INTRODUCTION TO ACALA

in LeoFinance2 years ago

The right reaction to the collapse of the markets in recent days, regardless of how much has virtually been lost, is to return to the study of new interesting projects, at this time undervalued by the market, in order to maximize the risk-return ratio. For this reason, today I am presenting a token that I think is very interesting, ACA, contained within an even more interesting ecosystem, POLKADOT, which will probably become even stronger than ETHEREUM (as I have repeatedly argued, ETH and DOT will outperform BTC because they have much broader and more versatile technical applications).

There is no single perfect blockchain for every application. Whether it's speed, transaction costs, blockchain capacity or something else, each blockchain has its own strengths and weaknesses depending on what companies are looking for when building their protocols.

Altering fundamental aspects of layer 1 blockchain design is a complex and time-consuming process (just remember Ethereum 2.0 updates). Furthermore, there is no question of modifying the entire network to meet the needs of each individual project.

But what if there was a platform for projects to do exactly that while maintaining the same level of security? The POLKADOT project thought of that by inventing PARACHAINS.

WHAT IS POLKADOT?

Many of you will surely have talked about DOT, one of the cryptocurrencies with the highest level of capitalization. Polkadot is a multi-chain Proof-of-Stake network of blockchains that are operable with each other and customizable. No single blockchain has the perfect configuration to fit every possible use case - there is no "one size fits all". Applications built on conventional blockchains, like Ethereum, are built within the rules and constraints of that blockchain: block size, block time, throughput, and other fundamental factors that cannot be changed just to fit a project.

Labeled the "Internet of Blockchains," Polkadot aims to provide a scalable platform where any application can create a specialized blockchain that fits its needs while having a seamless connection to other blockchains on the Polkadot network.

PARACHAIN

Parachains are the main innovation that Polkadot has introduced to the blockchain world. Parachains are unique and independent Layer 1 blockchains that run in parallel (Parachain) with each other. "Projects" (companies) are able to modify their own Parachains by customizing them as they prefer.

They can have their own governance, economics, functionality and tokens so that they can optimize the requirements for whatever use case/application is required.

All Parachains share security through the Relay Layer, which means projects don't have to manage their own validators. Resources and information can be easily sent through these parachains and there are no requirements for execution.

Collators are the third class of network participants on the Polkadot network, who validate transactions on the parachains and produce state proofs for the relay chain validators.

At the center of the entire network is the Relay Chain, which manages security, consensus, and interoperability between chains. The Relay Chain uses a variant of the Proof-of-Stake consensus mechanism called Nominated Proof-of-Stake or NPoS.

Like other Proof-of-Stake networks, Polkadot validators process transactions on the Relay Chain, protecting the network and ensuring continuity. However, with NPoS, there is another class of participants called nominators. A nominator is any DOT holder that publishes a list of validators they trust and then points some DOTs to nominate those validators as potential candidates to be included in the network.

Parachains are located within "slots" in the middle of the network. These slots are rented through a candlestick auction where projects can bid on a slot and, after a certain period (which is unknown at the start of the auction), the highest bidder secures the slot. Slots can be rented for a maximum of 2 years, divided into 3-month periods (this is the minimum rental time).

For example, a project that is about to expire may bid on another available slot to continue operations on Polkadot. When the lease on their current slot has expired, they can seamlessly move to the next slot and continue as before. Eventually, the goal will be to have 100 slots on the entire network.

The first Polkadot Parachain auction ended with Acala winning, claiming the first parachain slot.

Investors in the project deposited DOT into Acala's crowdload cghe then will be returned at the end of the lease, in Acala's case this is a two year term.

Until the token is officially released it is not possible to know the listing price of ACA, however it is possible to get an idea by relating the total supply to the market capital raised.

INTRODUCTION TO ACALA

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One of the biggest problems in DeFi is the operability between different blockchains. For example, it is impossible to use Solana-based resources on the Ethereum blockchain and vice versa. This is where the independent properties of the Polkadot blockchain come into play.

Acala is a multichain DeFi hub for the Polkadot ecosystem that uses liquidity from other projects (blockchain or common tokens) to create new DeFi assets.

Honzon Protocol

Acala has an embedded stablecoin platform and its own stablecoin called Acala Dollar (aUSD).

aUSD is an algorithmic and decentralized stablecoin, pegged 1:1 to the US dollar through an over-collateralization mechanism. The technology behind this structure is called the Honzon Protocol.

  1. Users will be able to deposit BTC, ETH, DOT or L-DOT as collateral that allows them to mint aUSD.
  2. A collateral debt position (CDP) is then opened, holding the other assets as collateral.
  3. The user can then use aUSD for a variety of functions on any of the chains linked to Polkadot (e.g. lend or buy other assets, just as in the case of usdc or tether)

The peg to the USD is maintained because the amount of minted aUSD is backed by collateral of greater value than its original value. This process is referred to as over-collateralization.

This can lead to liquidation if the value of the deposited assets reaches a certain collateral-debt threshold. This is called the liquidation ratio.

The Honzon protocol is the key to stablecoin liquidity on Acala . Having access to stablecoin liquidity is critical to decentralized financial activity on any network and having that kind of utility on all Polkadot connected chains is a game changer in terms of user experience, cross-chain liquidity, interoperability and DeFi integration.

HOMA Protocol

Typically, only a defined number of tokens are available at a time on most Proof of Stake protected networks. Depending on the design, networks that use a Proof-of-Stake consensus to protect the network require staking of tokens.

This gives rise to a dilemma: there must be enough tokens in staking to ensure the security of the network, but at the same time a large number of tokens are needed to ensure users can use all the services on the ecosystem, such as bonding, paying transaction fees, lending, etc.

This is where the HOMA protocol comes in: users can stake their DOTs via Acala and receive the L-DOT (Liquid-DOT) derived token.

  1. Users deposit DOTs into HOMA's Staking Pool.

  2. In return, users receive L-DOT tokens at a 1:1 ratio for their deposited DOT.

  3. Staking rewards are paid in L-DOT tokens.

L-DOT is a fungible derivative token, which means it can be exchanged for other tokens, used as collateral to mint aUSD and other basic functions.

Currently there is an unbonding period (the period of time it takes to hold the staked currency before it can be sold or transferred) of 28 days for DOT staking. The HOMA protocol removes this impediment by providing some options for early unstaking (with some additional fees), representing a true innovation in the DeFi world.

This is possible because all staking rewards are kept in a reserve pool until a user decides to unstake (swap their L-DOT back into DOT).

And that's how the DOTs needed to protect the Polkadot network are provided, while removing the liquidity constraint that comes with blocking DOTs for at least 28 days (the unbonding period). In addition to L-DOT, Acala offers Liquid Crowdloan DOT (lc-DOT) to initial Crowdloan participants who have chosen to contribute through that method. The mechanism and utility of lc-DOT are the same as L-DOT, except that DOTs cannot be claimed until the end of Parachain's lease period.

Tokenomics ACA

ACA is the governance and utility token for the Acala network.

Used for voting rights in the DAO, payment of fees, and as a contingency for recapitalization of the collateral pool for stablecoin aUSD in the event of insolvency.

There are a few things we need to consider to infer a fair valuation for Acala, and we have a number of metrics we can use to do so:

  1. The number of tokens allocated to rewards (15% of the offering, 150 million tokens).

  2. The maturity program (20% unlocked at launch, 30 million tokens). The remaining 80% was invested linearly over 96 weeks.

Total estimated tokens available at launch are 30 million, immediately unlocked by rewards, plus another 130-170 million tokens available as liquidity/exchange incentives, etc. We are therefore talking about 200 million total tokens available at launch.

The reasoning behind a conservatively high estimate is that issuances will begin immediately once the chain is active, so opting for the higher end extends our time frame over the next 2-4 months, at least.

We can use this estimate to perform an arbitrary market capitalization calculation based on the total DOTs collected for the project, which equates to approximately 32.515 million DOTs.

Considering the value of 1 dot ($26 on today's date after the sharp drop of these days, but objectively with a target of $48) and multiplied by 32.515 million (the total DOTs collected by the crowdloan), we get approximately the implied market capitalization of Acala which would amount to $845 million, but after this period it could easily reach 1.5 billion (yes I am confident about the DOT program, I see it stronger in fundamentals even compared to ETH and BTC).

We can use this market capitalization to estimate the value of a single ACA token at launch:

$845 million /200 million ACA = ~$4,225 per ACA.

We know that there is a minimum of 4.6 ACA as a reward for each DOT contributed, but only 20% of that will be available at launch - the rest is locked in.

As you may have noticed, the price of DOT can vary and so can the DOT and ACA offerings, so the calculations will vary constantly. When Acala's market capital is 16-24% of Polkadot's, this will be a 'reasonable area to start selling some ACA tokens to recoup some of the capital invested (the DOTs deposited in the crowdloan).

The project is interesting and I will follow its development closely. Thanks for reading.

CREDITS

The ACALA logo is property of ACALA Fundation.

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It's still incredible how the complete Polkadot project is "unknown" to the masses and how undervalued it is... But, as you said, the same thing has happened to Ethereum as people didn't understand how it works and for what it can be used...

I suppose that the same will happen with DOT and when people realize the full potential of it, it will go through the roof... But, for that to happen, we need tokens built on DOT, like ACALA to do the work...


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Sure, DOT right now is less well known than ETH but technically in a more advanced position (I say that because ETH aims to implement the same functionality as DOT, but has a larger ecosystem). Mass adoption necessarily comes through a broadening of the development ecosystem. There are also other very interesting projects that are doing well but not as well as DOT right now.
I thank you for your support and for bookmarking my post within your review.

thanks for shading the light for this opportunity, but I don't understand the optimism about Etherium and everyone is avoiding the ERC-20 because of the gas fees>

The problem of gas fees is being solved and has been strongly mitigated since the August update and those following, there are new proposals under discussion: EIP 4488 for example is a proposal that aims to redistribute the fees on the type of calls, reducing from 16 to 3. But the real solution will be the transition to ETH 2.0 that will be POS, which will increase the processing capacity of ETH. Simply put, right now ETH is the leading smart contracts platform and DEFI in existence, with implementations already underway, ETH will definitely perform better than BTC because it has more extensive practical applications.

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