Acala Network Launches aUSD Polkadot Multi-Collateral Native Stablecoin
Polkadot gets its first multi-collateral stablecoin
The Acala Dollar, a decentralized and multi-collateral stablecoin, was released by Acala. The Acala Decentralized Currency Reserve and aUSD are the foundation of the Acala DeFi ecosystem and will drive the Polkadot and Kusama ecosystems. The first two acceptable collateral assets for minting a USD are DOT and LCDOT. Hackernoon had interviewed Acala Network co-founder Bette Chan discussing the Polkadot ecosystem and building the DeFi ecosystem.
The stablecoin (aUSD) protocol acts as the decentralized monetary reserve of the Polkadot ecosystem, enabling the issuance of stablecoin using a basket of collateral reserve assets, similar to the systems of conventional reserves backed national currencies with precious commodities like gold.
Decentralized exchange Acala Swap and “Homa” protocol for DOT liquid staking are the DApps created to support and manage the stablecoin. The Swap enables liquidations that support the health and functioning of aUSD, in addition to standard DEX use cases. The Homa Protocol for DOT Liquid Staking is also a DApp that helps support aUSD by releasing millions of dollars of liquidity on staked DOT and establishing a brand new DOT derivative that can be used as collateral for the aUSD mint. Users can also increase their exposure to DOT while generating staking yield with this product.
To establish a stablecoin backed by the US dollar, the stablecoin protocol uses a multi-collateral support method. The Stablecoin protocol operates as a decentralized reserve currency, minting stablecoin from a pool of reserve assets. This allows consumers to use aUSD to transact, exchange and perform services while maintaining control over their reserve assets such as ACA, DOT, DOT derivatives, parachain assets and assets linked to other consensus networks such as BTC or ETH.
A method known as Collateralized Debt Positions (CDPs) is used to create the USD. The value of an aUSD token is pegged to the value of one US dollar using the aUSD stablecoin protocol on Acala, which includes a set of incentives, supply and demand balancing, and methods risk management. aUSD also has an on-chain liquidator, which eliminates centralized third-party risk and oracle quality of service, ensuring that oracle price feeds are included in every block. As a result, the aUSD protocol can manage risks more autonomously and efficiently.
Each CDP stores collateral assets and the associated aUSD debt position deposited by the user who initiated the CDP that produced the aUSD tokens. Collateral assets deposited by CDP are locked and the user cannot withdraw them until the corresponding aUSD bond has been redeemed. Active CDPs are always over-collateralized, with the value of the collateral exceeding the amount of the debt. A stability fee, or interest, is paid to protocol and liquidity providers (LP) of USD stablecoin pairs in Acala Swap when a CDP is opened.
Understanding Stablecoins – The Backbone of DeFi
A stablecoin is a cryptocurrency tied to a stable asset, such as fiat currency or a precious metal. Stablecoins were created to mitigate the high levels of volatility that characterize the cryptocurrency industry.
Stablecoins are classified as fiat-backed, crypto-backed, or algorithmic. Stable coins with fiat backing, such as BUSD, are tied to regular fiat currencies. They maintain a stable peg by holding fiat reserves that can be exchanged for it. To accommodate crypto price volatility, crypto stablecoins (such as DAI) over-collateralize their tokens, while algorithmic stablecoins govern supply without the need for reserves.
Stablecoins are attracting the attention of authorities due to their widespread use and high market value. Some countries are even developing their own to retain control of the money.
Volatility is not the only factor with cryptocurrencies. Stablecoins, for example, are primarily intended to maintain a stable price. There is a huge desire for currencies that combine the benefits of blockchain with the ability to track a more stable commodity in an environment where coins and tokens can drop overnight. If you haven’t started trading or investing with stablecoins yet, it’s worth learning more about them and the pros and cons they offer.
Stablecoins are digital assets whose value is tied to the value of fiat currencies or other assets. You can buy tokens linked to the dollar, euro, yen, gold and oil, for example. A stablecoin allows its holder to lock in profits and losses and transfer value at a constant price across peer-to-peer blockchain networks.
The high volatility of cryptocurrencies makes them difficult to use for day-to-day transactions. For example, a store may accept $5 in BTC for a coffee one day but find that their BTC is worth 50% less the next. This makes it difficult to plan and manage a business.
Previously, there was no method for crypto investors and traders to lock in profit or prevent volatility without converting bitcoin to cash. Stablecoins were created as a direct response to both of these issues. Stable coins like BUSD and USDC make it easy to enter and exit crypto volatility today.
A fiat currency-backed stablecoin holds fiat currency in reserves, such as the US dollar or British pound. Each BUSD, for example, is backed by a real US dollar held as collateral. Users can then exchange money for stablecoins and vice versa at a fixed rate. Arbitrators will quickly bring the price of the token back to the set rate if it deviates from the underlying fiat.
Crypto-backed stablecoins are comparable to currency-backed stablecoins. However, cryptocurrencies are used as collateral in dollars or another currency as reserves. Due to the significant volatility in the cryptocurrency market, crypto-backed stablecoins over-hedge and collateralize their deposits as a hedge against price swings.
Smart contracts are used to control the minting and burning of crypto stablecoins. Users can audit contracts independently, making the process more credible. Some crypto stablecoins, on the other hand, are run by Decentralized Autonomous Organizations (DAOs), which allow the community to vote on project improvements. You’ll either have to commit or trust the DAO to make the right judgments in this scenario.
Consider the following scenario. To create a DAI tied to the US dollar, you will need $150 in coins with 1.5x leverage. Yuse your DAI, whatever you choose after obtaining it. You have the option of transferring it, investing it or simply keeping it. You must repay the 100 DAI if you wish to recover your guarantee. On the other hand, your collateral will be liquidated if it falls below a certain collateral ratio or loan value.
When the stablecoin drops below $1, holders are incentivized to surrender their stablecoin in exchange for the collateral. This reduces the supply of the coin, forcing the price back up to $1. Users are motivated to generate the token above $1, increasing its supply and decreasing the price to encourage price stability. All crypto stablecoins use a combination of game theory and on-chain algorithms.
Due to their unusual combination of fiat and crypto, stablecoins have piqued the curiosity of authorities around the world. They are valuable for purposes other than speculation since they maintain a constant price. They can also be transported easily and inexpensively around the world. As a result, some suggest that stablecoins could compete with fiat, even if a country’s central bank doesn’t regulate them directly. As a result, several countries are experimenting with the production of their stablecoins.
Since a stablecoin is a cryptocurrency, it will most likely be governed by the same laws that apply to cryptocurrencies in your jurisdiction. Issuing stablecoins with fiat reserves may require government permission.
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