What Is Acala?
Tech Deep Dives

What Is Acala?

Created 2yr ago, last updated 1yr ago

CoinMarketCap takes a deep dive into one of the Polkadot parachains, Acala — an smart contract platform optimized for DeFi applications and compatible with Ethereum.

What Is Acala?

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Blockchain development is never straightforward. From maintaining synchrony between nodes to actually developing apps that people use on a blockchain, programmers have a tough time ahead of them. 

The technology has very obviously evolved in many ways over the last year, with decentralized finance (DeFi) taking center stage, the beginning of the launch of Ethereum 2.0 and Bitcoin at a new all-time high. However, blockchain has also undergone an underlying shift that isn’t as apparent.
A quick look at the top DeFi platforms, according to DeFiPulse, shows that they all (except the Lightning Network) run on Ethereum. The decentralized platform has been the most popular environment for blockchain development for quite some time now, and changes to its core have significant effects on how decentralized applications (DApps) are created. Ethereum offers a platform that allows you to make anything, but not however you want to make it.
By enforcing its rules upon DApps, such as the ERC-20 token standard, Ethereum has arguably limited the kinds of distributed applications the community could have developed over the last few years. The pressure on blockchain to scale to billions of users was real even when the only application that tested its limits was CryptoKitties. Now, with a market capitalization of over $1.5 trillion, rivaling the value of the world’s largest private companies, scalability has never been as crucial.

Blockchain is the future of financial services worldwide, and new projects are jumping on the bandwagon. One of the most significant barriers to entry into developing for blockchain is funding. With billions of dollars entering the space, it’s no wonder more people want a piece of the pie, but starting a decentralized network from scratch is still as tedious as ever.

Decentralized finance may be bringing value to the blockchain community, but creating DeFi products is still not as simple as they need to be. Ethereum has maintained its position as the second most valuable blockchain by market capitalization for a few years now, and it was only in the last year that a competing network has put the veteran smart-contract blockchain on its toes.

Polkadot’s rise to the top-five cryptocurrency platforms was unprecedented but reasonable. It was created by British software developer Gavin Wood, a co-founder of Ethereum who invented the Solidity programming language and the Ethereum Virtual Machine. Wood saw the need for an alternative to Ethereum that could scale, bring governance on-chain, solve the gas fee problem and enable the flow of assets across blockchains.

Imagine if every person that wanted to cross the Atlantic Ocean needed to build a plane. This was the state of blockchain development before Polkadot. It isn’t the only project making progress in this domain, but it’s undoubtedly the most accessible and could even change the way we think about blockchains as a whole.

Simplifying Development With Parachains

Polkadot is a blockchain network that allows not just tokens but also arbitrary information to be transferred across it. Unlike Ethereum, which only allows DApps to create tokens within the bounds set by the parent chain, Polkadot allows developers to create their own parallel blockchains or “parachains.”

While they might seem like sidechains to the uninformed, parachains are much more advanced. Instead of creating a new set of validators and nodes for each new parachain, Polkadot’s relay chain maintains the entire network’s security. This lets developers focus directly on development without needing to worry about incentivizing users and validators to secure each new parachain.

Polkadot users can currently stake DOT tokens for all kinds of rewards. While staked validators receive incentives for approving transactions, “nominators” can select up to 16 validator candidates to trust their stake with and receive rewards in the process.

To launch on Polkadot, a parachain team must gain a “slot” in the network. Currently, Polkadot has a limit of approximately 100 parachain slots. Each parachain can define its own parameters for attributes like block times, transaction fees and even mining rewards. Parachains are customized blockchains that are optimized for specific use cases such as DeFi, identity or gaming.

The amount paid to lease a parachain varies based on the auction and requires teams to lock the amount away in DOT tokens. These tokens cannot be staked and are returned to the team on the lease’s expiry. Further, teams can crowdfund the DOT needed to start the chain, significantly lowering the initial capital required to create practically useful blockchain applications. The DOT gained in a crowdloan is similarly locked in the Polkadot Relay Chain and never touched by the parachain team. The funds are returned to contributors at the end of the lease term (estimated at a maximum two years for Polkadot).

Acala defines itself as a high-performance decentralized finance platform built as a Polkadot parachain. Founded by members of two Polkadot ecosystem teams, Laminar and Polkawallet, Acala brings a slew of decentralized financial services to Polkadot, including a decentralized exchange (DEX), staking liquidity (Liquid DOT (LDOT)) and even an algorithmic stablecoin, aUSD. Acala is both a parachain platform on which other teams can build, as well as an application layer providing a suite of applications offering the aforementioned financial products.

Current DeFi applications face many problems concerning adoption from a mainstream audience, and much of these issues stem from the platform they’re built on. Unlike Ethereum, which requires gas fees to be denominated in ETH, Acala allows any blockchain platform to participate and pay for computation in any currency in what the team calls “Bring Your Own Gas.”

Along with its micro-gas fees system, Acala is slowly but surely solving the gas fee inflation and network congestion problems faced by decentralized applications built on Ethereum. Additionally, since the platform used to design Polkadot, Substrate, is capable of parsing any language that compiles to WebAssembly, it’s much easier for developers to try their hand at creating an app.

Ethereum may be the most popular DeFi platform right now, but not all developers are willing to learn Solidity, and Acala’s open approach to development could be crucial in the long run. Further, its engineering team has also deployed a custom-built Acala EVM, a novel contribution to the Polkadot ecosystem that gives a seamless, full-stack experience for Solidity, Substrate and Web3 developers. This way, developers on Acala get the benefit of the EVM environment, without sacrificing the power of Substrate.

The Acala EVM also brings protocol composability between EVM and Substrate runtime environments, giving Acala developers outstanding tooling support. Smart contracts deployed within the Acala EVM can directly access both native and cross-chain assets like DOT, aUSD, PolkaBTC and XBTC, but even ERC-20 tokens can be made available at the runtime level. These can be listed on the DEX or used as gas fee tokens through governance approval. Composability is vital to a sustainable development environment because it allows developers to use existing resources as building blocks to create higher-order DApps.

The blockchain’s trustless, permissionless and stateful nature allows computers to truly unlock the power of composability, enabling developers to build on top of shared infrastructure without worrying about dependencies and other development resources being taken away. Just like how Ethereum pushed the limits of what blockchain could achieve, Polkadot and Substrate are redefining DLT as a whole and could lead to many new on-chain innovations outside of the Ethereum ecosystem.

Acala runs on a fundamentally different model than Ethereum, which is more inclusive and beneficial to developers and end-users alike. Their goal isn’t to redeploy Ethereum on Polkadot but create an environment conducive to cross-chain innovation and interactions between distributed applications on top of interoperable blockchains.

Opening the Floodgates

As mentioned earlier, Polkadot allows parachains to crowdsource the DOT required to lease a parachain. Any network participant can create a crowdloan campaign to compete for a parachain slot, and the campaign duration can span across multiple auctions. This means teams do not have to restart campaigns after not securing a chain the first time around.

Once the crowdloan campaign opens, anyone can participate by sending a transaction to the campaign’s index. The DOT used for this transaction must be transferable — i.e., not locked in staking, vesting or other governance-related reasons. This is because the network eventually transfers the funds to a uniquely generated module-controlled account.

At the parachain level, teams can decide whether or not, and how much, to reward participants that forgo staking rewards to fund the chain. Ideally, parachain owners upload the chain’s data before asking for funding so participants can verify it. This can only be done once during the campaign and is the state that will be deployed as the parachain’s runtime. This doesn’t mean the parachain cannot implement changes through runtime upgrades, but those will be determined by its local governance protocols.

The success of a crowdloan campaign is determined by whether or not the team wins the subsequent parachain slot auction. Teams will participate in an unpermissioned candle auction using the crowdloan support from their community. Parachains that are successful in their parachain slot auction will then be integrated into the Polkadot ecosystem, with the DOT locked into the parachain’s account as long as it’s online. If they are not successful in the auction, the DOT is made withdrawable to participants; however, it’s important to note that tokens not withdrawn within the stipulated period will go to the Polkadot treasury.

Unlike most smart contract platforms, Acala is more directly focused on optimizing the DeFi situation, integrating its DEX, stablecoin and liquid staking protocol. While Acala’s current focus lies on its own DeFi applications and compatibility with Ethereum, once the floodgates to a more open development ecosystem have been opened, there may be no turning back for DeFi developers.

Working Together With Acala

Interoperability is the next frontier for blockchains, allowing them to communicate with each other, seamlessly make transactions across chains and operate smoothly across multiple decentralized networks. It also ensures a more user-friendly experience, which is imperative to improving adoption and enabling multi-token transactions across different blockchains.

Completely decentralized blockchain networks function without any intermediaries or third-party involvement. While current models have allowed for rapid development in the blockchain space, the lack of interoperability has severely diminished many efforts to create better decentralized applications.

Blockchain without interoperability will only create disconnected systems that cannot share resources — a key aspect of a sustainable development ecosystem. Interoperability lets users from various networks interact without spending resources on translating the information sent or received and less downtime.

When it comes to developing innovative solutions, it’s common for developers to ignore standards in favor of greater creative freedom. However, this can lead to interoperability and communication bottlenecks, and one of the biggest challenges for the blockchain industry is setting the different parameters and models for interoperable networks to adopt.

Polkadot encourages customization among its parachains, making each project part of its broader ecosystem. With the main chain handling security, new projects need no longer look to incentivize participants to join yet another blockchain network and can instead tap into the resources that have already been set in place by Polkadot.

Acala and Polkadot are recontextualizing what it means to crowdsource funds to start a blockchain project. While thousands of blockchain projects have started up in the last few years, the resources used to create each one often could have been better used, improving the technology as a whole. The internet may have revolutionized communication and information transfer, but if every person that wanted to start a website had to build their own internet, it wouldn’t be as popular as it is today.

From the blatant scams faced during the ICO bubble in 2017 to the slightly more reliable IEOs and IDOs that followed, crowdfunding a blockchain project is almost a tradition in this space. Acala has positioned itself as the DeFi hub on Polkadot, testing new and more effective ways of setting up configurable blockchain applications without requiring a lot of capital on hand.

Unlike other DeFi platforms which have integrated with the current Substrate EVM, Acala has built and released a homegrown solution called the Acala EVM — a composable EVM stack on Substrate. Instead of simulating nodes using Frontier to replicate Ethereum block production, Acala uses a JavaScript SDK to interact with apps by simulating Web3 Providers that wrap around a Polkadot Extension.

The Acala EVM also tracks around some legacy issues with Ethereum while retaining the benefits of Substrate. For example, Acala allows for a customizable economy that is fully upgradeable and provides local cross-chain functionality along with on-chain governance systems. These are features that aren’t currently possible on Ethereum, making some contracts deployed on Ethereum require code adjustments to ensure compatibility with Acala’s economic models.

Over the last decade, blockchain technology has shown the potential that lies in a decentralized future, but unless the space can learn to optimize its use of resources to best support innovation, progress will be too slow to keep up with modern needs. Decentralized networks aren’t simple and require knowledge in several fields, including finance, economics, computer science, distributed networking and cryptography.

Since blockchains require an alignment of incentives for stakeholders, their complexity scales with functionality and security, making them optimal for specific use-cases instead of platforms that can do everything. This means that having a single standard for all applications is unconducive to a thriving ecosystem of decentralized financial services. As Acala and other interoperable projects continue to push the limits of what’s possible with blockchain, the industry could be moving into an era of shared resources, sustainable innovation and empowered people.

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