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A Deep Dive Into Acala Network

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What is Acala?

Acala Network is the financial center for Polkadot with their staff that is aiming to concentrate on decentralized finance protocol mechanisms, development of mechanism, and parachain economic model and governance. The project provides users with essential financial fundamentals such as stable coin decentralized derivatives, staking derivatives, along with DeX, Acala Network powers open-source cross-blockchain finance (DeFi) applications for Polkadot and further.

With the support of Polkadot It is looking rather promising that Acala Network can enable true interoperability, as well as economic and transactional scaling. Acala is the very first financial institution decentralized to provide a set of protocols, including a stablecoin protocol to serve as Polkadot’s DeFi development.

The goal of the project is to issue Acala Dollar (aUSD) which is a stablecoin decentralized. Customers can redeem 1 USD for every US dollar. Acala makes use of BTC, DOT or ETC for collateral. Users can transfer or receive USD effortlessly across any blockchain linked with Polkadot. Polkadot network. The project plans to allow Staked Assets (DOTs) in the form of fungible and liquid assets (L-DOTs) and extract its derivative value from staked assets in order to fuel DeFi without compromising your security on the network. Acala Network is secured under Polkadot’s shared security model providing high resilience and forkless upgradeability.

Probleme that Acala helps solve:

To fully understand the problem Acala is trying to solve, and the problem Acala is trying to address We will go over the benefits of Stablecoins and Proof-of-stake and their drawbacks:

  1. Consensus Mechanisms:

When Satoshi Nakamoto was developing the first cryptocurrency ever created, Bitcoin, he had to come up with a method for payments to be audited without having to rely on a third-party. This was achieved by introducing the Proof of Work system.

In essence, Proof of Work is used to determine when the blockchain is able to reach consensus. That is how does the network ensure it’s legitimate and that no one is doing something wrong for example, spending the same amount of money twice?

The Proof of Work algorithm is built on a sophisticated mathematical concept called “cryptography”. This is the reason digital coins such as Bitcoin and Ethereum are also referred to as cryptocurrencies!

Cryptography is a mathematical process which are so complex that only computers with the power to solve these equations. Every equation is never identical, which means that when it is solved the network is aware whether the transactions are genuine.

A lot of other blockchains have took from the Bitcoin code and, as they also utilize as well the Proof of Work model. While Proof of Work is an incredible invention, it’s not perfect. It is not just that it requires massive amounts of electricity however, it is very limited in the amount of transactions it is able to process simultaneously.

This is why other models of consensus were devised among them one of the most well-known of them being Proof of Stake model. Proof of Stake was first invented in the year 2012 by two programmers known as Scott Nadal and Sunny King. In the initial days of creation the founders claimed they believed that Bitcoin along with the Proof of Work model required an equivalent of $150,000 for per day electricity expenses. Since then, the amount has grown to thousands of dollars.

This Proof of Stake model uses an entirely different method to verify transactions and achieve consensus. The system uses an algorithm for cryptography, however its purpose is distinct.

In contrast to Proof of Work rewards its miners for solving complicated equations and in Proof of Stake, the person who creates each block determined on the amount they’ve staked. To make it easier for you, stake is determined by the amount of coins that individual has in the blockchain they’re trying to mine.

To be clear:

  • Proof of Work is a game that requires ALL of its players to work together to find an intricate amount, and the winner decided by the one who owns the highest amount of power of Hardware devices.
  • A Proof Of Stake model randomly selects the winner according to the amount they staked.

Other benefits from Proof of Stake compares to Proof of Work:

Decentralization:

  • Evidence of Work blockchains give people who purchase high-end hardware the best chance to win the mining rewards.
  • What has led to centralized organizations purchasing thousands of computers (known by the name ASIC’s) that produce the greatest mining power. This type of activity is referred to as a “mining pool’. It enables individuals to pool their resources in order in order to maximize their chances of completing the cryptographic sum first.
  • Therefore, only four mining companies (of which the majority are in China where electricity is inexpensive) are responsible for more than half of the overall Bitcoin Mining power.
  • This is a system that is unfair because it means that the common person has no chance of ever receiving the mining payout. This is why Proof of Stake is different. This system does not allow groups of people to join groups to take over the network to make profits. Instead the people who help an online community by freezing currency get rewarded in proportion in proportion to the amount they’ve put into.

Less Electricity Consumption:

  • Certain Proof of Work blockchains like Bitcoin require large quantities of electricity. This is due to the cryptographic equation that miners need to be able to solve is extremely difficult.
  • A recent study revealed that the amount of power needed for keeping the Bitcoin network running is greater than the electricity utilized in more than 159 nations!
  • Not only is this harmful for the environmental however, it reduces the speed that cryptocurrencies are able to increase their acceptance in real life. The reason is that electricity bills have to be paid in fiat currency!
  • However, Proof of Stake does not require a large amount of math to be solved. This means that the cost of electricity for verifying transactions are considerably less.

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Prevent 51% Attack:

  • A 51% attack can be described as the situation in which a group or single person can gain greater than 50 percent of overall mining capacity. If this happened on the Proof of Work blockchain like Bitcoin the blockchain would permit the user to make modifications to a specific block. If the person involved was criminal and wanted to alter the block to gain.
  • A recent instance of 51% hack was carried out on the Verge blockchain, which enabled the attacker to escape with XVG coins worth $35 million. At the moment of the attack it was equivalent to a worth in the range of $1.75 million!
  • If you are using the Proof of Stake consensus mechanism It would not make economic sense to carry out an attack of 51. In order to achieve this the criminal will need to be able to stake at most 51% of quantity of currency that is in circulation. The only way to accomplish this is to buy these coins on the market.
  • If they decide to purchase the amount they did that is, the actual value of the currency would increase as the time progressed. In the end, they’d end up paying a lot more than what they would gain by the incident. In addition, after the rest of the network learned of the incident the culprit could lose all their stakes!
  • Once you know the concept of Proof of Stake and how it functions however, Proof of Stake (Nominated Proof-of-Stake in the case for Polkadot) consensus mechanism does isn’t perfect: Polkadot network targets 50 percent active DOT stakes with an annual return of 20. In effect, this is a chance for a cost to use it to use DOT in different applications instead of using it to stake. Ethereum in its current state as an PoW network is not subject to this limitation, and, in fact it offers a reason for ETH holders to join DeFi-related applications such as MakerDAO as well as Compound. On the other hand when DeFi lending applications offer higher yield than staking, it could encourage the collective shift of money from stakes into lending, creating a “bank panic’ and risking the security of the whole network. This issue can be addressed with an alternative protocol called the Homa Protocol of Acala. We will discuss it more in depth later.
  1. Stablecoins:

Stablecoin from its beginning to its widespread acceptance (at most in the world of crypto) has demonstrated its value beyond speculation: They have been utilized in alleviating political and economic stress as well as a hedge method for traders.

The present USD stablecoins are the most popular and are most prevalent on Ethereum. Ethereum platform, to mention a few USDC (centralized stablecoin) and DAI (decentralized stablecoin). In the realm of decentralized stablecoins (using an over-collateral system to secure the stablecoin) Single network assets are limited by its base ledger as well as the assets that are available on that platform for collateral, thus making it difficult to use them and their adoption.

The importance of cross-chain communications for the blockchain is the same as the importance of the internet and intranet. Polkadot creates a network of private, consortium and public blockchains. It enables interoperability, transactional and economic scale. Acala is the first financial consortium that is decentralized and offers the protocols e.g. an open-source stablecoin protocol which will act as a building block for Polkadot’s DeFi.

The most distinctive features that are part of Acala and the way Acala utilize them to address present problems:

– Multi Collateral Type CDP:

Every USD is backed in excess by a cryptocurrency asset using the Honzon Protocol, it follows the procedure called an over-collateralized debt place (or CDP). Along with a variety of incentive mechanisms, such as supply and demand balancing and risk management The price of a USD is stabilized. The CDP mechanism’s design was inspired by the decentralized stablecoin project MakerDAO that has evolved into the core DeFi block within the Ethereum ecosystem. In contrast to Ethereum Honzon Protocol is a bit different. Honzon Protocol can use Off Chain Worker to streamline the process, and improve safety and security of the stable coin.

– Price Stability Mechanisms:

The worth of one USD token has been designed so that it will be pegged to the US Dollar at a 1:1 ratio throughout the day. This is achieved through an automatic risk management system in Honzon Protocol. Honzon Protocol together with community governance.

– Automatic Liquidations for risky CDPs

The collateral value in each active CDP is continuously monitored via Honzon Protocol. Honzon Protocol to ensure that the outstanding debt that is associated with it in USD is able to be paid at any time by selling the collateral. Honzon Protocol Honzon Protocol will trigger the liquidation process if the active CDP is thought as too risky. Once the liquidation process is initiated, it will conduct an auction process that will take care of the debt that is outstanding by selling as little of the collateral that is possible.

– Acala DeX:

It is the Acala DeX protocol was inspired by Uniswap however, it is designed as a runtime component in the Acala Substrate chain to serve the USD community. Each liquidity pool has two tokens. The exchange rate is the value of one token is divided by the amount from the second. Customers can make a quick token swap without the need of an order book. However, a the liquidity provider may provide liquidity for the two tokens within a pool to charge an amount.

The first step in network design involves defining the requirements. The purpose of this step is to determine what hardware and software should be used. The next step is selecting the appropriate equipment. This step depends on the experience level of the designer. It can be difficult to select the correct devices without a solid understanding of the desired outcomes. This step involves conducting research on many vendors and studying the datasheets of devices. Once the requirements are defined, the designer can start designing the network.