Why We Committed 500,000 DOTs to Acala — DFG
Our team started the discussion of allocating DOT to support our portfolio projects on October 14th, the day when the Polkadot parachain auction schedule was announced. Parachain crowdloans are the unique opportunity that has been at the back of our minds ever since DFG first invested in Polkadot back in 2019. We have been patiently waiting for this moment — while DOT has remained on our balance sheet for a long time. Now we proudly announce our very first decision: 500,000 DOT that will be contributed to the Acala Crowdloan. This was a decision made even before there was any public announcement of the rewards and bonus for crowdloan participation. Some may question or view it as a bold move, but we take it with confidence.
We regard Acala as a high conviction long-term investment project as we discover its uniqueness along the way of conducting in-depth research and growing together with the team.
A Creative Game-Changer with Metaphorical Names
Built on top of Polkadot’s layer 0 heterogeneous frameworks, Acala functions as the Layer1 smart contract platform. Acala means “The Immovable” in Sanskrit. In East Asian Buddhism, Acala is a guardian deity classed among the five wisdom kings. Acala is often described as immovable, powerful, and protective. The connotation here is likely to be associated with the founding team’s initial plan to launch a stablecoin project on Polkadot — creating a stablecoin that is immovable, powerful, and protective of its value. The name can also be interpreted in a more general sense as Acala, the go-to DeFi hub, serving as a guardian of and a gateway to the entire Polkadot ecosystem. It aims to provide the underlying DeFi infrastructure for the whole ecosystem, while also introducing several native DeFi applications to expand its network and utility (Imagine Ethereum having its own money market or DEX).
The foundation of Acala consists of two major built-in protocols: Honzon and Homa which also derive from the same Buddhist contexts. Homa is a votive offering where practitioners pour directly into the fire during ritual practice and Honzon is the chief deity honored in the rite. In the Acala network, Honzon is a cross-chain multi-asset collateralized stablecoin protocol. Homa is a tokenized staking liquidity protocol. Acala has also released an AMM swap protocol, as well as several other DeFi protocols. These protocols together enable customized DeFi applications such as lending, DEX, synthetic assets, insurance and more, to function. In this light, the Acala team envisions a DeFi gateway to Polkadot that offers trustworthy products and attracts loyal users. Furthermore, Acala is built to be interoperable, primarily due to two key features:
First, it is compatible with Ethereum DApps.
Currently, the Frontier technology adopted by Moonbeam and other projects is seen as the most popular EVM-compatible solution as it encapsulates the Substrate nodes by simulating Ethereum ones. This is a relatively easy way of cross-chain implementation, which could make Moonbeam stand out and surge regarding the number of DApps in the short term. However, in copying the entire pattern from Ethereum, the Frontier approach encounters similar drawbacks such as elevated gas fees and extravagant node sizes, which are supposed to be resolved by Substrate.
In contrast, Acala decouples Substrate functionalities that have been deployed on Frontier by independently creating a new EVM-compatible solution named Bodhi, which means the knowledge or wisdom of a Buddha. The Bodhi Stack by Acala is similar to enlightenment in Buddhism which ensures DApps already deployed on Acala interact with Acala’s EVM via Polkadot extensions, retaining the technological advantages of Substrate while eliminating the centralized large node monopoly. In the future, Acala will launch a customized framework called EVM+, allowing Ethereum developers to build DApps in an Ethereum-compatible environment using tools like Metamask, Truffle, Waffle, and others without Bodhi. We believe this self-created technology stack is a tribute to the decentralization concept of Web 3.0.
Second, Acala enables cross-chain asset transactions.
Acala has integrated cross-chain asset bridges connected with the Bitcoin and Ethereum ecosystems, realizing interoperability. It is linked to the Bitcoin network via Interlay and Ren, and to Ethereum via Chainsafe and Snowfork.
A Promising Pioneer to Sprout Polkadot’s DeFi Projects
As the parachain auctions approach, projects in the Polkadot ecosystem have become increasingly more active. According to Polkadot data websites Dot market cap and Polkaproject, as of October 25th, 2021, the total market value related to the Polkadot ecosystem has reached $75 billion — It also includes many other mature public chains connected to Polkadot, such as Chainlink — with a daily trading volume of about $3.1 billion. There are 64 tradable projects and a total of 173 Substrate based projects. We expect Acala to serve as a first-mover in Polkadot to accommodate the rapid growth of the ecosystem with the following features:
● Full Suite of DeFi products
Acala meets the urgent needs of Polkadot investors, by providing coherent DeFi products that liquidize investors’ staked DOT/KSM which could then be used in the built-in DEX, stablecoin protocol, and other DeFi protocols. Polkadot’s NPoS(Nominated Proof-of-Stake) consensus requires DOT staking for blockchain safety, and a pre-established 2-year lock-up period is for parachain auctions, resulting in the illiquidity of those locked DOTs in both cases. Acala has come up with a closed-loop solution where one can mint LDOT/lcDOT, as a certificate of staked DOT/crowdloaned DOT via its Homa protocol. LDOT/lcDOT can be used as collateral to borrow Acala’s stablecoin aUSD, which is pegged with various assets and circulates in Polkadot’s ecosystem. As a result, Acala not only seamlessly provides one-stop-shop services for more than 17,300 delegation nodes on the Polkadot network, leveraging the staked DOT with more than $28 billion in value, but also links cross-chain assets with massive market value and accelerates their integrations with Polkadot.
Throughout its product layout, Acala learns from leading projects in Ethereum like MakerDAO, Uniswap, and Compound applying their proven prototypes to its product development so that other DeFi projects could benefit directly.
● User Friendliness
As a DeFi portal of the Polkadot Ecosystem, Acala provides its users with concise and economic-quality services. The succinct Dapp UI integrates all functions provided by the platform, thus dismissing the cumbersome process of switching back and forth between wallets and networks. Acala’s original EVM solution Bodhi, which keeps the customization features of Substrate, will settle payment in any supported token, and realize automatic upgrades — meaning that any new Substrate pallet i.e., a product or feature in the form of a DeFi primitive or runtime can smoothly integrate into Acala. Additionally, using Acala is considerably cheap. Taking the DEX swap fee from Karura as an example, we see that the DEX swap fee is usually around 0.1 dollars, whereas the average gas fee on Uniswap is around 50 dollars.
● Innovation in Settlement Mechanisms
One of Acala’s key innovations is the Decentralized Sovereign Wealth Fund (dSWF). The goal of the dSWF is to effectively utilize the network’s surplus revenue to invest in valuable and yield-generating assets, therefore protecting the Acala network in events of risk. If any event such as the market crash on March 12th, 2020 reoccurred, the collateralized assets in aUSD stablecoin protocol would face liquidation risk. In order to protect both the platform and its collateral-backed stablecoin users, the Acala dSWF will act as the second risk taker after its DEX automatically triggers liquidation. Moreover, the Polkadot parachains, which operate at a throughput of more than 200 TPS, will prevent network congestion in such risk events.
● Developer Friendly with Impressive Grants
Acala provides a series of plug-and-play functionalities backed by various DeFi modules, such as decentralized stablecoin aUSD, staking derivative LDOT, and a decentralized exchange. In addition, Acala offers developers a large number of open-source application modules including the first oracle module in the Polkadot ecosystem and cross-chain assets standards to better accommodate developers.
The Acala Foundation Grants Program focuses on software development and research in the field of decentralized finance protocols that benefit the Acala and Karura ecosystems. The maximum amount of funding per application is limited to $50,000. On September 8th, 2021, the NUTS Finance team was awarded the first Acala Grant for its Tree protocol. The Tree protocol will provide a synthetic asset protocol designed to optimize liquidity and increase the availability of assets in the Polkadot ecosystem in a fragmented manner.
A Diversified Team with High-Level of Recognition
Acala was launched in October 2019 by the Laminar team and the Polkawallet team, who were the very first group of active pioneers in the Polkadot ecosystem since 2017. The core members had several discussions with Gavin Wood, the founder of Polkadot, and contributed to the Kusama test with constructive comments. The launch of their Polkawallet and Laminar products, the first mobile wallet and synthetic asset protocol in the Polkadot ecosystem respectively, filled such applications gap in Polkadot. Those rich development experiences paved the way for the creation of the Acala.
The team has been recognized for its continuous contributions to the Polkadot ecosystem. So far, the Acala team has received five grants from the Web3 Foundation and completed two funding rounds in 2020, raising a total of $8.5 million from institutional investors including Coinbase, Polychain, Pantera Capital, 1 confirmation, Arrington XRP Capital, ParaFi Capital, Coinfund, DCG, Spartan Capital, and others.
In addition, after 2 years of operation, Acala has built an active and supportive community with 157.6k followers on Twitter, 32k on Telegram, and 68k on Discord. The community members are positive in supporting Acala’s Polkadot parachain auction.
A Trusted Veteran with Proven Track Records
To assess its functions on a testnet with a high-similarity economic system, Acala has introduced Karura on Kusama. Despite having an identical underlying code as Acala, Karura is faster as well as more flexible. Acala’s mainnet functions are deployed on Karura, and Karura’s successful launch and excellent operational performance both reflect the execution and development capability of the team.
On June 22nd, Karura won the first Kusama parachain auction, culminating with 501,137 KSM tokens contributed by more than 14,000 community members. Up to now, among the 11 Kusama parachain auction winners, Karura has recorded the most KSM contributions, with 2.2 times as many KSM raised as the second place.
In less than one month after winning the parachain auction, Karura removed Sudo modular and started the KAR transaction. The network has operated smoothly on Kusama since then.
Taking a close look at Karura, one would find that most core DeFi products of Acala have launched on Karura, including multi-collateral stablecoin kUSD, liquidity releasing protocol LKSM, Karura DEX, and others, all of which have good performance according to data.
Based on Karura’s official statistics, the current DeFi TVL on the Karura network reaches $170 million, with $46.76 million locked in Karura DEX, $37.35million in staked liquidity releasing protocol LKSM, $48.52million in multi-asset stablecoin, and $37.99million total Earn Staking. Additionally, the minted kUSD on Karura is valued at $14.61million.
Meanwhile, in comparison with other DeFi projects rooted in Solana, Terra, and other emerging public chains, Raydium and Anchor to be specific, Karura still has a gap in terms of TVL, while the market cap/TVL ratio is quite healthy. From August 15th, when the market recovers from depression, Karura surpasses its competitors in terms of acceleration in TVL growth over market growth. The ratio between Karura’s TVL and Kusama’s market cap is about 0.03, indicating Acala will lock at least $1.28 billion in the Polkadot ecosystem pro-rata based on Polkadot’s $42.5 billion market cap. The market has recognized the value of Karura despite its short operational duration and experimental nature, and we expect Acala will outperform in the future once it operates and grows with the Polkadot.
Raydium’s TVL almost doubled, from April, while Anchor’s nearly sextupled. Raydium surged due to the sudden influx of DApps in Solana seeking lower gas fees, while Anchor kept dominating in Terra as it has built strong connections with real-world partners in business scenarios.
Those projects grew to be unicorns in their ecosystems with endogenous competitiveness and strong support from backers. In July, Terra initiated a $150 million ecosystem fund to incubate its projects, soon after which Anchor was granted $70 million. In addition, Solana also launched a $140 million strategic fund to support projects within the ecosystem. In the foreseeable future, Polkadot will follow a similar approach. As Gavin Wood tweeted on October 19th, Polkadot has allocated more than 18.9 million DOTs (approximately $800 million) to its development fund. As the leading project in Polkadot, Acala is likely to receive considerable support funds, accelerating the expansion of DeFi applications.
Uplifting Growth Prospects
The initiation of the Polkadot parachain auctions officially demonstrates that the Polkadot cross-chain ecosystem is ready to boom, and we believe there will be a wave of DeFi growth in Polkadot just like in other emerging public chains.
The DeFi market is expanding rapidly. According to DeFi Llama, the total TVL has reached a record of $245.2 billion, an increase of over 10 times since the beginning of this year. There is about $164.5 billion (67.1% market share) locked in the Ethereum ecosystem, while its market share was 97% at the start of this year. The high gas fees on Ethereum have forced DeFi projects to flow to other blockchains like BSC ($20.6 billion), Solana ($13.6 billion), and Terra ($10.2 billion).
With more and more parachains going live, Polkadot will target DeFi users and divert DeFi traffic with its interoperability advantage. Acala, as the DeFi hub of the Polkadot ecosystem, will foster the DeFi applications growth in Polkadot.
In addition, it is worth mentioning that the launch of the Polkadot parachain auctions will also directly drive the growth in terms of the value of the Polkadot network and, of course, the value of Acala, the leading project of the Polkadot ecosystem.
Since June, Kusama has listed 12 parachain slots for auction (the 12th one is in progress)，attracting about 19 participating projects and locking about 2.46 million (21.2% of total KSM supply) KSM through crowdloans in total. This number will constantly grow as the Kusama parachain auction continue. Consistent with liquidity theories, the growth of KSM lockup reduces the circulating supply, resulting in a steady market cap rise of KSM from $1.92 billion to $3.59 billion, an increase of about 87%, from June to now.
Similarly, a large number of DOT will be locked with the launch of the Polkadot parachain auctions, together with the increase in DOT demand. A token deflationary process will take place, stimulating the value of the Polkadot network and projects in the ecosystem such as Acala as well.
Conclusion
Acala has been actively involved in the Polkadot ecosystem from the very beginning, accumulating solid product development experience and shareholder support. Now that Acala has demonstrated its capabilities through its canary network Karura and its ambition to win the first slot in the Polkadot parachain auctions. Its distinct and leading position in Polkadot will be cemented with continuous growth in product, technology, and community.
We like the vision. We appreciate the passion. We trust the numbers. Acala covers them all. As an early backer of Polkadot and a strategic investor of Web 3.0, DFG is confident in Acala and DeFi thriving in the Polkadot ecosystem. We have been tracking and supporting Polkadot and its promising native projects all along their journeys from the beginning. Now we are ready to celebrate the grand opening of Polkadot together with all projects and supporters. More announcements to come as we continue to support more Polkadot members from the DFG family!
About DFG
DFG is a global investment firm with more than $1B in AUM focused on empowering blockchain and Web3 companies. Founded by James Wo in 2015, DFG is committed to the long-term potential of blockchain technology and manages investments across the crypto ecosystem.
DFG’s portfolio has included equity holdings in Circle, Coinlist, Amber Group, FV Bank, Chainsafe, and Bloq among others. DFG is an early investor in new and emerging protocols and projects including Polkadot, Kusama, Avalanche, Solana, and Near among others.
Recently, DFG has become a leading and active member of the Polkadot ecosystem, which includes partnerships with and investments in projects such as Astar, Acala Network, HydraDX, Interlay, Manta Network, Bit.Country and many more.
