, let us make two assumptions, that acala will become a bluechip cryptocurrency project if the polkadot ecosystem becomes adopted and much of the flow of capital in the Polkadot ecosystem will flow through Acala.  We could see Acala become a top 100 cryptocurrency project in the next bullrun.

The other benefit is gaining aUSD. Because the core purpose of aUSD is to become the native stablecoin of the Polkadot ecosystem, we can expect a lot of utility to come out of it.  Another benefit is having cash to buy the dip.  As we all know, the name of the game of crypto is volatility and that is where all the gains are to be had.  Let us assume you see the price of dot fall.  This gives you the opportunity to use the yield gained in terms of aUSD to buy more Dot on the dip.  This is a distinction from other cryptocurrencies which offer “in-kind” rewards.  This “in kind” yield results in a volatile yield on your assets in terms of dollar of value.  Having aUSD can be a great option to have.

We could also see more farm yielding opportunities with aUSD as the backbone as other parachain auctions go live and become accessible.  This means you’re going to be flushed with an asset to perform this task for you.  This can include farm yielding on other parachains or other ecosystems.

Concluding Thoughts

If you ever use another ecosystem, you likely used two specific apps; a dex to swap assets and a lending protocol to gain yield on your assets.  Acala at the moment offers this in the polkadot ecosystem.  It is likely most assets are going to be listed first on Acala because you can use DOT to pay transactions to onboard new users.  If you had to pay attention to a polkadot project, it might as well be Acala.  

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