Over the last decade, blockchain technology has grown by leaps and bounds, pushing the boundaries of what's possible with decentralized networks. There are thousands of cryptocurrencies in existence, and the number of blockchain projects sprouting up is ever-increasing. Blockchain is undoubtedly the future of money and financial systems, but there are still areas that could be more efficient.
The Ethereum network's launch put a spin on what blockchain tokens could be and catalyzed the rise of decentralized finance (DeFi) applications. The introduction of programmable smart contracts has enabled countless use-cases across various industries, but with so many DeFi applications relying on Ethereum, the platform's limitations have become the limitations of decentralized finance too.
Development efforts in the blockchain sector are broadly scattered, with siloed ecosystems and very few shared resources. Applications on one platform are disconnected from the value on other platforms, which is detrimental to the space's growth as a whole.
Interoperability is the next frontier for blockchain systems, connecting value and people across disparate networks seamlessly and in a decentralized manner. Though there have been efforts to create interoperable blockchain systems since around 2014, it wasn't until last year that it truly became a reality.
Interoperability in Blockchain
Polkadot was created by Gavin Wood, a British software developer who was a co-founder of Ethereum. An expert in decentralized networks, Wood saw the congestion problem on Ethereum and sought to solve it by enabling value transfer across interoperable blockchains.
Modern decentralized networks need to integrate features like governance, smart contracts, a currency and more, and applications built on these networks are bound by its global settings.
Creating an entire blockchain to cater to one specific application is far too expensive for smaller projects, forcing most of them to adhere to the limitations of the most accessible platform.
Instead of creating a standardized platform to develop applications, Polkadot allows developers to create their own parallel blockchains customized to their exact needs. These parallel blockchains or 'parachains' can be configured to match different block time requirements, mining fees, and governance systems.
What Is Acala?
Polkadot is built on the Substrate platform, and its “canary network” Kusama acts as an experimental network for the latest updates and application features. However, Kusama is not a test network.
With gas fee inflation and network congestion on the rise, Ethereum has many problems to solve with its next iteration. Using a micro-gas fee system, Acala solves these problems while also being interoperable with decentralized applications on other platforms.
What Is DOT Used For?
Polkadot's native DOT token plays a crucial role in the Polkadot network's maintenance and operations. Users are given the ability to vote on governance, network upgrades and more by owning and staking DOT. The network also holds these tokens in exchange for leasing out parachains, which contributors can retrieve once the lease expires.
However, the DOT tokens cannot be staked or locked into any smart contract elsewhere. This makes the actual cost of leasing a parachain the interest lost from being unable to stake the tokens. To make things even easier for newer projects with less capital, parachains can also be crowdfunded, with decentralized participants providing the DOT required to lease a chain.
The Acala DeFi Hub on Polkadot offers:
- Liquid DOT (LDOT) Staking
- Algorithmic Stablecoin aUSD
- Decentralized Exchange
- Early DOT Unbonding
The DeFi Hub of Kusama
The word “Karura” originates from the name of a fire-breathing bird in Japanese mythology, described as being similar to a phoenix. Karura aims to be the first project to lease a parachain through a crowdloan on the Kusama network, and it is designed to function as a hub for decentralized finance on the blockchain, similar to Acala's role on Polkadot.
The Kusama network has a near-identical codebase to Polkadot, and Karura also bears many similarities with Acala. Both platforms are fast-paced, efficient, inexpensive to use and sufficiently secure for all kinds of financial applications.
What Does Karura Offer?
Karura’s core Liquid Staking product allows users to lock up KSM tokens in exchange for L-KSM (Liquid KSM) as collateral and interest. This is similar to how DOT can be staked for LDOT on Acala.
L-KSM is a fungible token and can be traded on exchanges, used in payments and can even be utilized in DeFi applications. As a derivative of KSM, the token can also extract residual value from KSM without affecting the network's security. It also brings greater liquidity to the platform and allows for the many varied use-cases of Proof-of-Stake platforms.
Acala’s aUSD multi-collateral stablecoin can also be borrowed or lent using a collateralized debt position (CDP), similar to how DAI functions. Its various risk parameters like collateral ratio, debt level and interest rates are managed at the protocol level, and CDPs can be opened using various tokens, including DOT, ACA, PolkaBTC and KSM. Karura also plans to introduce a similar kUSD stablecoin on its network.
Should I Use Karura or Acala?
Acala and Karura will operate in parallel, offering DeFi services to both the Polkadot and Kusama communities. However, once the two blockchains are made interoperable, Acala and Karura will also be interoperable. As a platform, Karura is most beneficial to smaller developers trying to build scalable applications that don't have exorbitant transaction fees and can communicate data and value across decentralized chains.
Karura will also offer an AMM-based (automated market maker) decentralized exchange protocol with dual-token liquidity pools and instant swaps. The platform's future will depend on the open-source community of builders on the network, creating new application use-cases on both the Karura and Acala platforms. Karura is built to serve the DeFi demand of KSM holders, and Acala is built to serve the DeFi demand of Polkadot’s community.
Starting a blockchain network from the ground-up isn't just daunting but unnecessarily tedious. The cryptocurrency industry is still incredibly young despite its unprecedented growth, and the infrastructure to simplify development and lower costs is still being built. Currently, setting up the infrastructure to secure a blockchain network can cost upwards of $200,000 per year — certainly not something every developer can afford.
Polkadot and its associated platforms are breaking tradition in an ecosystem where tradition is only ten years old, pushing the boundaries of what's possible with decentralized networks, and enabling innovation in the space. Karura's goal to be the first parachain on Kusama is a sign of confidence in its crowdsourced security paradigm for blockchains, and through a crowdloan, supporters can bond their KSM to support their attempt to initiate a “paradrop.”
How Do Crowdloans Work?
Like parachain auctions on Polkadot, Kusama allows teams to bond or lock KSM into the Kusama Relay Chain for the lease's duration. Users can also bring assets like BTC and ETH onto the Karura platform through bridging solutions, paying fees in those wrapped tokens. This lets traders pay fees with the token being transferred instead of a network's fixed native token.
Once KSM is staked, the network levies a seven-day unbonding period which theoretically reduces liquidity and improves the stability and security of staked assets. With Karura, users no longer need to wait the seven-day period to unbond their KSM and can quickly retrieve their assets by paying a fee to compensate for the lost liquidity. Acala also provides this service on the Polkadot blockchain, except the unbonding period is 28-days for DOT, and the fees for reducing or removing the wait time are much higher.
How Does Karura Help DeFi?
As Acala's more risky sister network, technology updates will always hit Karura before platforms on Polkadot. This ensures that Karura users are always interacting with the latest DeFi technology while keeping products operating safely and predictably on Polkadot and Acala. Some have dubbed Kusama a “Cypherpunk Heaven,” enabling its vibrant developer community to create world-class tools and financial services platforms with all the features we've come to expect from them.
Karura's multi-collateral stablecoin kUSD is also available for borrowing and lending, and with its in-built decentralized exchange, cryptocurrencies like Bitcoin and Ethereum are also available through bridges. Like Polkadot, Kusama is built on Substrate, allowing developers to create unique economic models for individual parachains.
Karura also offers high capacity and throughput, providing projects and users with scalable cross-chain liquidity. Through the native oracle price feed built into the platform's code, developers also have access to quality of service and Karura's flex-fee capability, allowing fees to be paid in any token.
KAR, the Karura network's native token, has a fixed supply, unlike most DeFi projects out there, and its value is backed by a certain number of reserved ACA. As Acala's “canary network,” Karura hopes to bring a suite of practical applications to the most bleeding-edge interoperable blockchain network in the world, allowing participants and developers to build, invest in and govern with real economic incentives.
The Karura DeFi Hub on Kusama offers:
- Liquid KSM (L-KSM) Staking
- Decentralized Exchange
- Algorithmic Stablecoin kUSD
- Early KSM Unbonding
- Fixed KAR Token Supply
Recently, Acala built and launched the Acala EVM for DeFi projects on Polkadot. This allows the network to parse Ethereum DApps, opening the platform up to many previously inaccessible applications. This also allows developers to take advantage of the user-bases on both platforms, improving both networks' liquidity and composability. It also has an on-chain automatic scheduler to allow for DApps that require subscriptions or recurring payments.
Kusama is an almost identical copy of Polkadot, but their differences lie in how they're used. While Kusama embodies lower stakes, cheaper costs and more updated software, Polkadot provides stability and security for a premium. While Karura and Acala offer a similar set of services to their respective networks, people will also use them in vastly different ways.
Karura isn't just a network to test out upgrades and patch bugs before deploying them to the mainnet. The ecosystem was made to encourage more developers to create applications for its network of interoperable blockchains. By offering a cheaper alternative platform to lease parachains with an active developer community and the option to crowdloan funds, Kusama and Karura are making a statement about blockchain development to the world.
From the deeply flawed ICOs of 2017 to today's more controlled IEOs, crowdfunding has been a tradition in the blockchain space. The model has seen many iterations over the years, and Polkadot's crowdloan system is the most sophisticated version we have.
Acala was proof that parachains can bring value to interoperable networks, and with Karura, the team is out to prove that newer projects can create value without a fortune to begin with. As outfits like Karura continue to crop up, inspiring more developers and blockchain-based projects to enter the space, Polkadot and Acala are ushering us into a new era of decentralized finance and interoperable distributed networks.
Interoperability is the next stage in the natural progression of decentralized networks. With the industry signaling a shift in the technology from all-in-one standardized blockchains to interoperable, customizable networks, blockchain is en route to becoming a much more dominant player in the financial services arena.