###### tags: `acala`

# Acala Completes Web3 Foundation Stablecoin Grant Milestones

Acala is geared to become an open finance platform in the Polkadot inter-connected blockchain ecosystem to provide financial stability, liquidity, and accessibility to anyone anywhere. Stablecoin is the first product built as a stepping stone towards this vision. The [Web3 Foundation](https://web3.foundation/) - the powerhouse behind the research and development of the decentralized web including protocols like [Polkadot](https://polkadot.network/), has awarded [a grant to the Acala team](https://medium.com/acalanetwork/acala-powering-cross-blockchain-open-finance-applications-on-polkadot-abb6075a6edf) for building a decentralized stablecoin platform end of 2019. Now we are happy to announce that we have accomplished all the missions set out in [the grant application](https://github.com/w3f/General-Grants-Program/blob/master/grants/speculative/stablecoin_acala.md), and more.


At a glance, we have delivered
1. A running network that is **ready to become a parachain** on Kusama & Polkadot
2. **Multi-collateralized Stablecoin aUSD** - a self-service credit facility for stable aUSD, it is capable of using cross-chain or bridged in assets as collateral such as Bitcoin
3. **An experience** - our web & mobile applications (while still evolving) has made the process **simple and delightful**
4. **Risk management mechanisms** with more automation, efficiency, liquidity, capitalization and ultimately more stable
5. **On-chain governance with progressive decentralization** from founding team steering the ship to council governance and democracy with referendums

Acala Network is built on [Substrate](https://www.substrate.io/) - a customizable and upgradable blockchain framework, allowing us to implement sophisticated financial and technical innovations to improve the resilience, usability, and adoption of stablecoin systems.

### Multi-Collateralized Stablecoin aUSD
The ability to inter-connect currently isolated crypto asset classes such as Bitcoin and Ethereum, and to extract their derivative values is immensely valuable. With inter-chain protocol Polkadot, stablecoins like the Acala Dollar (aUSD) will no longer be bound by assets available on its network, the collateralization risks will be more diversified, the supply ceiling of stable dollars will be raised, and aUSD can be transacted on all chains connected.

Acala uses over-collateralization as an instrument to mitigate credit risks - namely in the event of a default, the protocol can liquidate the collateral as pledged assets to pay back the outstanding loan.

The Honzon stablecoin protocol is implemented as a set of runtime modules and is live on the Mandala Test Network. Read more on the implementation [here](https://github.com/AcalaNetwork/Acala/wiki/Z.-Modules)
and interact with the protocol [here](https://github.com/AcalaNetwork/Acala/wiki/2.-Honzon-Stablecoin).

### An Experience
We have launched [a web portal](https://apps.acala.network/) that makes self-serviced stablecoin (and decentralized finance) experience simple and seamless. The Acala open finance suite is also available on mobile (beta) powered by [Polkawallet](https://polkawallet.io/#download). We are constantly improving the user experience to make decentralized finance more accessible to the masses. [Try it now.](https://github.com/AcalaNetwork/Acala/wiki/1.-Get-Started)

[video here?]

Acala's [protocols/runtime modules](https://github.com/AcalaNetwork/Acala) and [SDK](https://github.com/AcalaNetwork/acala-dapp) are open-sourced with technical and financial primitives to power more cross-chain open finance applications and a rich ecosystem. There are several pathways and many benefits (specialist financial chain with customizable fee schedules, optimized performance and oracle services, just to name a few) to build with us and Polkadot, feel free to [reach out and discuss]([e-mail]).

### More Stable
The stability of stable aUSD is guaranteed by the value of the underlying collaterals stored on-chain in a trustless and transparent manner. When the value of pledged collateral assets cannot cover the aUSD debt and fees e.g. when the asset price plummeted to a point where the loan is under-collateralized, the liquidation process is triggered to ensure aUSD is solvent.


#### Automated Liquidation
The continuous monitoring of loan positions and triggering liquidation when they become unsafe no longer rely on external actors, and can now be automated and become an integral part of the protocol using [Substrate's off-chain worker](https://substrate.dev/docs/en/conceptual/core/off-chain-workers). This ensures Acala can respond almost instantly (e.g. every block) when markets downturn rapidly.

#### Diversified Liquidation Strategy - DeX + Auction
Acala uses a hybrid liquidation strategy of liquidating collaterals on decentralized exchange alongside with collateral auctions. Similar to a mortgage sale, auctions and reverse-auctions might be an effective way to make the most of the collateral sale and repay the debts. However it might not be the most efficient way to safeguard system stability in times of swift market downfalls with insufficient liquidity, like what happened in [crypto black Thursday](https://medium.com/acalanetwork/regaining-confidence-in-decentralized-stablecoins-bd98ba8e3c83). Hence Acala supplements the process by liquidating assets on the built-in decentralized exchange (Acala DeX) within acceptable slippage limit first, before entering into collateral auctions.

**Acala Dex is a Uniswap-inspired exchange** based on the constant-product mechanism, where a liquidity pool is established for each token pair, and the exchange rate is simply the amount of one token divide that of the other. Users enjoy instant (no order book) token swaps, while token holders can provide liquidity into the pools to earn exchange fees, plus an additional reward (as profit share from stability fees) to almost guarantee their yield. The strong incentives aim to attract more liquidity to support Acala's stabilization mechanism. Read more [here](https://github.com/AcalaNetwork/Acala/wiki/8.-Deposit-&-Earn).

#### Gradual Execution of Risk Parameters
Risk parameters such as loan interest rates, liquidation ratio, and collateralization ratio are important instruments for stabilizing the Acala Dollar. When the network governance decides to increase the interest rate from 5% to 20% due to skyrocketing demand, instead of applying the rate instantaneously, we have implemented **gradual update module** to increase the interest rate every block over a designated period to soften the blow per se. Read more on the implementation [here](https://github.com/open-web3-stack/open-runtime-module-library/tree/master/gradually-update).

#### Robust Oracle Infrastructure
Oracles provide critical pricing information for assets on the Acala Network. We have built **quality of service that prioritizes oracle operations** to ensure reliability and minimize delays which are critical when the network is in high demand or crisis. Meanwhile we can provide custom and favorable fee schedules to these critical services, thanks again to the flexible Substrate framework, to keep it cost-efficient. The oracle infrastructure is flexible enough for us to [integrate external oracle providers like Chainlink](https://medium.com/acalanetwork/acala-and-chainlink-collaborate-to-power-defi-on-polkadot-f11b3a74745d). Read more on the oracle implementation [here](https://github.com/AcalaNetwork/Acala/wiki/5.-Oracle).

## Governance - Progressive Decentralization
Since Acala's inception in Sep 2019, we have intentionally chosen a progressive decentralization pathway towards our ultimate goal - making ourselves redundant while the network is thriving. [a16z in a post](https://github.com/AcalaNetwork/Acala/wiki/9.-Governance) earlier this year depicts **progressive decentralization** well, and we are pleased to not only be able to live the ethos but also execute it on the blockchain.

### Phase I: Start-up
During this initial phase like right now leading into initial mainnet launch, there is no pretense of decentralization and competency trumps. The research and development of the Acala Network are led by the Acala Foundation. This is the **era of appointed councils** manage various aspects of the network on-chain. For example changes to risk parameters such as interest rates can be proposed and voted by the Honzon Council, and if passed will be executed on-chain automatically. Read more on governance implementation [here.](https://github.com/AcalaNetwork/Acala/wiki/9.-Governance)

### Phase II: Community Participation
In the next phase of community participation, we will see a significant portion of the network token gradually distributed as incentives to network participants, the network will be **upgraded to elected council governance** giving more power to the community as it matures. The surplus of the network will be managed in [Acala's decentralized Sovereign Wealth Fund (dSWF)](https://medium.com/acalanetwork/building-a-decentralized-sovereign-wealth-fund-6a5a0ae995b1), which will invest in **foreign crypto-asset reserves that have value, yield and utility**. This will ensure Acala's economic sustainability and access to critical services like shared security/consensus in the long run.

### Phase III: Sufficient Decentralization
Ultimately we achieve sufficient decentralization by moving into **democracy with on-chain referendum** and collective governance by stakeholders, as well as **economic sovereignty** via wealth accumulated by the decentralized Sovereign Wealth Fund. Read the whitepaper [here](https://github.com/AcalaNetwork/Acala-white-paper/blob/master/Building_a_Decentralized_Sovereign_Wealth_Fund.pdf).

## What's Next
With Polkadot just launched mainnet, and its canary network Kusama may soon be ready for parachains (inter-blockchain connectivity), Acala is ready and awaits to launch its canary network Karura connecting to Kusama, and mainnet soon after.

Delivering the stablecoin protocol checks off an important milestone towards Acala's vision of becoming a multi-chain open finance platform. We are expanding our [Ecosystem Program](https://acala.network/#ecosystem), stay tune for updates, and meanwhile if you are also excited about building a fairer, more open, and abundant financial future together, please get in touch.