On March. 12, the crypto market has experienced severe sell-offs and flash crashes in just a few hours. The price of Bitcoin, ETH and many other crypto currencies have sharply fallen for nearly 50% with more than $50 billion evaporated from the crypto markets.
The slow transaction rate of Ethereum has worsened the situation and caused a panic among investors. The delay time of transactions once reached about 6 hours resulting in multiple exchanges halting the transfer of all ERC-20 tokens including stablecoins. Congestion of the Ethereum network also led to problems during the liquidation of MakerDAO, the largest decentralized stablecoin provider, causing it a loss of more than $4.5 million and forcing an auction of MKR tokens.
The crypto market crisis shows the need for new DeFi infrastructure is more pressing than ever.
According to the statistics of DeFi Pulse, more than $1.2 billion has been locked in DeFi prior to the crypto price fall. Due to the sudden drop of Ether price, a large amount of liquidation process were started for multiple DeFi platforms. On Mar. 13, the locked value in DeFi has dropped as low as $0.25 billion.
The total amount of assets liquidated was above $23 million, of which $10 million took place in the MakerDAO platform followed by Compound and dYdX.
One DeFi liquidation process usually includes the execution of muitiple Ethereum transactions. The sudden increase in the number of transactions had apparently overloaded the Ethereum network, pushing the transaction fees several hundred times more expensive. This means if you want to have your smart contract transaction executed in a few minutes, you have to pay over $10 just for the transaction fee.
There were many cases where people wanted to increase their CDP collaterialization ratio by depositing more ETH but in the end lost all their collaterals. The reason was they didn’t pay a transaction fee high enough to have their deposit transactions executed in time. Such loss could have been avoided if the Ethereum network had a bigger capacity.
The congestion of the Ethereum network also caused panic in centralized exchanges when they announced the halt of withdrawing ERC-20 tokens. Rumors were spread that certain exchanges were bankrupted and closing down, which again gave a heavy blow to the already struggling confidence of the crypto market.
The Acala Network is a decentralized stablecoin platform built with the Substrate framework of Parity Technologies, the same company which is behind the Polkadot project. By offering two innovative protocols, Honzon and Homa, the Acala Network enables the user liquidizing their staked asset in the Polkadot network and borrow stablecoin for other DeFi applications. The stablecoin, aUSD, is 1:1 mapped to the US dollar and works in a similar way as the DAI of MakerDAO.
Different from Dapps in the Ethereum Network, Acala benefits from the sound design choices of the Polkadot ecosystem. An improvement of speed, asset safety and functionality can be identified comparing to its counterparts in the Ethereum network.
Built with the Substrate framework, Acala is equipped with advanced consensus mechanism such as GRANDPA/BABE , making it much faster than the Ethereum Dapps regarding transaction speed. In addition, the overall system capability can be increased by employing more parachains, giving the system good scalability for future use cases.
Thanks to the ease of cross-chain mechanism of Polkadot, Acala can have more types of assets from various Polkadot parachains as collaterials. The diversity of assets can reduce the overall system risk in case of market downturn. By use of the off-chain worker module of the Substrate framework, Acala has original collators in place of 3rd party liquidators (as in the MakerDAO system) for liquidation to safeguard user asset. In addition, the integrated DEX in Acala can be used for asset auction to avoid the risk of a 3rd party DEX.
In the future, functions such as Building a Decentralized Sovereign Wealth Fund, can be realized in the Acala Network, making it an indispensable building block of the Polkadot DeFi ecosystem.
After the Polkadot mainnet launch in 2020, the Acala Network will compete for a parachain slot and then become a parachain of Polkaot. We expect it to provide safe and efficient DeFi services for the users of Polkadot.
Acala — a first-of-its-kind decentralized finance consortium, with a vision to create cross-chain open finance infrastructure for the Polkadot ecosystem. The Acala Network is a dual-protocol network, with a decentralized cross-chain capable multi-collateralized stablecoin protocol — Honzon, and a trust-less tokenized staking liquidity protocol — Homa. Acala aims to bring stability and liquidity to the crypto world and beyond.
The Acala Stablecoin Project is proudly supported by the Web3 Foundation.
Web3 Foundation funds research and development teams building the stack of technologies that form the basis of the decentralized web. It was established in Zug, Switzerland by Ethereum co-founder and former chief technology officer Dr. Gavin Wood.
For more information on Web3 Foundation, visit web3.foundation.
Polkadot is the first interoperability protocol that enables blockchain networks of all kinds to work together under the protection of shared security. Applications from decentralized finance and energy to gaming and communications will thrive on Polkadot, forming the basis of digital jurisdictions in Web 3.0. Polkadot is the first project spearheaded by Web3 Foundation.
For more information on Polkadot, visit polkadot.network.