Honzon Fungibility Pallet to make aUSD fungible between Acala & Karura

Context

Unifying aUSD between Karura & Acala will allow aUSD to serve as the native stablecoin and source of liquidity across the Polkadot and Kusama multichain ecosystem. Read more about the unification of aUSD across Acala and Karura here.

Below are the steps to complete this unification:

  1. Upgrade kUSD symbol to aUSD on Karura (DONE)
  2. Deploy an asset bridge on Karura and Acala (DONE)
    a. Wormhole is currently the bridge being used, and it can be upgraded to the Substrate native bridge when it becomes available
    b. Wormhole goes live on Karura (DONE)
    c. Wormhole goes live on Acala (DONE)
  3. Deploy the Honzon Fungibility pallet on Karura and configure aUSD quota to Acala and aUSD quota to Karura
  4. Deploy bridge front-end to support aUSD transfers
  5. Upgrade Wormhole bridge to an inter-RelayChain bridge (powered by XCM)
  6. Upgrade governance of the aUSD Honzon protocol on Karura to be governed by Acala’s Financial Council which governs aUSD on Acala

The following proposal is to address step #3 above (Deploy the Honzon Fungibility pallet that enables fungibility of aUSD between Karura and Acala):

Honzon Fungibility Pallet

aUSD originated from Acala (aUSD@Acala) is the aUSD standard for bridging to chains outside of Polkadot/Kusama ecosystem e.g. Ethereum via Wormhole.

The Honzon Fungibility pallet is deployed on aUSD associate chains e.g. Karura, making aUSD originated from Karura (aUSD@Karura) fungible to aUSD@Acala.

Via the Honzon Fungibility pallet

  • aUSD@Karura can be sent from Karura to Acala, and get turned into aUSD@Acala, be used to payback vaults, trade in aUSD pools locally and across parachain ecosystems
  • regardless of where the aUSD originated, aUSD can be sent amongst external blockchains e.g. Ethereum and received back to Karura and Acala
    thus providing unified cross-chain liquidity for aUSD.

While the Honzon Fungibility pallet manages fungibility of aUSD between Karura and Acala, the actual generic token transfer is handled by the underlying token bridge e.g. Wormhole (currently) and later on the XCM-powered inter-RelayChain bridge.

Mechanics

Transfers from Karura to Acala

The Honzon Fungibility pallet is configured with a Quota to Acala that limits the risk exposure to Acala from Karura (relying on Kusama’s shared security) and Wormhole. For example, if Quota to Acala = $500k, then the maximum amount of aUSD can be transferred from Karura to Acala is $500k + amount of aUSD@Acala transferred to Karura.

To configure the Quota to Acala, the Honzon protocol treasury on Acala generates the aUSD@Acala quota (not in circulation), directly deposits to the Wormhole bridge to mint 1:1 waUSD (aUSD transferred via Wormhole), and deposit the waUSD to the Honzon Fungibility pallet.

When a transfer of aUSD@Karura to Acala is initiated, aUSD@Karura will be deposited to the Honzon bridge to receive 1:1 waUSD, and waUSD will be automatically redeemed 1:1 on Acala as aUSD@Acala which is effectively backed 1:1 by aUSD@Karura.

Transfers from Acala to Karura

The Honzon Fungibility pallet is configured with an Quota to Karura that limits the risk exposure to Karura from Acala and Wormhole.

To configure the Quota to Karura, the Honzon (aUSD) protocol treasury on Karura can generate an aUSD@Karura quota (not used in circulation), to directly deposit to the Honzon Fungibility pallet on Karura.

When a transfer of aUSD@Acala to Karura is initiated, aUSD@Acala is deposited to Wormhole to mint 1:1 waUSD, and waUSD is deposited to the Honzon Fungibility pallet on Karura to issue 1:1 aUSD@Karura using the aUSD@Karura quota previously deposited there by the treasury, which is effectively backed 1:1 by aUSD@Acala.

Considerations

  1. Risk parameters Quota to Acala & Quota to Karura: limit the risk exposure to the underlying bridge technology, also exposure to Acala and exposure to Karura respectively. They may need to be considered in relation to the issuance of aUSD on Acala and Karura.
  2. When XCM v3 or later version becomes available, there is a plan to have Acala governance to directly manage the Honzon protocol (aUSD protocol) on Karura via XCM. Prior to that, the Honzon Fungibility pallet is deployed on Karura and under Karura governance. If the pallet or Karura governance is exploited, Acala will need some mechanism to mitigate such risks e.g. remove quota, hence waUSD to prevent redemption of aUSD@Acala.

Recommendations

Below are recommendations of risk parameters from Gauntlet

  • initial Quota to Acala = 1.1M
  • initial Quota to Karura = 450k

During normal conditions it’s expected that users will be sending aUSD both ways across the bridge, and ideally, neither quota should become binding. However, if there were a major de-pegging event on one protocol, it can be expected that users to max out the quota while fleeing the de-pegged token. Hence to cater for worst case scenario for Acala to absorb Quota to Acala and Karura to absorbQuota to Karura, these initial parameters are proposed.

Conclusions

Unifying aUSD will bring the following benefits to Acala and the wider Dotsama ecosystem

  • improve liquidity efficiency between Acala and Karura, and effectively between Polkadot and Kusama
  • create more arbitrage opportunities and improve stability of aUSD
  • holders of KAR/KSM (as well as other accepted collaterals on Karura) can draw aUSD credit, trade and access services on Polkadot ecosystem seamlessly; holders of ACA/DOT in turn can do the same on Kusama ecosystem seamlessly effectively unifying the two ecosystems

Pallet: Acala/modules/honzon-bridge at master · AcalaNetwork/Acala · GitHub
SDK will be released once it’s ready

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Nothing to say but wonderful !!

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Can’t wait for this!