Developers Will Wake Up to the Fact That There's a Toolkit to Build Full-Fledged Customized Chains: Acala's Bette Chen
Bette Chen and Ruitao Su are building Polkadot's financial shard.
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Hello Defiers! In this week’s interview I speak with Bette Chen and Ruitao Su, who are building DeFi on Polkadot. While most of DeFi is being built on Etheruem, here is the team creating an entire new financial infrastructure on the decentralized network built by the Web3 Foundations and Parity Technologies —which was founded by Ethereum co-founder Gavin Wood. Their project called Acala, has been mostly known for its stablecoin, but they’re also building staking derivatives —a token that’s a derivative of staked DOT tokens and can be used in DeFi— and a DEX. Each one of these pieces is a huge undertaking on their own, but this ambitious team is making all of them at the same time.
They want to become the go-to financial shard on Polkadot. The goal is for any financial activity that comes to the new network will land on Acala first. Much of their concept is inspired by MakerDAO, though they do aim to improve on it with different liquidation and oracle solutions. They talk about why they decided to build on Polkadot, and not on Ethereum, and walk us through the basics of this new network and its test chain, Kusama. They end with their big vision for the future, where autonomous sovereign digital nations will transact with each through AI, with a decentralized network of inter-operable blockchains as the base layer.
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Camila Russo: Here we are with Bette Chen and Ruitao Su. They're the cofounders of Acala, an exciting new stablecoin platform that's being built on Polkadot. On the Defiant podcast, I generally focus on DeFi projects being built on Ethereum because that's kind of where most of the activity is happening. So, I'm really excited to hear about a project that's being built outside of Ethereum and how they're tackling things. But before we get to that, I'd love to hear about Bette and Ruitao’s backgrounds and how they got started working together and interested in crypto. Bette, do you want to start?
Bette Chen: Yeah, sure. Thank you very much, first of all, Camila, for having us on the show. And also, congratulations on your new book as it’s out, “The Infinite Machine”. I recommend it to anyone who's interested as it’s awesome and inspirational.
CR: Thanks so much!
Down The Rabbit Hole
BC: So, a bit of myself. I'm an engineer by trade. But halfway through my career, I've gone into a bit of the dark side to do product management. And then I think the first time I've come across Bitcoin is way back when quite early, about 2015 or 16. But I think I'm a bit like many others that I just missed idea the first time around because it comes from a source that I didn't think I trusted 100%.
And then the next time it comes around, I read the white paper and I just couldn't actually stop digging into the rabbit hole. Before I started our current venture, I met Ruitao, my cofounder and my other technical cofounder Brian Chen through another blockchain venture where we were all hacking together, building blockchain technology together. I think through those experiences I got great conceptual experience about how blockchain works. I even at one point coded a JavaScript blockchain just to understand how it works.
We were building like real-life technology. Two years ago, we started using Polkadot’s Substrate technology to build our own blockchain framework. And that's sort of how the whole story unfolds.
CR: Ruitao, interested to hear about your background?
Ruitao Sui: Yeah, thank you for having us, Camila. So, my name is Ruitao Su, I'm one of the cofounders of Acala network. I've been in the blockchain industry for four-plus, five years. Actually, I first heard about Bitcoin way before that, again, maybe have similar experience like Bette. So, at some stage I was looking at Reddit, I was looking at the Bitcoin whitepaper. At that point, I understand that it’s something like a decentralized sort of currency. I understand the concept. But at that point, it's just very hard for me, I was still young at this stage. Just still very hard for me to understand how this coin could have value accrued.
So, I was thinking that I should actually mine it at some stage. But actually, I end up thinking it's too complicated, too much, so I just leave it for a while. Until maybe like four or five years ago, I join another venture in the blockchain industry and that's where I turned full time on blockchain. Although, Acala network, we’ve been quietly building the Acala network in the past nine-plus months. I think we accomplished a lot.
I've pretty much been an entrepreneur for my whole life. I'm very into cutting edge technology, into new stuff that otherwise wouldn't be possible without technology. And decentralization, the ability of owning your own assets on a blockchain is something that I truly believe. So, that's why we are where we are. By the way, we all live in New Zealand. We are fortunate enough to be able to meet the right set of people, I try to work on something cool. So that's pretty much my background.
“…the ability of owning your own assets on blockchain is something that I truly believe. That's why we are where we are.”
Image: Bette Chen, Ruitao Su, Camila Russo. Video shortly available on The Defiant’s new YouTube channel.
CR: I'd love to hear how you came up with the idea of Acala. I mean, what drove the project in the very early days?
The Early Realization
RS: We went through the ICO hype in 2017, we saw a lot of speculation at that stage. But deep down, we were asking like hey, we do believe that blockchain is going to be useful, it's probably going to apply to a lot of real-life application at some stage. But we were looking at where is the next breakthrough, where is the next sector that blockchain can really have some sort of impact in short term, rather than us speculating on maybe things that will be available in 5-10 years later?
We thought, “hey, finance is probably the first sector, that is going to have some sort of breakthrough on blockchain”. We can see it. We can use it. We can see the user benefit from using finance on blockchain. And I was previously in the finance sector as well, so I understand a little bit of that.
We were saying, if we want to start a new venture, we want to put something on top of blockchain, it's actually way before when DeFi was in a super hype status. We were thinking that if you want to build something and if you want to build something cool, then it’s going to be finance related. And I'm fortunate enough to connect into finance, have some sort of advisory from some of the finance experts. We look at where this sort of stuff is available and can be applied on the blockchain. We look at all the existing solutions out there and we will also look for a new type of layer one and this is how we explore the possibility of Ethereum, Cosmos and Polkadot and ultimately we choose to build it on top of Polkadot.
CR: Why did you choose to build it on top of Polkadot?
Building on Polkadot
RS: I will chip in some of my ideas and Bette will chip in some of hers. So, I think we are not single-chain maximalists. We believe that in the future, there will be many connecting blockchains. Ethereum, it's great. It took us here, it let us see what is possible. They already have a super mature ecosystem running on top of it. And we have a look at Cosmos, it's very similar to Polkadot as well. And then we looked at Polkadot.
“… we are not single-chain maximalists. We believe that in the future, there will be many connecting blockchains.”
I think the difference between Cosmos and Polkadot is that on Polkadot, because we are building something that requires very high security, for example, we're building something like a stablecoin, you require a very secure network. On Polkadot, you're able to tap into the shared security model. And that's pretty much one of the reasons that we think Polkadot is more viable for our project.
For some projects, it might be more viable to do it on Cosmos, for some projects, it might be more viable to do it on Ethereum. It's just like our unique characteristics of the project, we think that Polkadot is the best fit. It gives us the ability to have a customized chain without sacrificing any sort of security. We don't actually have to go shopping for a lot of validators in a token to push up the security. I think that's one thing that we think it’s like Polkadot is more viable for us to took off.
CR: Bette, what do you think?
BC: Yeah, I think, specifically for Acala, we are building a finance infrastructure. So, we are the finance shard in Polkadot. If you think about anything that will come into Polkadot, in terms of financial activities, probably the platform you should land on first will be Acala. And then of course, having a finance infrastructure, the first few couple of things you will think of or start to build or provide to other people as one, is stablecoin.
And that's why, for the last few months, we were mostly known as just a stablecoin project, because the team was actually mostly engineers. We actually built a concrete product before we actually go out and tell people what the next step is actually, it is a shard, it is a blockchain on its own and it provides to financial infrastructure. And that said, we are able to build a stablecoin as well as a staking a derivative on a proof-of-stake network for DeFi to actually start to be popular and a lot more innovative.
Having that context, so Acala is the finance infrastructure, then Polkadot is actually the infrastructure for infrastructure. So, I think it doesn't do justice to say Polkadot is Layer 1. I were to say Polkadot is the Layer 0, because each individual chain like ourselves, like each individual shard or what they call Parachain is the Layer 1 because we are a full-fledged blockchain that, you can actually build a chain logic, you can have your own governance and then you have your own domain specific optimization that you do.
For us, it's finance. We have a stablecoin, we have Dex and we have staking derivative, and then we start also having other teams come and build other stuff like bridges and applications. So, you can see a finance vertical stack happening on top of Polkadot and we actually foresee there will be many of these verticals that happen in the next few months, for example, like gaming; for example, maybe also social networking verticals that will happen on Polkadot.
Polkadot is more like in the universe that it provides all the roads that communicate, connects all the little islands and it also provides the overall national security that governs the whole universe. And then our little islands will actually be in that universe and provide a service that we are very good, very specialized in. That's sort of like how I see it.
“Polkadot is more like in the universe that it provides all the roads that communicate, like connects all the little islands and it also provides the overall national security that governs the whole universe.”
All of those things said, they're not just on paper. For Polkadot, they've got two networks, Kusama and Polkadot, is already running, so the governance and upgrade and all of that is actually implemented. It's pretty cool what they've been able to do.
As I mentioned, we've known the technology since about two years ago. That was the time that Polkadot hasn't come out, they only have the underlying technology blockchain framework called Substrate. This is a toolkit that you can take and you can start your own blockchain in 10 minutes. Even like myself, I'm not, in developing every day, I can still do that in 10 minutes.
And then to customize a blockchain for your special purpose like finance, it takes three to six months. Rather than three years later you still haven't gone live. That is the difference. It’s only now that people are starting to realize. And then, as soon as more developers wake up to the fact that now you've got a full-fledged toolkit for you to build, then innovation will come very quickly. Because even in Polkadot right now, there are 100 teams already building those verticals and you will see the innovation come out.
“As soon as more developers wake up to the fact that now you've got a full-fledged toolkit for you to build, then innovation will come very quickly.
Another cool thing is what Ruitao was pointing out and people didn't realize, to start a chain, is quite a lot work. So not only the engineering effort I mentioned, now you have a toolkit that you can do it very quickly and very professionally.
Another thing is finance, economics. Because to secure your chain, you need tremendous effort to bootstrap. Bitcoin and Ethereum have done a great job. It’s unprecedented, right? And then I hardly see any other chain followed that can actually get to the same level. It’s because it's hard, the economics is hard. Polkadot is able to help all the chains like ourselves to bootstrap, because it already provides over a billion-dollar valuation market cap and that is the security level that Polkadot is able to provide to the teams. And then we're able to tap into that on day one, rather than actually individually we grab the capital and then build our own security. I think that actually just dilutes the effort. I think those are quite key things especially for early startups to realize, this is a place that you can build and actually, go to market quite easily.
CR: To summarize why Polkadot was so interesting to you. One, you're able to bootstrap security from a bigger, Layer 0 with Polkadot. Two, you're able to really customize your own blockchain using the Substrate framework, which makes development really easy. And you're able to create your own financial shard over which different financial applications can be built beyond the initial stablecoin application which you're building now.
BC: That’s very much to the point.
Double Network Project
CR: Before touching on these points, I want to understand where in the process you're at right now. Because you mentioned the Kusama network which has been the Polkadot test network so far and have you been actually building on Kusama and testing Acala there and then is the plan to shift that to the live Polkadot chain?
BC: People say Kusama is the test net. It doesn't quite justify the role for Kusama. I think, it's a network already has like $19 million value. And the intention for that is the Polkadot mainnet will put a fraction of its value onto the Kusama network so that the network itself can actually test in real life with real incentives for its governance and also for other applications on top of it as well. Kusama is a real mainnet, it just has lesser value than Polkadot mainnet. And also, like another aspect to that is some of the applications or some of the chains may not eventually land on Polkadot, they might just live on Kusama forever. So that's their universe.
CR: Oh, got it. But your goal is to live on Polkadot, or on both?
BC: We’ll be on both. Acala, we are the financial infrastructure. It doesn't matter if you are a slightly lower value universe or very high-security network, we will need to be there to provide the financial services. But also it's quite critical for Acala network to actually test in the same sense as Polkadot testing on Kusama that we can test with real incentive with slightly less cost. We'll be connecting to Kusama and launch on Kusama first with real stablecoin backed by Kusama token, KSM. And we will also be providing staking service for Kusama as well using our staking derivatives. And so, the same sort of functionality, but then once they’re stable, it will be launched on Polkadot shortly after that. So, we’ll be two network project.
RS: There's some background information I would like to add here regarding Kusama and Polkadot. I think the key thing to know is actually Kusama and Polkadot is almost identical in terms of the code basis, the structure. The only difference between Kusama and Polkadot is that Kusama has lesser value and it has faster governance turn around. So that's why it's called Canary network and that's why it's a value staging test net. It's one of a new concept as well.
Think about that you have a test that has no value and then you want to progress towards and test net with value with same incentive and you’re less risky and then a faster turnaround environment and that's Kusama. And then at some point, you need to deploy on the Polkadot mainnet, which is bank rate security and the actual mainnet. And by having two networks running side by side, we have a valid staging environment for our network as well.
If we're going to roll out some policy changes regarding the financial parameters, which might be risky, we can test that on Kusama, see how the market reacts, see how the trader reacts and give us more confidence in growing out that in once Acala grows to a very high-value shard in Polkadot. They give us some sort of confidence that we can actually test that before we go out to the main real stuff.
BC: And both ecosystems are very vibrant. There's a Kusama hackathon going on right now as we speak. It goes for six weeks. I think there's already how many people like 350 or plus already building in it.
CR: Very cool. I'd like to get more into the inner workings of Acala. I guess, first, can you explain where the name comes from?
The Immovable God
RS: I will just roughly say where the name comes from and Bette has much a better idea of explaining why there’s different networks callled different things. Acala is one of the deities in the Japanese culture, it is being considered as the immovable God and that's where we would like our stablecoin price to be, like PAX US dollar immovable, very stable. And I mean, there's actually a whole background story regarding that we name our network with a different shard of direction from that deity. Bette can look in with like, information regarding like, why we name the network that way.
“Acala is one of the deity in the Japanese culture, it is being considered as the immovable God and that's where we would like our stablecoin price to be, like PAX US dollar immovable, very stable.”
BC: Acala is that stable foundation or the guardian to the whole Polkadot universe, so hence that goddess. And then we also have a Canary network that we'll be connecting to Kusama and it's called Carrara. Carrara and then that is actually the fire. If you look it up on Google, the god there looks a bit angry, but it's just showing strength to actually protect that whole universe. And then Carrara is actually the fire behind it and that's our Canary network.
And right now, we are running a live test net. It's actually got like, 3,000 new accounts and 40,000 transactions already running on the live test net and the test net is called Mandela. So, Mandela is meant in that context, a gateway into two worlds and that is how to name come from.
CR: Wow. Very kind of biblical. Interesting. Can you explain more about how Acala is structured? You know, you spoke about this shard within Polkadot that you wanted to customize so that it worked in this specific way. What are the different things that you are optimizing for in this shard?
Stablecoin, Staking Derivatives, and DEX
BC: On Acala, the finance shard, it's a blockchain on its own and then we're able to customize the logic for finance purposes. And then the three protocols or the three financial primitives that we delivered is the stablecoin and then also staking derivatives and also decentralized exchange. Those are the three pillars.
And along with that, there's also a decentralized sovereign wealth fund as a DAO, that manages all the surplus and the solvency of the network. And then I'll just briefly go through each one of them. And for the stablecoin, it is a multi-collateral stablecoin. And then the collateralization mechanism as well, inspired by Maker model. It's great in this industry that we all build on each other and reinforce each other's ideas, but at the same time, also constantly moving forward and making the product better and more usable for users.
Specifically, our stablecoin, as a given, it can use cross-chain assets as collateral. For example, apart from a native token like DOT, KSM, it can also use, say, Bitcoin as collateral. And those Bitcoin will actually cross over into Acala and then as a collateral for stablecoin. And then on the other side, the Acala dollar will also be cross-chain capable: it can actually flow around order Parachains within Polkadot and also through the bridges, it can actually go out to other isolated chains.
Cross-Chain Bridges
CR: Let me just stop you to ask you other question on kind of these cross-chain assets, because it's so interesting, especially considering what we're seeing now with Ethereum and Bitcoin on Ethereum and how successful that has been. What mechanism are you using to port these other cross-chain assets into Acala? Is it a smart contract that issues a token that's backed by Bitcoin, or how does it work?
BC: We're fortunate that we're not building those bridges ourselves. There're respective teams building different bridges. I'll take Bitcoin as an example. We are collaborating with three different teams that build three types of different Bitcoin bridges. Because of decentralization, it's not black and white, there's a degree of decentralization.
There's one team called Interlay within the Polkadot ecosystem that built complete decentralization, so trustless bridge between Bitcoin and Polkadot. They use the collateralization mechanism as an economic way to actually protect the trustlessness for their system. They’re very research-focused and got paper on how can they actually safeguard their system.
And there's also on the other end of the scale, there’re a very, very early project that's already live for quite a while call ChainX, so they are also Bitcoin bridge, but they're more using the federated approach to bridge in Bitcoin. But you can see, on the one hand it's quite difficult, so it takes a long time, but ultimately, they will get to their trustless end. The other side is you can have a live network, but it's slightly less decentralized.
And there's also middle ground. We are also working with, this hasn't been announced, can we actually say this? We are actually working with REN Project, so they are bringing REN BTC onto Acala network. I will say, they are more decentralized and trustless, but at the same time, they bring a lot of convenience for the Bitcoin users. They're sort of in the middle and we're working with them to deploy their project on top of Acala. This is deploying a module on Acala to bring Bitcoin natively into Acala.
“We are also working with, this hasn't been announced, can we actually say this? We are actually working with REN Project, so they are bringing REN BTC onto Acala network.”
And one thing I think they quite liked what we are doing is, for example, REN BTC users, when they have a brand new account, they just mint some Bitcoin on their account, they have no native token or anything, they can still transact using their REN BTC balance. This is the optimization that we're able to do.
And then also initially, for projects like REN and others, they come to a new platform. You want to promote the usage. We can actually allow free transactions for REN BTC initially without compromising security. That is the stuff that we could do and then are able to customize. That's going to empower a lot of innovation on our shard, on our financial hub that I think you can hardly actually do it natively in any other chain without the level of customization.
CR: The idea is to use these different bridges to other assets and to be able to use them as collateral for the Acala dollar?
BC: Yeah, that’s right. That's one aspect of our protocol. But obviously, for a stablecoin to work very stably, there are many aspects to it. Because it always constantly reminds me of what happened on Ethereum, because it's a platform that has been developed very fast, a lot of DeFi innovations and we all saw what happened on Black Thursday. And it actually, is a multitude of reasons. Ruitao, actually has a very good article, detailed, a number of reasons why they actually happen.
I mean, apart from just the network being congested and the performance or the scalability doesn't hold up to the financial value that they can transact, that's only the fundamental challenge in that network. Apart from that though, there's also Oracle issue that gets stuck, gets congested. And then another thing is also, when you go into a liquidation situation, you need efficient liquidation for your assets with the optimized price rather than $1. And then there's a multiple and complex issue to solve.
And some of that, it's hard to solve at a smart contract level, just because you don't get control of the underlying ledger as a whole and you're constrained by those limitations. But for us, we're innovators. We look at that and see, how can we actually do better? How can we protect our users, just in case Black Thursday happens again? And I'm sure it will happen.
For one, of course, we are given a platform that's like 100 times, 1,000 times faster, but that's not good enough. And then we implemented a couple of things to actually counter that challenge. And one is, we're able to have a more efficient liquidation process. So, we have a decentralized exchange that will be used as liquidity in the liquidation event.
“We look at that and see, how can we actually do better? How can we protect our users, just in case Black Thursday happens again? And I'm sure it will happen (…) we're able to have a more efficient liquidation process. So, we have a decentralized exchange that will be used as liquidity in the liquidation event.”
When your collateral is being liquidated, apart from just going to the auctions which may not be the most efficient way, especially when a market moves dramatically, it will actually use the decentralized exchange to actually sell off the collateral and then get back their dollars to pay back the loan. And as long as the price and slippage are acceptable, then the two are complementing each other for liquidity. So, that is one way.
And then another mechanism we are able to optimize is oracle. On our network, we're able to classify oracle transactions as priority transactions or Operation transactions, a technical term. But it’s basically the quality of service that we are enjoying today when we are using internet. Whenever an oracle transaction comes in, it's going to be prioritized and always be included in the block. Not only like stablecoin, but any finance application deployed on Acala, they will have reliable price feeds and also timely price feed no matter.
CR: Where are you getting those price feeds from?
BC: Good question. We provided an oracle infrastructure, so they're able to connect with multiple different oracle providers and we are working with some well-known oracle providers in the market as well. For example, Chainlink is one of our collaborators and also Band Protocol is another. We don’t dictate, you should use Chainlink or you should use Band. They will all be available through our Oracle infrastructure. And in different projects there might have different preferences and they can choose how and what type of oracle price feed they have. But one thing they can be sure is the price feed they get, it's going to be timely and it's reliable and that's what we provide. But in terms of the sources, we’ll probably rely on the professionals to provide that.
CR: Got it. I guess, to understand kind of the similarities and differences between Acala or Acala Dollar and DAI, so it's similar in that it's also collateralized by a diverse number of assets. DAI was collateralized by ETH for a long time, but now it started to accept, well, it first accepted BAT and then USDC and their plan is to keep accepting different assets and it looks like you're going that way too. So that would be like a similarity with DAI, like the collateralization that you're using?
Collateralization on Acala
BC: Yeah. The initial version of the collateralization is similar and it's inspired by Maker. So that's a good mechanism for a trustless version of it. And then we also had chats with people to say, can you do a basket of currency and collaterals to back Acala Dollar? And I think, this type of innovation is going to keep coming out. Because people will always find good ways to innovate, because collateralization is good, but it's not efficient. I'm sure there will be new ways of doing things.
The good thing about building on Acala is the network it can go through upgrades without forking through its governance. Let's just, hypothetically, in six months time, there is a new mechanism devised by, I don’t know, an economist or whoever that we can do this basket of collateralization. That's more capital efficient or whatever benefit that it can bring, we can actually go through a governance vote to say, this runtime module, new version, we all agreed to include in the project and the vote passed and then the module will just shift on the blockchain and it goes to a runtime upgrade and then people will get a new version without having a new version of Acala Dollar.
“The good thing about building on Acala is the network is can go through upgrade without forking through its governance.”
It's exactly the same Acala Dollar. And from a user perspective, nothing is changed. None of the apps needs to change, only the underlying chain logic is changed. You can go through a very smooth upgrade continuously. Only on the surface we’ll see the product there. But actually, fundamentally, what we are trying to develop is infrastructure that allows continuous evolution and improvement. I think that is the sort of the core of this whole industry. It's going to change all the time. There's no way that you deploy one contract and it's going to live there for 1,000 years.
“But actually, fundamentally, what we are trying to develop is infrastructure that allows continuous evolution and improvement. I think that is the sort of the core of this whole industry. It's going to change all the time. There's no way that you deploy one contract and it's going to live there for 1,000 years.”
Apart from, code as law, we should need an apparatus to make legislation, like a legislative body to make the law and then to agree on things and then to do politics and then to execute the law. I think we were lacking the legislation procedure or apparatus before. But now we are we are able to implement that on Substrate and also in Polkadot and in Acala.
CR: That brings me to the question of the governance token. So, you have this ability to upgrade through votes, so does that mean that there's a separate token link to Acala other than Acala Dollar?
RS: Yeah, of course, there's the native token. For in this network, there’s this native program that's going to be the governance token, the default transaction fee token. And ultimately, the fee is very similar to the MKR token in the Maker ecosystem. We think this is, and also it's going to be the reward for people to support us in the project auction. This is another process. It's very interesting in the Polkadot ecosystem, that if you want a shard, you need to go through an auction process. And that's why we come up with our decentralized. So it compliments that process to make sure this chain can also become at some stage self-sustained as well.
But I mean, in a simple form that yes, there's the governance token. And I think the one key thing with the network that we're building is that we build the governance into the core. There's actually a number of key parameters that require some sort of governance. For example, there's this network upgrade, there’s like the risk parameter adjustments and those will be governed by the native token.
“one key thing with the network that we're building is that we build the governance into the core.”
And there's also, in staking duality protocol that may be Bette we'll talk about a little bit more later. But their staking duality protocol is actually not governed by the native token, it’s governed by dual holder who staked through a staking pool, because it's more reasonable and more logical to make it that way. We have a staking pool, there's a DOT and there's L-DOT. This L-DOT holder actually get to choose which validator to get this to delegate you, which set of validator should delegate you. That's actually the final offering and one of the main modules that Bette was covering. So Bette, would you like to talk more about these staking duality products?
CR: Sure. I wanted to ask a question on the governance token. What's it called?
RS: It's called ACA. It's the first three layers of the Acala network. And just keep in mind, because we actually have two networks. So, we have a Canary network running on Kusama, we have a mainnet running on Polkadots. So, we have two shards of the token as well. So have the ACA, which is the mainnet token and then we have the KAR which is the Canary networks, native token.
CR: Got it. This token is used to vote in governance and also receive rewards in the system. And for token holders in MakerDAO’s case, the way that holders accrue value is because Maker kind of buys on and burns these tokens in line with kind of activity in the protocol. How does it work with ACA?
ACA: Not Just Governance
RS: The ACA token actually has a lot of functionality other than just governance. Let me go through the functionality then we can foresee. First, it is the governance token, there's no question, it's used to adjust the parameters of the network and to automatically choose what the next version, the network is going to become. Secondary, it's also a staking token. Why it's called staking? Because we think, Polkadot that actually, we are a blockchain ourselves. We just don't need like thousands of validators to secure the network. But we do need some sort of node to actually operate and package the transaction and somebody to facilitate the Polkadot relation. And that’s where we called it correlators. You can think about those are the nodes in our network.
And we found a way to incentive those nodes to be operating and running, it doesn't have to be secure, but it has to be there. It doesn't have to be that many, but it should to be at least like maybe 20 or 30 nodes. And the ACA token can be used for staking to incentivize those nodes to be operating as well. So that's one additional usage.
And there's also the ultimately fee token for the network connection. If you think about your transacting on Ethereum, you have to pay for ACA token after you pay for each token as the guest fee. Or the Acala network, when you're transacting, ultimately, you are paying the fees with ACA, although, because we can customize the chain logic, you can pay in USD in REN BTC in whatever token, but ultimately is settled in the ACA is the fee token. Yeah, so those are the utility of it.
And ultimately, it also have a share of the network's surplus. This is a DAO that would create it. So, think about in the Maker’s cases, there's a surplus buffer, which is maybe at some stage a cure to some certain amount of figure, they will decide to take hey, we should buy some MKR token and burn it. Instead of going the buyback way of like creating value, what we are trying to release that all this surplus to the network is then a cure in a DAO and then the ACA token holders are actually a DAO operator as well, so they can decide what to do with the surplus.
And ultimately, we have a prime objective of what the DAO hould do, the DAO should cure the value in DOT. And why we think it should cure value in DOT that we'll need to talk about a little more about how the project option works, how do you get a shard in the Polkadot ecosystem, so those is like related to that. But ultimately, like there's a lot more functionality in simply just a governance token. It's essentially a multi-utility token.
CR: One thing that's not so very clear to me, is that you mentioned that there is a staking in Acala and that you don't think you would require that many nodes to stake. But, I mean, if you're going to be transacting with the stablecoins on tons of value, wouldn't you do require a large amount of nodes to make sure that the system can't be censored and uncorrupted?
RS: That's the beauty of Polkadot. In fact, you can think about us is a shard connecting to the Polkadot ecosystem. The censorship resistance, the security of the network is not up to us, it's up to Polkadot and Polkadot has thousands of validators. But if we want to connect to their network, we need to have some set of nodes that stay live and able to receive user transactions, process through our own blockchain and then ultimately submit it for the Polkadot relation to verify everything is correct. For us, we don't actually need validators, we need collators which can't change the rule.
BC: Broadcasters.
“For us, we don't actually need validators, we need [broadcasters] which can't change the rules.”
RS: Yeah, broadcasters can't change the rules, they cannot game the system, but they’re going to be there for the user to provide relay to the relation.
BC: We call them a proof-of-liveness, so that the network is alive.
CR: Got it. Perfect. We've covered kind of maybe the basics of a stablecoin and Bette, you're going to go through the other pieces that you're building, right?
Staking Derivative
BC: The other piece, it's quite interesting, because now you go into a domain of proof-of- stake network. In a proof-of-stake network naturally your native token, I mean, let's say DOT is kind of the usage is in competition between staking and DeFi and probably other usages.
First year of Polkadot running, the staking reward is quite high as between 15 to 20%. Then it actually means for it to justify to be using DeFi, you need to provide equivalent or even higher return for the DOTs. And I think, in other POS network, even it's Ethereum 2.0, you will get into similar situation, that if your ETH is using one situation, how do you compete? And also, it's not good enough for DeFi just raise its return, because if your return is too high, then you're kind of compromising security of the whole network, so it's not good for everyone. Then it's critical for us to provide some sort of facility to allow liquidity to come out of this native token without compromising security.
“… it's critical for us to provide some sort of facility to allow liquidity to come out of this native token without compromising security. So, that's the whole premise.”
And our staking derivative is exactly that to solve that problem. And what that is, firstly, it's a trustless protocol and as a meta staking protocol where users can put in their DOT, which essentially from a user perspective, they just staking. They swap the token in and they already start earning yield. And then inside the protocol, it will generate this receipt called Liquidot or L-DOT token. That it's a little bit like when you put your DAI into compound and then you'll receive cDAI in return. So, it's DAI-cDAI relationship.
The L-DOT token will actually be interest bearing. So, if you just sit on it, it's going to earn your return. Right? But of course, it is a fungible and transferable ERC 20 token, so you can try to swap it, you can use it for DeFi. For example, one of the collaterals in our stablecoin is L-DOT. It creates an interesting dynamic, because now you have this L-DOT, is yield earning and then you're paying a little bit of interest. Now, you can get a credit line of Acala Dollar and then to use it for something else that I can't even think about. There will be all the other DeFiers or the yield farmers to actually think about. That creates a dynamic in the system where we don't compromise security. All the Polkadot security are still maintained and respected, but at the same time, we released that derivative value of DOT for people to use for different use cases.
“The L-DOT token will actually be interest bearing. So, if you just sit on it, it's going to earn your return. Right? But of course, it is a fungible and transferable ERC 20 token, so you can try to swap it, you can use it for DeFi.”
And another very key aspect is we were part of this IDEO Collab. I think they incubated many reputable projects like Compound and others. We’re also part of their product validation day program to just like verify our product ideas. We interviewed quite a number of DOT holders and users in the community. And what that struck them is like if you're staking, when you unstake, there's always a period of time that you have to wait. In Polkadot is about 28 days; in some other network is like 7 days or 20 or is a different days that you have to wait for you to unstake. And the reason is, there's good reason for it. Because you don't want to shift your security up and down.
If there's whales and your shift like $50 million in and out of the staking pool and that's not good for the security or stability of the network. So, there's good reasons for it. But for users, though, it means that my liquidity has a long period of wait time before I can get my DOT back. Through our protocol, we have a smart way that we provide liquidity early to user if they want to. Actually, just simply as token swap, they can swap their L-DOT back and they can immediately redeem their DOT. We provide that sort of liquidity to them immediately. That's like eye-opening for many people. I think, at some point, someone watching need their money immediately to do something else. If there's a farm just open up next door, you want your DOT back to do something with it.
“Through our protocol, we have a smart way that we provide liquidity early to user if they want to. Actually, just simply as token swap, they can swap their L-DOT back and they can immediately redeem their DOT. We provide that sort of liquidity to them immediately. That's like eye-opening for many people.”
CR: And is that through like a DEX that you're just getting DOT liquidity and swapping L-DOT through DOT?
BC: On the surface, it looks like Uniswap, like an exchange, you’re exchanging the two tokens, but underlying, is not quite simple. Like underlying, there's multiple pools and batches of DOTs that we are constantly staking and also unstaking and through our chain to the Polkadot main chain, so we can maintain that liquidity but also maintain a good portion of DOT that's been stake. Continuous return is being generated for the rest of the participants.
CR: But if you have a number of stakers staking their DOT, you need to have that return back to them. Where does this kind of additional batch of DOTs that you have to have on reserve come from?
Staking DOTs
BC: That's the algorithm that we're working out. What is the right proportion of DOT being stake? And also, what is the right proportion for reserve DOT, to use as liquidity? Because for people who want early liquidity, there's a premium they have to pay for that liquidity. But then the algorithm should dynamically adjust the proportions so that base on demand, we can work out what is the right number so that the rest of the stakers they can get their fair share of returns.
CR: That's such an interesting mechanism. Very cool.
BC: And you don't stop there. Because we are not only attracting just individual DOT holders, we are attracting a lot of validators as well. Because we don't do validating ourselves, we don't run nodes, so those validators, they could just put through their DOTs to us and then they can all collectively vote which validator nodes they want to stake or nominate on. That is like the next level game, is like a lot of those professional validators, they may put a portion of their stake through us just because all the benefits that I mentioned they really like. And that's important that those L-DOT holders have a say on who they want to vote for in terms of validators. There's a mechanism through the protocol that you can vote for validators and etc for that…
Acala DEX
CR: Got it. Super interesting. We went through stablecoins and went through staking derivatives and I guess like the third piece you mentioned was a DEX. Is that right?
BC: Yeah, I can just quickly mention it as it’s nothing too fancy. It's just like decentralized exchange. It's a constant product, sort of exchange, like Uniswap. The main purpose is firstly, it provides liquidity and usage for the network. But then, it also complements our stability, stablecoin mechanism to complement the liquidation process. And then also, fees, it can just magically swap order fee token, so you can pay in any token that support it.
CR: It's incredible. I mean, it's like each one of these pieces is a huge undertaking on its own and you're doing all of these at the same time. How are you managing that risk of trying to do too much, spreading yourself too thin?
Huge Undertakings
RS: Yeah, I think we don't. First is that we are a team of engineers and we are very high achievers. And I mean, the reason that we come up with this set of protocols is not because we just want to have like this set of protocols, because we see them, they are companions, they work with each other in a way that we think that form the financial primitive.
“…the reason that we come up with this set of protocols is not because we just want to have like this set of protocol, because we see them, they are companions, they work with each other in a way that we think that form the financial primitive.”
But what you mentioned is it's very important as well, like how do you manage the security? Because like, there are so many moving pieces, how do you make sure that every moving pieces is working as intended and what's the risk if you make all those node pieces work together? I mean, we are close to launch. The plan for us is to get not only one or two, we will seek for a number of independent security audit to make sure the code itself is going to be secure. We don't see this as something that we would consider it lightly, we're going to make sure that the code or everything that we come up with is secure.
But only having a security audit is not enough. Because there are so many moving parts, there are so many parameters you can adjust. We are in the process of engaging a very reputable firm, they're going to provide what we call an economic model or economic parameter, value audit. It's like to audit this whole economic model how this whole game rule they will set up in a way that's like they have a very sophisticated way of like validating all those models. What they do is that they will take the parameter that you are able to adjust and they will pump that into some sort of simulation by tester in a max degree, so simulate maybe millions of people's trading with different set of parameters to maybe they would test all the combinations and last know what's the risk there and what's going to happen there, how to set this parameter.
And this is something I've seen is gradually will become a requirement for any sort of an important DeFi protocol. Because you come up with a set of rules, you got to test it. And it's just like how much you can test in a manual way. But if you want to fully test that, you've got to do it in an automatic way to cover any possible combinations that you can think of. Those are the other step of guardian that we're trying to take as well.
CR: Plus launching a Canary network.
RS: And then we also have a Canary network. But ultimately, I think the governance process of this network put us into like a very good hand, in case something went wrong. There's still a governance process. We'll try make sure that's not going to happen. But in case the worse happen, there’s still a governance process. As long as the token holder agrees, there's always a way to upgrade that to the next stage. To prevent something like a hard fork.
CR: Got it. There's so much to talk about and we're running out of time. But I always like to end with asking the big picture vision that you have, both for your projects and for DeFi and blockchain technology in the future. So, say 10 years, 20 years from now, where do you see Acala and DeFi?
Sovereign Blockchain
RS: I think, for us, the short term goal for Acala is that we would like to become a financial hub in Polkadot and beyond. We would like to become a customized special blockchain just fine-tuned for finance. We’ll like to see, not only our core protocols getting mature and getting more of usage. We like to see other projects to be on top of us as well. That is the short to medium-term goal that we believe.
Our ultimate goal is to make sure this is truly decentralized. And by definition of truly decentralized is even if at the company or even as a team member, the founding team members stop working, or leaving or for some reason, stop intervening the project, this project can still survive can still mature and grow on its own. And that's where we call ourselves become successful. That's something hard to achieve, but we'll try very hard to achieve that.
“Our ultimate goal is to make sure this is truly decentralized. And by definition of truly decentralized is even if at the company or even as a team member, the founding team members stop working, or leaving or for some reason, stop intervening the project, this project can still survive can still mature and grow on its own.”
CR: Got it. Perfect.
BC: Yeah, I echo that and I would like to push that beyond a little bit, as we are seeing just the beginning of digital jurisdictions, that's being implemented on blockchain. Because a lot of the stuff that we talk about for a long time in blockchain space, like decentralized autonomous organization and then organization transactions with each other autonomously. And all of those things were talked about, but now is the time that we can see is implemented. Because I think Acala at one point, we didn't talk too much about the wealth fund, it's going to generate enough wealth that Acala is going to be a sovereign blockchain. It doesn't rely on external party for its security. It doesn't allow an external party for its continuous development and maintenance. So, it's a sovereign blockchain.
And then once that becomes a sovereign blockchain, it has its own governance and it kind of has a change agency, so the governance to continue to evolve itself. It's an organizational organism on its own. And then beyond that, through the wealth that it generates, it can now also help other blockchains or other digital jurisdiction to secure say, a chain within Polkadot or beyond, because that actually means now a sovereign chain can have a stake in other sovereign chains. Now, you can actually, you're holding a stake collectively as a digital jurisdiction of another digital jurisdiction and you can now do foreign trades between you guys. You can hold it out as foreign currency as a reserve and you can do businesses and then you can also go through merger and acquisitions. I think that's one step even beyond that. Once we have a lot of these jurisdictions, one day that they might dissolve, right, and then you can acquire a piece of it or you just like merge with it.
I think right now, you can all think about it in paper, but through the mechanism that we are using on Substrate and Polkadot, sort of, because Polkadot provides a way that you communicate, so you can do all of those things, actually on-chain. I think we'll start to see that people actually start building things we cannot do today. I think that's the most exciting thing. You can build applications on-chain that you just can't do it today. And with a lot more autonomous and imagine if you actually plug in AI and making some of those decisions as well, it’s going to be interesting.
CR: It's crazy. No, it'll be definitely exciting to see. You know, it really sounds like you're kind of pushing the boundaries of this technology and DeFi and this futuristic world of autonomous sovereign digital nations transacting with each other and maybe automatically through an AI, is just mind-blowing. So, it'll be interesting to see. But for now, just step by step, it'll be great to watch you guys lunch on Polkadot and see how that evolves and how DeFi and Polkadot starts growing. So definitely, we'll be keeping an eye on that on The Defiant. And yeah, thank you so much for coming on. It was really interesting conversation.
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The Defiant is a daily newsletter focusing on decentralized finance, a new financial system that’s being built on top of open blockchains. The space is evolving at breakneck speed and revolutionizing tech and money.
About the editor: Camila Russo, is a financial journalist writing a book on Ethereum with Harper Collins. (Pre-order The Infinite Machine here). She was previously at Bloomberg News in New York, Madrid and Buenos Aires covering markets. She has extensively covered crypto and finance, and is now diving into DeFi, the intersection of the two.
