# A short guide to Acala Network By [Prcrypto](https://paragraph.com/@prcrypto) · 2022-12-06 --- The **Acala project** is a single stablecoin that designed to be useful throughout the whole Polkadot network,just as we have the DAI that is useful throughout the whole Ethereum ecosystem for decentralized finance. ![A decentralized stablecoin platform powering cross-blockchain open finance applications](https://storage.googleapis.com/papyrus_images/a466df987c2a90a26f2b6a78a2b922deb4a94e9855790f4b58d739a80f7cfd62.png) A decentralized stablecoin platform powering cross-blockchain open finance applications Decentralized finance right now is the new frontier to which blockchain is been applied and currently there is over $1 billion dollars locked up in different defi platforms,also\*\* [Decrypt Media](https://decrypt.co/30278/developers-built-more-than-100-defi-apps-in-past-month?utm_source=twitter&utm_medium=social&utm_campaign=auto) \*\*reported that last month 90 Defi dapps were built by developers. Acala is a project designed to create a defi ecosytem in Polkadot such that there will be stuffs like staking,stablecoins and a whole suite of other applications. We will discuss the principal component of Acala. **Why we need something like Acala?** Bitcoin,Ethereum and several other cryptocurrencies are very volatile,we have seen the rapid devaluation of crypto assets,this volatility has adverse effects on its adoption in the real world,you cannot really adopt bitcoin per say,bitcoin is good for cross border transfers, payments but when we are talking the issue of real world utility,if you are a merchant and you accept bitcoin payment and supposing there is Bob on the other side of the planet buys merchandise from you today and pays in bitcoin,you will not want to keep your money in bitcoin,you will want to convert it to something that is stable like the US Dollars, …. so to mitigate against those kinds of problems,that is where stablecoins comes in and if you look at the whole bulk of cryptocurrency trading right now, you see stablecoins, and there are a whole lot of them. Stablecoins are basically cryptocurrencies whose value are not left to market conditions,their value are predefined by some parameters,hence we can say they are stable as the parameters that define them. There are 4 kinds of stablecoins: fiat backed coins(USDTUSDC etc),asset backed(assets like gold,silver etc),commodity backed coins and algorithmic backed coins(like DAI) **Acala in a nutshell** The Acala project is alliance or consortium of defi platforms,it was founded by [Lamina](https://laminar.one/) and [Polkawallet](https://polkawallet.io/)  . Acala consists of the **_Honzon protocol_** (protocol in charge of the creation and liquidation of a CDP) and the **_Homa protocol_**(the protocol in charge of the tokenizing stakes). ![The Honzon Protocol](https://storage.googleapis.com/papyrus_images/54163c2f381d781482fc955642941b7cac1f20c67dc0691b7ca153aac5a736bb.png) The Honzon Protocol Unlike other projects,Acala offers the option of multi collateral debt positions,you can take a CDP with tokens based on Polkadot or those connected to the Polkadot network be it Bitcoin,Ethereum etc. **How to create a CDP in Acala** **1\. Deposit Collateral :** You deposit the colatteral asset accepted by Acala and you want to use to take a CDP, **2.Borrow :** : You can borrow aUSD and open a CDP. When a user sends a request to borrow aUSD,the network will lock his collateral and mint aUSD tokens for him. This locked collateral will only be released if the aUSD tokens are paid back. **3\. Liquidation :** You pay back the aUSD you collected and your collateral is returned back to you with the stability fee and your position is liquidated. **4.Closing CDP :**  After the network receives the outstanding aUSD and the stability fee,the CDP becomes free and user is now able to withdraw their capital. **How Acala maintains 1:1 ratio** The confidence of any stablecoin is when it’s able to maintain this ratio and at all times,for centralized stablecoins the control is in the hands of some company but for decentralized alternatives,the control is in the hands of code. Acala is managed around\*\* _risk parameters and token governance_,\*\*there are times where the risk parameters of the token are been managed,now there are times where the risk parameters of the CDP might need to be adjusted,also others parameters like the stability fee,liquidation ratio,liquidity penalty,debt ceiling. Also another way is to consider adding a new collateral or remove an existing collateral,\*adding or removal of oracles,\*make network upgrades or even trigger an emergency shutdown. **Homa protocol** It’s a system designed to designed to mitigate against the issue of illiquidity and network security of staking blockchains. As we all know there is staking and there is lending, staking is the locking up of tokens to help with consensus in a blockchain,the rewards are based on the amount of stake and the amount of stakes affect how much transactions they can process and how much transactions a staker can process affects how much block rewards they can get,lending on the other hand is giving your tokens to a defi platform,the defi platform may do anything with the tokens,it might lend them out to other people for interest or make them available to boost an exchange liquidity power for trading(liquidity pools) or even stake them for rewards in a blockchain network. There are people who are not giving out their crypto tokens for staking purposes,maybe they do not have the\*\* _technical know how ,_ \*\*right now we see a massive shift from staking to lending and some of the reasons for these are not far fetched **_the ease of the lending process coupled with better or guaranteed returns_** \*and \*if this continues many proof of stake networks will be vulnerable to attacks over the lack of stakers. The Homa protocol seeks to actually tokenize stakes,rather than go and lend to a platform,the Acala platform can help you lend your tokens to them and they help with the staking of the token,they issue you liquid DOT(**_L-DOT_**\*) \*that you can simply hold or sell this token in the market any time. **Sustaining the future :dSWF** its main goal is to keep the Acala ecosystem SUSTAINABLE ======================================================== One major challenge faced by blockchain and crypto companies is that of sustainability,from the onset even the currency of choice for IEO/ICO events which is ETH or BTC is flawed due to its volatility,project teams have the choice to sell those ETH/BTC for a stablecoin or convert it to cash,another challenge is that the prices of goods and services are also unstable. The Swiss government recently discovered that \*\*\*[80% of 203 companies operating in the crypto valley in Zug Switzerland are bankrupt](https://news.bitcoin.com/switzerlands-famed-crypto-valley-seeks-103-million-government-bailout/), \*and not profitable and hence will not be fit to receive corona virus relief or bail out packages.**Projects like** [Purse.io](https://cointelegraph.com/news/bitcoin-based-payment-facilitator-purse-io-shuts-down),[Factom](https://winkreport.com/blockchain-project-factom-is-shutting-down-due-to-a-lack-of-funds-%E2%80%A2-cryptomode/) \*\*and many others have had to announce that they are shutting down operations because they ran out of funds,the \*\*[crypto community](https://support.purse.io/en/articles/3851246-purse-is-saying-goodbye) \*\*came to rescue drowning Purse.io but Factom and many others were not so lucky,to mitigate against similar fate the Acala network team have factored in a model it calls the decentralized sovereign wealth fund(dSWF) :  **its main goal is to keep the Acala ecosystem SUSTAINABLE** A sovereign fund is usually a state-owned pool of surplus funds that is invested into several endeavours for profit returns. It’s usually money that is surplus from a budget. Many tech companies have such funds and they invest into other tech companies for profit,we have the likes of Google,Facebook among others doing same. A decentralized sovereign wealth fund as against a sovereign wealth fund invests in crypto assets that has \*\* _value_,_yields and utility_\*\* access to other blockchains and services. **dSWF** will invest these funds for the long term economic prosperity of the ecosystem,network security,continuous development and network sovereignty. To finance this fund,Acala will have to source is from realised fee from CDPs,Liquidity penalty of risky CDPs,Protocol fee of L-DOT. ![https://github.com/AcalaNetwork/Acala/wiki/V.-ACA-&-KAR](https://storage.googleapis.com/papyrus_images/30fe98fe7a7b458450c64847d8a227527f4d15bd4c5fa9e09c03ce64ab436ba2.png) https://github.com/AcalaNetwork/Acala/wiki/V.-ACA-&-KAR Token economy ------------- The total amount of ACA tokens that will ever exist will be minted upon release to the public and here are the distribution. ![ACA token distribution](https://storage.googleapis.com/papyrus_images/780ff2605b88a8c8c06b353a1d930727eeb180a129113ff78477fd53f32d2240.png) ACA token distribution **Token Utility** On the polkadot chain,the Acala tokens are used for the following functions. **1\. _Network fees :_** it’s the single token used for transacting in the network,it’s used for paying transaction fees,liquidation fees and stability fees. \*\*2. _Governance_ : \*\*decisions around upgrades,oracles,network rewards,risk parameters,adjustment,addition and removal of assets for CDP etc are based on voting and token holders need the tokens to vote. \*\*3. _Contingency solutions_ : \*\*For events unpredictable like sudden price collapse,black swan events etc,the tokens will be sold and used to recapitilize the market **Key Actors** The Acala network relies on several participants for its everyday functions and there are rewarded for their contributions ![](https://storage.googleapis.com/papyrus_images/bed567cea2655502dd48e05da247604f22fccc09826f6a305f0f533129006c62.png) \*\*Collators :\*\*Their function is to provide the most recent and update version of state transitions in the network. They maintain a full node of the network and validate blocks for reward **Oracle operators :** Defi cannot exist in isolation,it needs external price feeds. Recently Acala partnered with Chainlink,contributors are incentivized for providing truthful information to the network. **Liquidators :** They are responsible for monitoring collateral levels of CDPs and triggering collateral auction when they become too risky. **How the Network is governed** The entire network is governed by the **General council and Specialized council.** Specialized council deals with issues affecting a particular domain like a protocol(Honzon,Homa),Finance etc while the General council deals with issues that affects the general network like block rewards,security,network upgrades,addition and removal of CDPs or oracle providers. The General council also oversight on the entire network to ensure that everything is in everyone’s best interest. Acala Network in infographics ============================= ![](https://storage.googleapis.com/papyrus_images/984c6c17a4001408560458cfc5cd727c33284d0ca16f66bad2e1491b69beb1e4.png) --- *Originally published on [Prcrypto](https://paragraph.com/@prcrypto/a-short-guide-to-acala-network)*