What is Happening
To boost DeFi on Polkadot, DeFi network Acala has partnered with Polkadot's innovation center Astar Network. The "Astar x Acala DeFi Rising" initiative was just released by the two top parachains to provide developers with more options and incentives.
The growing number of decentralized applications (dApps) on Astar is largely due to the range of adaptable financial products offered by Acala, which supports the Polkadot network. Due to this partnership, developers may use Acala-native assets like aUSD, LDOT, and ACA to create a protocol on the Astar DeFi environment with the added bonus of collecting ACA and other benefits from the many different teams that make up the Astar ecosystem.
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What is Acala
The aUSD ecosystem is powered by the decentralised Acala financial network. Acala USD is the native stablecoin of the Polkadot ecosystem, and it is a decentralized, multi-collateral, crypto-backed stablecoin. The DeFi protocols built into Acala's Ethereum-compatible blockchain can be used by application developers. These protocols include a trustless staking derivative (liquid DOT — LDOT), a decentralised exchange, and the EVM+, a hybrid EVM that provides an Ethereum-compatible development environment that is also fully compatible with Substrate.
Compostability, Parachains and Bridges on Polkadot - The Next Frontier for DeFi
All parachains coupled to the Polkadot Relay Chain get economic security from the Relay Chain validators, which is crucial to DeFi composability. There is a higher barrier to entry and the need for trust amongst communication chains in proof-of-stake systems because teams must discover and bootstrap their own set of validators. When using Polkadot, on the other hand, interchain communication is not dependent on whether or not the receiving chain trusts the sending chain. Parachains share an equivalent level of trust, simplifying things for programmers and guaranteeing consumers a consistent experience across platforms.
Polkadot implements asynchronous communication across parachains using cross-chain message passing (XCMP). With XCMP, sending a message either assures a response from the receiving chain or allows the sending chain to transmit the message with the expectation of getting a response of some kind (such as the return value of a function called on the receiving chain).
Using bridges, Ethereum and Bitcoin-based DeFi will be able to interact with other nodes on the Polkadot network. Polkadot's robust feature set is ideal for use in DeFi initiatives. Allowing for the creation of decentralised blockchains opens the door to several fascinating applications.
Instead of creating their own native parachain, some organisations opt to install their infrastructure on top of existing DeFi chains in the Polkadot ecosystem. For instance, Ren deployed its RenVM bridge module on the Acala Network as part of an alliance with Acala.
Developers may choose to build on top of parachains in one of two ways: by creating runtime modules and integrating them into the parachain, or by using a parachain like Moonbeam, Plasm, or Edgeware that already supports smart-contracts (specifically, Solidity or Ink! based smart contracts). In the future, we anticipate that some groups will still choose to develop using preexisting frameworks.
Liquid staking is a special type in DeFi. Staking token holders may acquire instant liquidity without a lockup period by exchanging their tokens for a synthetic token that can be traded on exchanges. Despite the increased centralization risk, token holders clearly profit from this. In the near future, Polkadot will likely be the most widely used blockchain ecosystem for liquid staking, since at least six companies are already developing solutions for it.
Polkadot's DeFi initiatives aren't just carbon copies of others; they're pioneering whole new fields of study. Acala's decentralized sovereign wealth fund is one such case (dSWF). The goal of the dSWF is to ensure the long-term financial viability of the Acala project by defraying the costs of maintaining the Polkadot network and funding ongoing R&D. Like MakerDAO, Acala's stablecoin platform necessitates the payment of a stability charge upon the termination of a collateralized debt position (CDP). The stability fees collected after a CDP is decommissioned are to be held in a central account. Then, anytime the system profit is over a particular level, the extra ACA tokens will not be burned but utilized to buy DOT on the open market and added to the dSWF's DOT reserve. Innovation in the Polkadot ecosystem is moving forward at an alarming rate with the implementation of cross-chain message passing and compatibility between protocols and blockchains.
Understanding the Acala Ecosystem and Polkadot
aUSD, the de facto stablecoin of the Polkadot and Kusama ecosystems, is issued and traded over the Acala DeFi network, which also powers financial apps on Polkadot. Staking DOT tokens on the relay chain ensures security and keeps users liquid using LDOT, a token backed by staked DOT, one of Acala's freshly released DeFi solutions.
Using Astar's Cross-Consensus Messaging Format (XCM) to carry out trustless and decentralized cross-chain transfers, the DeFi Rising initiative is the first step toward a healthy DeFi ecosystem.
For Astar to become the de facto standard for multichain smart contracts, developers will need access to a large supply of high-quality assets like aUSD and LDOT. Astar programmers may use Acala's solid foundation to construct novel decentralised applications. In exchange, early use cases for widespread aUSD adoption throughout the multichain future will be developed by the Astar ecosystem.
Acala's $250 million aUSD Ecosystem Fund and Astar's SpaceLabs initiative are available to projects that improve the value of aUSD on the Astar Network. Start-ups developing robust stablecoin use cases on either Polkadot or Kusama parachain are encouraged to apply to the $250 million aUSD Ecosystem Fund. The aUSD community is looking for use cases, including money markets, DEXs, derivatives, asset management, DAOs, payments, and other use cases that may be powered by Solidity or Substrate and increase the currency's yield or usefulness.
Final Thoughts on Astar and Acala DeFi Rising Program
The collaboration between Astar and Acala is critical for the Polkadot ecosystem as it brings developers together and furthers the innovation in DeFi. In my opinion, for the Polkadot ecosystem to compete with Ethereum, such programs are essential for attracting software developers to build the next generation of applications.
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Image credits: GuerrillaBuzz Blockchain PR Agency, Mike Enerio, and Nik Shuliahin.