Guide to Acala and Karura

January 26, 2022

Acala is a Polkadot parachain built to support decentralized financial solutions. Participate in Acala, and its Kusama-based sister chain Karura, with Coinbase Cloud to signal your early support for the network.

An introduction to Acala and Karura

Acala, a Polkadot parachain, is a decentralized finance network that aims to form the basis for Polkadot’s DeFi ecosystem. Acala will support financial applications and is coming to market with its own built‐in protocols, including:

  • a trustless liquid‐staking derivatives protocol (Liquid DOT/LDOT)

  • a multi‐collateralized stablecoin backed by cross‐chain assets (Acala Dollar/aUSD)

  • a decentralized automated market maker asset exchange

Acala is Ethereum‐compatible by way of the Acala EVM, enabling Ethereum based dapps to access scalability by launching on Acala, and allowing gas fees to be paid in any token.

The Acala Foundation is responsible for overseeing and supervising the advancement of Acala and Karura. Karura operates identically within the Kusama ecosystem as Acala will in the Polkadot ecosystem. The Acala team notes that due to its "canary” properties, Karura should be viewed as an experimental protocol focused on driving financial innovation.

Acala dollar

Acala Dollar borrowing enables a credit facility modeled after Ethereum’s MakerDAO; the protocol produces a stablecoin (aUSD) as the unit of account for Collateralized Debt Positions (CDPs). This forms its body of over‐collateralized digital asset debt. aUSD is pegged to the USD and can be transferred to any chain in the Polkadot ecosystem.

Users can set up a CDP to mint aUSD using DOT as collateral and, in the future, may use any crypto asset that has been bridged into Polkadot, such as BTC or ETH, as collateral. The CDP holds the collateral asset along with the associated aUSD debt position, and the collateral asset cannot be withdrawn by the user until the aUSD debt is paid back. Closing a CDP also requires paying a stability fee in ACA (considered the interest rate of the aUSD loan).

aUSD uses off‐chain workers, called liquidators, to automate the process of monitoring and closing debt positions nearing their margin limit, increasing aUSD’s security and stability.

Oracle operators provide real‐time market prices for aUSD, collateral assets, and ACA; the Honzon Oracle operations will be permissioned initially, but the team expects this approval process to later be governed by ACA holders.

Liquid staking

In Acala’s liquid staking protocol, users provide DOT liquidity to a pool and receive LDOT in return. These LDOT are liquid 'receipt' tokens that represent the underlying staked DOT assets. The staked DOTs are later delegated to a set of Polkadot validators selected via Acala’s governance process.

To redeem DOT with LDOT tokens, a depositor must wait an ~28 day unbonding period or pay a redeem service fee in ACA. Users can also pay a premium (in DOTs) to redeem their deposited DOTs from the protocol earlier than the 28 day unbonding period, even immediately.

ACA token

ACA, the native token of Acala, serves three functions in the network:

  • Network utility: ACA is used to pay network transaction fees, stability fees (for aUSD interest), and penalty fees if a user’s aUSD borrowing position is liquidated.

  • Network governance: Any ACA holder can propose network upgrades, risk parameter adjustments, or other network proposals to be considered by the elected General Council.

  • Contingency solution: If the price of a collateral asset were to collapse and under collateralize CPDs (Collateralized Debt Positions), ACA could be automatically diluted to recapitalize the system.

The Acala Treasury

The Acala team plans to launch with the Acala Treasury to grow the Acala parachain’s on‐chain collection of native assets (ACA) and foreign assets including DOT. The Acala Treasury’s goal is to enable self‐sustainability for Acala by accumulating enough DOT in order to secure future parachain slots without needing to rely on crowdloans to fund a winning bid. The Acala Treasury will be funded through ongoing protocol fees, as well as two community contribution events called "Build Acala."

How to participate on Acala and Karura

Collator nodes are at the core of Acala’s functionality. Collators are parachain-specific nodes in the Polkadot ecosystem that prepare the blocks from parachains. These nodes are not responsible for validating and finalizing those blocks onto the main Polkadot Relay Chain. Instead, collators pass Acala’s blocks to a randomly selected subset of Polkadot’s Relay Chain validators, who then validate and finalize the blocks using Polkadot’s consensus method.

Because of this process, collator nodes do not have a direct impact on the security of the chain. The result of poor collator performance is a failure to get blocks from the Acala blockchain validated on the Polkadot Relay Chain in a timely fashion. This slows down the Acala parachain, as it gets out of sync with the Relay Chain’s state.

Acala plans to launch an authorized set of 15—20 collators provided by the Acala Foundation and third parties. Once the network is stable and the collator incentive model is finalized, the collator set will be open to public participation. As collators are non‐security critical a parachain only needs one collator acting as expected in order to be censorship‐resistant.

A large set of collators could potentially have adverse effects on the network such as by slowing it down; the collator incentive model being finalized by the Acala team will be designed accordingly. As collators are neither responsible for network security nor decentralization it is less demanding to run a collator node than a validator node, and Acala’s rewards are likely to reflect that dynamic.

Governance on Acala and Karura

Acala’s governance structure includes a primary council (the General Council) and referendum chamber aligned with feeder councils that govern different aspects of the protocol. This structure reflects Polkadot’s governance structure.

The early stages of Acala’s development are overseen by the Acala Foundation, with plans to implement self‐upgrading on‐chain governance in the future.

There are four governance councils in Acala:

  • The General Council is the overarching chamber governing Acala, driving governance alongside community-proposed ACA Referendums. Only the General Council can submit protocol-level upgrades, and the General Council also appoints the other special councils which funnel specific governance needs to the General Council.

  • The Financial Council is responsible for the stablecoin, decentralized exchange, and other relevant DeFi protocols’ governance. All motions are executed with a delay to allow input or override from either the General Council or the Technical Council.

  • The Liquid Staking Council is responsible for the Liquid Staking protocol’s governance. All motions are executed with a delay to allow input or override from either the General Council or the Technical Council.

  • The Technical Council includes three parties and can cancel any "uncontroversially dangerous motions" from the other councils via an unanimous vote.

Risks of participation on Acala and Karura

In the authorized collator set phase of Karura and Acala there is no slashing, as Acala collators do not need to stake any assets to their nodes. Poor collator performance may lead to a collator being removed from the active set, but performance affects only liveness as opposed to presenting a financial or security risk.

Why run an Acala or Karura node?

  • Operating a collator in the early phases of Acala’s and Karura’s mainnets demonstrates a deep commitment to the network, and signals the intention to add value to the network.

  • Help make the network more decentralized, robust, and ultimately valuable.

  • Establish your credibility as a validator and long‐term alignment with the Acala community.

  • Improve your chances of securing a collator slot and attracting community delegation when Acala collator staking is live.

Why choose Coinbase Cloud?

Coinbase Cloud's expertise in running Substrate-based infrastructure is unmatched, making us uniquely positioned to provide unparalleled enterprise-grade node infrastructure for Acala collators.

  • Protocol expertise: Coinbase Cloud is an integral infrastructure partner to Acala. We will be operating the boot nodes used to bootstrap the Karura network in its early launch stages on Kusama.

  • Experience with the Substrate ecosystem: Our team brings deep technical knowledge of the Polkadot network and the broader Substrate ecosystem. Working with Coinbase Cloud to support the top Parachain projects will allow you to bypass years of learning how to operate successfully within the Substrate ecosystem.

  • Dedicated support: We offer dedicated support from our protocol experts and customer success teams to make your participation seamless.

  • Enterprise-grade security: As one of the most trusted names in the blockchain infrastructure industry, we have best‐in‐class security augmented by information, application, and incident management policies.

Coinbase Cloud will support Acala, the DeFi hub of Polkadot and an Ethereum‐compatible financial application platform, and Karura, Acala’s sister protocol on the Kusama network, when they launch this year.

As the two sister parachain networks stabilize, we expect there will be opportunities for Acala ecosystem partners to run collator infrastructure with Coinbase Cloud.

Although participating as a collator operator in the early stages of Karura and Acala does not yield participatory rewards, it:

  • Demonstrates a deep commitment to the network

  • Signals long‐term intention to bring value and security to the parachain

  • Helps pave the way for a successful transition from an authorized collator set to a public collator set model

  • Establishes your credibility as a collator operator and trusted ecosystem partner