What is Acala?
Acala is a decentralized finance (DeFi) hub that aims to be the ‘cornerstone of DeFi’ within the Polkadot ecosystem. The main features of Acala are a DEX, a stablecoin protocol that creates multi-collateral CDPs, and a tokenized liquid staking protocol. Acala additionally functions as a platform for developers and entrepreneurs to build their own ideas and projects on top of. On Ethereum the demand for these various capabilities has been well documented. As Polkadot matures, it is a reasonable assumption that there will be increasing demand from users there as well.
What is ACA?
ACA is the native token of Acala. ACA serves as a network utility token and is required to pay transaction fees, stability fees, and penalty fees. ACA is also used as a governance token, which gives holders the right to propose network upgrades and risk parameter adjustments. The usage of the token is deeply embedded into the various functions of the protocol(s) and it can be assumed that as network usage increases, the value of the token should rise accordingly.
What is Polkadot?
Polkadot is the decentralized ‘layer-0’ network that Acala will connect to. On Ethereum, dApps build upon the existing Ethereum blockchain. For Polkadot, entire blockchains will connect to the layer-0 network like spokes on a hub. This structure will allow greater interoperability between projects, and it will potentially allow Acala to cater to a wider breadth of assets than what are easily used in Ethereum-based DeFi.
What is Kusama?
There is a sister network to Polkadot called Kusama (same development team.) Kusama serves as an ‘experimental testing ground’ for projects that eventually plan to launch on Polkadot. Kusama will have lower economic stakes and governing parameters that are generally amenable to development and experimentation. Polkadot is more rigid in nature and places a greater emphasis on security. Acala has already launched an iteration of their project on Kusama called Karura which will serve as a good comparable for what to expect from the Acala launch.
Parachain Auction?
To connect to the Polkadot network, Acala needs to win a parachain auction. This auction gives Acala the right to lease a space on the Polkadot network for a certain amount of time (up to 2 years). Acala is crowdfunding their bid in the auction and will reward participants with an amount of ACA relative to the amount of DOT (Polkadot’s native token) that they contribute at a to-be-determined ratio. The DOT that is raised will be locked for the duration of the lease and will then be returned upon expiration. This is said to be done through a smart contract and the team is not in control of these funds. The date for parachain auctions on Polkadot has not yet been announced but they are expected within the next few months.
In the Karura crowd loan, 501,137 Kusama (KSM) were contributed. This was more than 5% of the entire Kusama network and it demonstrated massive community support. Tokens were initially said to be distributed at a 12:1 ratio, but with bonuses and referrals, the ratio ended up being 19.95:1 or even higher. On July 21st, the day that KAR (Karura’s native token) hit the market, the prices were $4.10/KAR and $174/KSM. $4.10 x 19.95 = $81.80 or a 47% annual return, which is far higher than the market staking reward for the same period. If the ratio was just 12:1, the return goes down to 28%, which is massive for traditional markets, but is less significant in crypto. Polkadot and Kusama have fluctuated far more than 28% in the last 3 months.
If you are a long-term Kusama or Polkadot holder, these auctions were/are likely a good opportunity. If you are not a long-term holder (or holder at all), it is difficult to stomach the exposure of being locked into either of those projects for so long and it drastically changes the equation in the underwriting.
Backing
There are almost 30 venture capital firms that invested in Acala. The most notable include: Coinbase Ventures, Polychain Capital, Pantera, Digital Currency Group, and the Web 3 Foundation. The backing and attention this project has received are extraordinary and are one of the main reasons we initially identified the project.
Team
The four main founders of Acala are Ruitao Su, Fuyao Jiang, Bette Chen, and Bryan Chen. The four started working together after they all participated in a Polkadot hackathon. These four all have a large amount of credibility within the cryptosphere and are known leaders in the space. There are 18 other team members listed on the website and approximately 50 community ambassadors. There are a number of job listings on the website indicating an intention and ability to grow.
Tokenomics
ACA will have a fixed supply of 1,000,000,000. All tokens will be minted at genesis; however, they will not all immediately be in circulation. The breakdown of the distribution and vesting for Karura is below. It is assumed Acala will mirror this structure:
Genesis for Karura was June 22nd and tokens started trading July 21st. As of August 15th, roughly 9% of all KAR is in circulation. Within 5 months of launch, the circulating supply will effectively double, and within a year it should quadruple. That is a notable supply shock and it will have some kind of negative pressure on token value.
Build Acala Event
On 8/15/2021 there was a ‘Build Acala’ event that allowed people to contribute funds to ready the Acala on-chain Treasury upon mainnet launch. The purpose of this was to bootstrap the decentralized sovereign wealth fund for things like providing liquidity to DeFi protocols, and sustaining the network through development and operational initiatives etc. This event had over 50,000 eager participants sign up and Acala filled its registration quota within 43 minutes. This event was not even open to multiple countries including the U.S., and the exchange rate hasn’t even been given. This is just one more indicator about the energy surrounding the project.
Ecosystem
At this point, there are only a handful of competing projects within the Karura ecosystem, and there are no projects live on Polkadot yet (although there are plenty building.) An overview of the competition in both ecosystems can be found at PolkaProject and KusamaProject. According to these sources, there are 485 projects building on Polkadot and roughly 35 on Kusama. A stark difference, but it also roughly mirrors the ratio of the market cap between both projects.
There are other DeFi projects building on the Polkadot network but most are either a dApp, or a platform, while Acala is both and is likely the farthest along in terms of development. There are 30+ Polkadot ecosystem projects that intend to use Acala products and services, integrate with Acala platforms, and/or deploy on Acala. Notable collaborations include: Compound, Current.com, Ren Protocol, and Ampleforth.
Growth and Community
Acala has a massive following, especially for a project that hasn’t been released yet. Across all of their Karura and Acala channels, there are over 340,000 subscribers. This includes 95,000 on Acala Twitter, 26,000 on Acala announcement Telegram and 35,750 on Acala Discord. These community numbers are in line with top-10 projects in the space. The community's enthusiasm can’t be overstated with this project.
Market Comparables and Underwriting
Notes:
Maker DAO- There are many users of the Maker Protocol, but likely millions of users of their Stablecoin DAI. This project is a great comparable for Acala’s aUSD offering.
Uniswap- As a DEX, Uniswap is primarily limited to LP pools as far as TVL goes, and they do not offer CDPs. TVL has less of an impact on DEX’s valuations.
Compound- Compound has a very high TVL/Market Cap. They just introduced new products and the momentum of the project is trending upward. It wouldn’t be surprising to see the price reflect a lower TVL/Market Cap as time goes on.
Aave- No adjustments here.
Synthetix- Synthetix is a synthetic assets platform that deals in derivatives backed by the SNX token. A TVL closer to 1:1 makes sense for this project, and the lending protocols are likely the best comparable as far as TVL goes.
Karura- Karura has maintained a market cap of roughly $66mm-$80mm since launch. It is currently at around $70,000,000. A 2.11:1 TVL is in line with the rest of the market comparables.
The comparables are fairly diverse, but that diversity actually represents Acala’s offering in a way. Acala will have derivatives, a DEX, and CDPs. When the crowd loan begins, it will be evident whether this project has the same level of enthusiasm relative to the Polkadot ecosystem that Karura had for Kusama. If this is the case, then there should be 10x the TVL for Acala, 10x the market cap, and the same TVL/Value ratio as Karura should be valid. Time will tell!
Conclusion
Acala is a great project that will fill a niche in the Polkadot ecosystem. The offering, team, backing, and community all look very strong and seem to be checking all the boxes that you would want to see a project complete before launch. Despite all of the attributes, there are negatives as well. The circulating supply of ACA will dramatically increase, there is an enormous amount of hype that will artificially inflate the value, and there is nothing live on Polkadot yet. Acala will likely be heavily used, but it seems unlikely that it comes out undervalued at launch.
Bonus
A recurring theme in this report has been the huge community interest and support of the project. When parachain capabilities on Polkadot are announced, there should be a heavily increased demand for DOT because users will need to acquire it to participate in the various crowd loans. This increase could push the price up significantly. It’s not clear whether there is any substance to this theory, but it’s something that can be underwritten in the next post. Maybe there is a different kind of opportunity with this launch.