Bridging DeFi with TradFi - Interview with the Acala team

Acala is an EMV-compatible network built on Polkadot aiming to democratize DeFi. Acala represents a comprehensive ecosystem with multiple solutions to bridge TradFi with the world of DeFi and enable users to earn by increasing capital efficiency through staking and yield farming.

Acala was developed to improve the liquidity for DOT, Polkadot’s native token, by building solutions to improve idle DOT found throughout the ecosystem. To test the solutions, the Acala team launched their own network called Karura. The team claims that Karura is built just like Kusama but has faster governance parameters and higher risk tolerance.

The ACA token is a native token of the Acala ecosystem, and it is now available for purchasing on LetsExchange for over 4,500 other coins and tokens. Learn more about the Acala project from the interview with the Acala team.

LetsExchange: Kurura was created to test Acala’s solutions for Polkadot. Can you briefly explain the process and reasoning for this?

Acala: Karura is great because we can execute governance proposals and smart contracts in an environment and economy that is very similar to Acala. We have tools like Chopsticks to test if the contracts will execute correctly, but using a canary network like Karura can show us the economic impact of the changes.

LetsExchange: The entire ecosystem is built on the expectation that the Polkadot project will flourish. What would happen if, for some reason, Polkadot collapses? Is there any plan B to protect ACA holders?

Acala: The entire Acala ecosystem indeed synergizes closely with the Polkadot network, leveraging its unique parachain architecture for interoperability and scalability. In the hypothetical scenario where Polkadot faces challenges that jeopardize its operation, Acala is committed to ensuring the resilience and continuity of its services. Our architecture is designed to be adaptable. Should it become necessary, Acala can transition to or bridge with other blockchain ecosystems that share our commitment to decentralization and user sovereignty, thereby protecting ACA holders.

LetsExchange: As a token issuer, are you ready for the coming regulatory requirements to introduce KYC for users?

Acala: As global regulatory landscapes evolve, Acala proactively engages with legal and compliance experts to ensure our platform adheres to applicable laws and regulations. In fact, we also speak with many TradFi companies that want to integrate with Acala and ensure that we are in line with all current local and international regulations if we are to partner with them.

LetsExchange: Speaking about the idea of a decentralized Sovereign Wealth Fund, it would work if DOT ensures sustainable growth only. Are there any mechanisms to ensure the Acala network's sustainability besides relying on DOT's price growth?

Acala: Acala's commitment to sustainability transcends reliance on the price growth of any single asset, including DOT. Recognizing the dynamic and multifaceted nature of the blockchain ecosystem, our strategy encompasses a broad-based approach. In line with our recent roadmap, we are actively integrating with multiple Layer 1 (L1) and Layer 2 (L2) chains, such as Solana and Ethereum, along with their respective liquid staking tokens.

This initiative is part of our broader vision to position Acala as the liquidity layer of web3, ensuring our network's resilience and sustainability by diversifying our asset base and income streams. By expanding our connectivity across different blockchains and incorporating a variety of assets into our ecosystem, Acala is building a robust foundation that is not solely dependent on DOT's performance. This approach not only enhances our network's stability and adaptability but also aligns with our mission to facilitate a more inclusive and interoperable DeFi landscape.

LetsExchange: On August 15, 2022, there was a de-pegging of aUSD caused by the developers releasing almost 3 mln of unsecured tokens. Is the de-pegging possible now, and how can the aUSD peg to USD be ensured?

Acala: We have been executing a plan for aUSD after this incident outlined in our Exodus Upgrade that involved the changing of aUSD to aSEED followed by vault conversion and redemption. We have just concluded conversions on Karura with redemptions following shortly and it has been very successful. The vote for conversion on Acala just passed and we believe it will follow the same path. Depegging is no longer possible as aUSD has been discontinued.

LetsExchange: Acala is a very complex ecosystem with many solutions, tokens, etc. This complexity is an obstacle to the Acala mass adoption even though the solutions could be very promising for the common public in matters of earning, financial inclusion, etc. Are there any options to make the Acala ecosystem accessible to the general public, those who do not have much experience with DeFi?

Acala: Absolutely, addressing the complexity of the Acala ecosystem and making it accessible to a broader audience is a priority for us. We understand that the intricate landscape of DeFi can be daunting for those new to the space. To bridge this gap, Acala is actively developing user-friendly, one-click solutions that abstract away the complexities of DeFi actions.

This means that users don't need to navigate through the multifaceted processes typically associated with DeFi transactions to achieve desired outcomes. Whether it's swapping tokens, participating in staking, or accessing liquidity pools, our goal is to make these actions as straightforward as making a simple online purchase.

Moreover, recognizing that comfort and familiarity play significant roles in user adoption, Acala is forging partnerships with traditional financial (TradFi) institutions and cryptocurrency exchanges. These collaborations are aimed at meeting customers in environments they are already comfortable and familiar with. By integrating our services with these platforms, we're not only expanding our reach but also providing a seamless bridge for users transitioning from TradFi to DeFi or from more traditional crypto platforms into the deeper functionalities of DeFi.

LetsExchange: Acala allows the development of Solidity-based dApps in its EVM+, an Ethereum-compatible environment. What tokens can be used for those dApps? You don’t mention any ERC-20 tokens in your whitepaper.

Acala: EVM-compatible tokens are a relatively recent addition to the Polkadot ecosystem, and by extension, to Acala as well. Currently, Acala supports any token that is transacted through the Wormhole bridge, including widely recognized stablecoins and assets like USDC and DAI, among others. This compatibility facilitates the use of these tokens within Acala’s EVM+, our Ethereum-compatible environment that allows for the development and deployment of Solidity-based decentralized applications (dApps).

Understanding the importance of expanding our token compatibility to foster a richer ecosystem and enhance the utility of our platform, we are actively working on integrating more complex tokens, including Liquid Staking Tokens (LSTs). This is a key component of our newest roadmap, where we outline our commitment to broadening the scope of assets available on Acala. Our efforts are aimed at ensuring developers and users on our platform have access to a wider range of tokens, enhancing their ability to build and interact with a diverse array of dApps and financial instruments.

LetsExchange: What are the staking conditions on the Acala network?

Acala: There are different types of staking you can do on Acala.
ACA staking is done on our platform or from select substrate wallets and centralized exchanges. There is a 28-day unlocking period but also a loyalty bonus program.

DOT liquid staking can also be found on our platform, where you will receive LDOT in return for staking your DOT. LDOT can then be used for different DeFi activities such as LPing while still earning the yield from staking DOT.

Euphrates is our boosting staking platform, where many different DOT and LDOT staking options are available. Here users can earn bonus ACA as an incentive reward. Soon we'll be adding more pools with different types of stablecoins and liquid staking tokens.

LetsExchange: You’ve mentioned that Acala will work on bridging TradFi and DeFi by creating institutional products and integrations. What products are available, and how can they be used for TradFi?

Acala: One of our current live initiatives in this area involves our collaboration with Credora. Credora has successfully implemented a Special Purpose Vehicle (SPV) leveraging Acala's DOT liquid staking solution, specifically designed to cater to Bitcoin lenders. This innovative application demonstrates the practical use of DeFi protocols within traditional financial structures, offering enhanced liquidity and yield opportunities to participants in the TradFi sector. For more comprehensive details about this offering, I’d suggest visiting the Credora website.

Furthermore, Acala is actively engaging with the Liquid Collective, supporting their goal to deliver institutional-ready products. This partnership is focused on creating solutions that meet the rigorous requirements of institutional players, thereby facilitating their entry and participation in the DeFi ecosystem. Through these and future initiatives, Acala aims to bridge the gap between TradFi and DeFi, providing secure, efficient, and scalable financial instruments that can easily integrate with traditional financial markets and practices.