Merging the Terra and Polkadot Defi Ecosystems to Extend the Decentralised Stablecoin Market

How Acala and Anchor are bringing Polkadot and Terra Ecosystems Together

Acala is collaborating with Anchor, a savings and borrowing protocol founded on the Terra blockchain, to extend the decentralised stablecoin market through a range of connections across the Terra and Polkadot ecosystems. Using Liquid DOT (LDOT) and Liquid KSM (LKSM), Acala's yield-bearing liquid staking derivatives, Acala and Karura, Acala's Kusama-based parachain, would first enable Anchor to increase its collateral choices for the UST stablecoin. The organizations will also collaborate to set up deep liquidity pools for aUSD and UST on Acala, which will serve as a conduit for UST consumers into the Polkadot ecosystem. By using early connectors as a base, the two teams are able to construct more integrations and deployments across the Acala and Terra ecosystems.

What is Terra UST? The decentralised algorithmic stablecoin

On the Terra blockchain, UST is a decentralised, algorithmic stablecoin. Anchor Protocol's UST yield is steady, thanks to staking profits from a variety of proof-of-stake assets that users submit as collateral. Anchor provides low-volatility returns on Terra stablecoin deposits by lending to borrowers who put up PoS assets as collateral and use UST for liquidity.

Users of Polkadot and Kusama will eventually be allowed to utilize their LKSM and LDOT to obtain Anchor yield. This will be accomplished by first sending their liquid staking assets to Terra through Wormhole, and then using their LDOT or LKSM as collateral to obtain UST on Anchor. The user will then receive ANC incentives for borrowing and will be able to place their UST on the Earn side to earn a consistent yield. A different group of Dotsama (Polkadot and Kusama) users will be brought to the Terra ecosystem as a result of this new application case for LDOT and LKSM.

aUSD

To keep its peg, the aUSD combines over-collateralization and crypto-backing. The mechanism of the USD creates a stable currency out of a bundle of reserve assets. This allows consumers to use aUSD to interact, market, and conduct services while preserving possession of reserve assets such as ACA, DOT, KAR, KSM, DOT and KSM derivatives, parachain assets, and assets linked from other consensus networks such as BTC or ETH. If decentralised stablecoins are approved by Gauntlet and undergo a governance vote, they would be suitable reserve assets for aUSD.

The Polkadot and Kusama ecosystems are native to aUSD, which means it can be transmitted cross-chain to any parachain or dApp in the system with minimal trust or bridge risk. aUSD will provide UST users with a portal into the Polkadot ecosystem, allowing them to utilize their UST or aUST for additional income prospects.

Acala and Anchor plan to construct UST/aUSD pools, starting with Acala and then spreading to several more parachains and L1s in the future. The pools will dramatically increase aUSD and UST liquidity while also allowing for joint attempts to simultaneously build the decentralized stablecoin space.

How LDOST and LKSM are being leveraged by Anchor and Acala

LDOT and LKSM will be included in Anchor's system as collateral assets shortly. Acala and Karura customers will be free to leverage their liquid staking assets using cross-chain collateralization to get more yield on Anchor while reaping the profits on staked DOT (14%) and staked KSM tokens (20%). The UST that is issued after that can be put into Anchor to gain the platform's existing APY (19%), raising the yield even more. A customer could, for instance, stake their KSM on Karura to gain 20% and obtain their liquid LKSM token, then transmit their LKSM to Anchor, put into Anchor to borrow UST, and then bank their UST in the Earn side to earn even more.

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Sources:

• https://medium.com/acalanetwork/anchor-protocol-and-acala-integrating-to-unite-terra-and-polkadot-defi-ecosystems-and-grow-9684aa90a81d
• https://acala.network/