Polkadot gets its first multi-collateral stablecoin
The Acala Dollar, a decentralized, multi-collateral stablecoin, has been released by Acala. Acala’s Decentralized Monetary Reserve and aUSD are at the root of Acala’s DeFi ecosystem and will drive the Polkadot and Kusama ecosystems. The first two acceptable collateral assets for aUSD minting are DOT and LCDOT. Hackernoon had interviewed the co-founder of Acala Network, Bette Chan discussing the Polkadot ecosystem and building the DeFi ecosystem.
The stablecoin (aUSD) protocol acts as the Polkadot ecosystem’s Decentralized Monetary Reserve, enabling stable currency to be issued using a basket of collateral reserve assets, similar to how conventional reserve systems backed national currencies with precious commodities like gold.
The Acala Swap decentralized exchange and the ‘Homa’ protocol for DOT liquid staking are the DApps created to support and manage the stablecoin. The Swap enables the liquidations that support the health and functioning of aUSD, in addition to standard DEX use cases. The Homa protocol for DOT liquid staking is also a DApp that helps to support aUSD by freeing millions of dollars in liquidity on staked DOT and establishing a brand new DOT derivative that can be used as collateral mint aUSD. Users may also increase their exposure to DOT while generating staking yield with this product.
To establish a stablecoin soft-pegged to the US Dollar, the stablecoin protocol employs a multi-collateral backing method. The stablecoin protocol functions as a Decentralized Monetary Reserve, minting a stable currency from a pool of reserve assets. This allows consumers to use aUSD to transact, trade, and conduct services while preserving control of their reserve assets such as ACA, DOT, DOT derivatives, parachain assets, and assets bridged from other consensus networks such as BTC or ETH.
A method known as Collateralized Debt Positions (CDPs) is used to create the USD. The value of an aUSD token is fixed to the value of a US Dollar using the aUSD stablecoin protocol on Acala, which includes a set of incentives, supply and demand balancing, and risk management methods. The aUSD also has an on-chain liquidator, which eliminates centralized third-party risk and oracle quality of service, ensuring that oracle price feeds are included in every block. As a result, the aUSD protocol can manage risk more autonomously and efficiently.
Every CDP stores the collateral assets and related aUSD debt position deposited by the user who launched the CDP that produced the aUSD tokens. The CDP’s deposited collateral assets are locked, and the user cannot withdraw them until the corresponding aUSD obligation is paid off. Active CDPs are always over-collateralized, with the value of the collateral surpassing the debt amount. A Stability Fee, or interest, is paid to the protocol and liquidity providers (LPs) of USD stablecoin pairings in Acala Swap when a CDP is opened.
Understanding Stablecoins - The Backbone of DeFi
A stablecoin is a cryptocurrency linked to a stable asset, such as fiat money or precious metal. Stablecoins were created to alleviate the high levels of volatility that characterize the cryptocurrency industry.
Stablecoins are classified as fiat-backed, crypto-backed, or algorithmic. Stablecoins with fiat backing, such as BUSD, are linked to regular fiat currencies. They retain a stablecoin peg by holding fiat reserves that may be traded for it. To account for crypto price volatility, crypto-backed stablecoins (such as DAI) over-collateralize their tokens, whereas algorithmic stablecoins govern supply without the need for reserves.
Stablecoins are attracting authorities’ attention because ofo their widespread usage and significant market value. Some countries are even developing their own to preserve control over the money.
Volatility isn’t the only factor with cryptocurrencies. Stablecoins, for example, are mainly meant to keep a steady price. There is a massive desire for currencies that combine blockchain advantages with the ability to follow a more stable commodity in an environment where coins and tokens may fall overnight. If you haven’t yet begun trading or investing with stablecoins, it’s worth understanding more about them, as well as the advantages and disadvantages they provide.
Stablecoins are digital assets whose value is linked to the value of fiat currencies or other assets. You may buy tokens that are tied to the dollar, euro, yen, gold, and oil, for example. A stablecoin enables the holder to lock in profits and losses and transfer value at a constant price on peer-to-peer blockchain networks.
The high volatility of cryptocurrencies makes them difficult to employ for day-to-day transactions. For instance, a shop may accept $5 in BTC for a coffee one day but discover that their BTC is worth 50% less the following day. This makes it challenging to plan and run a company around.
Previously, there was no method for crypto investors and traders to lock in a profit or prevent volatility without converting bitcoin to cash. Stablecoins were created as a straightforward answer to these two problems. Stablecoins like BUSD and USDC make it simple to get in and out of crypto volatility today.
A fiat-backed stablecoin holds a fiat currency in reserves, such as the US dollar or the British pound. Each BUSD, for example, is backed by a genuine US dollar kept as collateral. Users may then exchange money for stablecoins and vice versa at a fixed rate. Arbitrageurs will swiftly bring the token price back to the set rate if it deviates from the underlying fiat.
Stablecoins backed by crypto are comparable to stablecoins backed by currency. However, cryptocurrencies are used as collateral in dollars or another currency as reserves. Due to the significant volatility of the cryptocurrency market, crypto-backed stablecoins over-cover-collateralize their deposits as a hedge against price changes.
Smart contracts are used to control the minting and burning of crypto-backed stablecoins. Users may independently audit the contracts, making the process more credible. Some crypto-backed stablecoins, on the other hand, are managed through Decentralized Autonomous Organizations (DAOs), which let the community vote on project improvements. You’ll either have to become engaged or trust the DAO to make the right judgments in this scenario.
Consider the following scenario. To create a DAI tied to the US dollar, you’ll need $150 in coin with a 1.5x leverage. Yutilizutilizee your DAI, whichever you choose after you obtain it. You have the option of transferring it, investing it, or just keeping it. You must repay the 100 DAI if you want your collateral back. On the other hand, your collateral will be liquidated if it falls below a certain collateral ratio or the loan’s value.
When the stablecoin falls below $1, holders are given incentives to surrender their stablecoin in exchange for the collateral. This reduces the coin’s supply, forcing the price to climb back to $1. Users are motivated to generate the token over $1, increasing its supply and decreasing the price to incentivize price stability. All crypto-backed stablecoins use a combination of game theory and on-chain algorithms.
Because of their unusual combination of fiat and crypto, stablecoins have piqued the curiosity of authorities all over the globe. They are valuable for purposes other than speculating since they maintain a constant price. They may also be easily and inexpensively transported worldwide. As a result, some suggest that stablecoins might compete with fiat, even though a country’s central bank does not directly regulate them. As a result, several nations are experimenting with producing their stablecoins.
Since a stablecoin is a cryptocurrency, it will most likely be governed by the same laws that apply to cryptocurrencies in your jurisdiction. It’s possible that issuing stablecoins with fiat reserves may need government authorization.
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