Acala’s aUSD ‘Honzon’ protocol is a decentralized liquidity facility for the Polkadot and Kusama ecosystem, over-collateralized with a basket of crypto assets to generate a native, multichain stablecoin - aUSD - as a hedging tool, routing asset, and medium of exchange.
We are at the very beginning of growing a native multi-(para)chain ecosystem built on and secured by Polkadot and Kusama.
- aUSD on Acala has $65M worth of collateral assets (DOT, LDOT, LCDOT, ACA), and $4.4M aUSD generated, with ~1,477% collateralization
- aUSD on Karura has $12.5M worth of collateral assets (KSM, LKSM, KAR), and $3.8M aUSD generated, ~329% collateralization
- Total debt ceiling on Acala is $66M, where debt ceiling for DOT is $50M, LCDOT is $6M, LDOT is $5M, ACA is $5M
- Total debt ceiling on Karura is $33M, where debt ceiling for KSM is $25M, LKSM is $5M, KAR is $3M
The required collateral ratios are conservative due to market volatility and liquidity available. Debt ceilings for DOT or KSM derivatives and ACA/KAR are set at a low level, as it is still a early stage to bootstrap liquidity of LDOT-like derivatives, although they are more desirable collateral assets (compared to plain DOT/KSM) as users can continue to stake DOT/KSM while drawing liquidity out of them to use elseware. See Gauntlet’s Acala dashboard here.
aUSD has been growing steadily and organically since launch. There is increasing demand for the aUSD stablecoin in the ecosystem while, at the same time, a shortage of stablecoin liquidity exists.
With Polkadot and Kusama’s multi-chain capabilities, aUSD can serve not only the local trading venues such as Taiga’s stableswap 3-pool on Karura, but also remote venues on other parachains via XCM. Trading venues are critical infrastructure to facilitate efficient markets and medium of exchange, help maintain a healthy stablecoin peg with ample arbitrage venues, and to serve as a liquidation backstop for aUSD and money market protocols.
IADS V0 is being proposed to launch as a new approach to providing liquidity into stableswap protocols like Taiga protocol. IADS will directly generate aUSD to be deposited into the Taiga 3-pool to improve liquidity efficiency and aid with keeping aUSD pegged to $1. This aUSD minted by IADS will be backed by 3USD, the LP token from the USDT-USDC-aUSD 3-pool.
This essentially allows the aUSD protocol to treat Taiga as an aUSD liquidity distributor, while the stableswap pools can facilitate arbitrage of stablecoins.
There is no stability fee (interest rate) charged in IADS, but the protocol will collect trading fees from the stableswap as a LP which will go into the Honzon Treasury.
This is the first step to grow a protocol-distributor network for aUSD across Polkadot & Kusama’s multichain ecosystem.
- V0: exploratory deposit to Taiga’s stableswap 3-pool
- V1: pallets to auto-adjust liquidity provision levels and scale to support other similar type of protocols and parachains
- V2: deposit to local smart contract protocols like the Pike money market
- V3: extend the protocol to support remote protocols via XCM
aUSD will be generated from the aUSD Honzon protocol, deposited directly into Taiga’s 3-pool to receive 3USD LP tokens, which will then be stored in the aUSD protocol as the aUSD backing asset.
The 3USD exploratory deposit amount shall take into consideration the overall debt ceiling and can be adjusted by governance. For example, if the exploratory deposit is $100k, it would be 0.3% of total debt ceiling on Karura, and 3.2% of outstanding aUSD debt.
If the deposit is too large, the 3pool will become imbalanced which would lower the effective price of aUSD relative to USDC and USDT.
3USD is the LP token of Taiga protocol’s stableswap 3-pool, which consists of aUSD, USDC (bridged in from Ethereum via Wormhole), and USDT (natively minted on Statemine and sent cross-chain via XCM to Karura). 3USD represents the share of the pool and the trading fees accumulated overtime.
3USD is redeemable at any time to underlying assets (USDC, USDT, aUSD) proportional to currently available liquidity in the pool，and directly into a single asset like aUSD. A governance vote can be passed to execute the redemption.
- Unbalanced pool: there could be premium or slippage when redeeming aUSD from stable pools. However, as the three are all stablecoins, the insolvency risk due to unbalanced liquidity is low.
- Non-aUSD stablecoin risk: with fiat-backed stablecoins, there is centralization and depeg risk associated. If they are bridged assets, then there are inherit bridge protocol risks as well. The exposure is proportional to the liquidity mix in the pool. E.g. if USDT makes up 20% of the pool, then the aUSD protocol will need to absorb bad debt = 20% of liquidity deposited if USDT is exploited.
- Taiga protocol risk: if the protocol is exploited, it’s possible to lose the deposit. There are on-chain mechanisms to pause part or all protocol operations to reduce attack impact.
We continue to work with various partners to evaluate ongoing economic, protocol and other types of risks.
This proposal is taking recommendations from Gauntlet to start with a deposit of 100k aUSD, which is a significant amount relative to the existing user deposits, but not so much that it will create an unbalanced the pool or expose the protocol to potential losses that the treasury cannot absorb.
Interprotocol aUSD Distribution Scheme (IADS) will bring the following benefits to Acala and the overall Polkadot & Kusama ecosystem:
- Grow a protocol-distributor network for aUSD to deploy liquidity to protocols and parachains that need the ecosystem’s native stablecoin
- Aid with aUSD stability, as this allows more arbitrage opportunities on more trading venues
- Governance can directly impact the risk assessments and liquidity quota of these deployments by adjusting ceilings and other parameters
- Enable Acala protocol-owned liquidity to help grow aUSD issuance locally on Acala/Karura and across the parachain ecosystem more effectively, thus aiding in the bootstrapping of all Polkadot and Kusama chains
- Generate trading fees and incentives from protocol-distributors