Recently, the aUSD stablecoin that’s part of the Polkadot DeFi platform known as Acala was depegged by more than 99% because of a hacker. The team behind Acala was forced to place a pause on the hacker’s wallet, which caused concerns for many Acala crypto investors about how decentralized the platform actually is. The Acala DeFi hack was among the most notable hacks in the crypto industry during 2022. If you’re an Acala crypto user, you’ll want to understand what the Acala DeFi attack entailed, and what it means for the Acala network over the coming months.
What Is Acala?
Acala is a Polkadot DeFi platform that offers modular financial services, and comes with a liquidity hub that’s designed specifically to support Polkadot DeFi. It brings borrowing, lending and stablecoin functionality to the broader Polkadot ecosystem.
Acala is a comprehensive decentralized finance (DeFi) platform that’s based on Web 3.0. Since the Acala network was the very first DeFi protocol to be launched with Polkadot parachain auctions, it’s considered to be the Polkadot DeFi hub. Being Ethereum virtual machine–compatible, developers can easily port over their projects from Ethereum to the Acala network. This means it can potentially become the DeFi hub for practically all cryptocurrencies.
The Acala network uses a dual-token system, which includes a governance token known as ACA and a native decentralized stablecoin known as aUSD. The ACA token is also used to pay for any transaction fees. Along with ACA, there are a wide range of additional tokens that are allowed for transaction fee payments on the Acala network.
Acala’s Origins
Founded by the Acala Foundation, Acala is essentially an in-depth collaboration between two development groups with Polkadot DeFi, known as Polkawallet and Laminar. The foundation has strived to develop DeFi markets across different blockchains that were connected by the Relay Chain. In order to reach this goal, the Acala network was created as a community-owned and -operated financial layer that uses Polkadot’s Substrate framework. While Acala includes financial application features, their main area of focus is improving development capabilities and interoperability initiatives.
Development on the Acala network first began in 2019 when the Web3 Foundation provided Acala with a development grant. Since that time, the Acala network has obtained additional funding from crypto investment firms Pantera Capital and Polychain Capital. These private fundings raised more than $8 million by August 2020, and the Acala network was formally launched on Polkadot in late 2021.
How Does Acala Work?
The Acala network provides a decentralized exchange (DEX), a liquidity staking protocol and a stablecoin, which makes it a well-rounded crypto project that’s part of the Polkadot DeFi initiative. Since the Acala network is fully compatible with EVM, it has a considerable amount of utility for Acala crypto investors.
When using this platform, you’ll gain access to DApps, crypto assets and DOT-based derivatives. At the moment, the Acala network is made up of three parts: AcalaSwap, Honzon and Homa.
AcalaSwap (AMM)
AcalaSwap is an automated market maker (AMM) that’s based on a standard swap interface, which gives you the ability to trade various crypto assets in liquidity pools. Any liquidity providers can earn fees for placing Acala crypto into the pools. While the Acala DEX uses a very familiar structure, there’s no need for it to completely change things up when it comes to decentralized trading.
On the other hand, a new feature that’s possible through the Acala network DEX is the ability to natively trade between different cryptocurrencies, across any blockchains that are connected to Polkadot. Note that both Polkadot and Polkadot’s canary network Kusama are already widely adopted. In fact, popular projects announce that they want to join Polkadot via parachains on a regular basis. Therefore, it’s believed that the amount of cross-chain liquidity available through the Acala DEX will always hold up.
One notable difference between the Acala network DEX and all other Ethereum-based DEX platforms is that the Acala DEX is much more affordable to use. Polkadot is known as a high-throughput blockchain, which allows for micro–gas fees. These fees can be paid with Acala crypto and a wide range of additional cryptocurrencies.
Honzon (Stablecoin Protocol)
Honzon is the stablecoin protocol that’s used with the Acala crypto network. Acala has taken advantage of its reputation as a cross-chain interoperability network by developing its own aUSD stablecoin, an algorithmic stablecoin that’s been 1:1 pegged with USD. However, it’s also backed completely by other crypto collateral.
The aUSD stablecoin platform works because of the Honzon protocol, which was created for minting stablecoins whenever these coins are deposited by crypto users as collateral. Upon the launching of this protocol, the aUSD stablecoin platform was able to accept ETH, BTC and DOT as collateral. It’s believed that additional currencies will eventually be supported by parachains.
The aUSD stablecoin is easy to understand. Once collateral from Acala crypto (or a wide range of other currencies) is deposited, aUSD is officially minted, after which you can open a collateral debt position. Taking on this position means that you owe money directly to the protocol, which must be repaid along with a certain amount of interest at a later date.
Once you’ve repaid your collateral debt position, the protocol mentioned previously will burn the same amount of aUSD stablecoin, which reduces the amount of aUSD stablecoin that’s currently circulating. This process allows the aUSD stablecoin to maintain its USD peg. If you’re considering investing in the aUSD stablecoin, it’s important to know that Honzon comes with enhanced stability and security.
Homa (Liquid Staking Protocol)
The Polkadot DeFi ecosystem centers on bonding assets. “Bonding” involves a process that’s similar to staking. During the bonding process, your tokens are locked with a smart contract for a certain amount of utility. In return for bonding your Acala crypto tokens, you’ll receive interest.
Before the development of decentralized finance, it was difficult to find platforms that used staked assets. When these assets did exist, they couldn’t be used for liquidity. Now that staked derivative assets have been created, crypto platforms can access staked liquidity.
The Acala network takes this one step further by providing DOT holders with LDOT via the Homa protocol. Also referred to as Liquid DOT, LDOT is a type of token that’s used to represent your staked liquidity. Your LDOT can be removed from the Homa protocol before being used as aUSD stablecoin collateral through Honzon.
Acala provides developers, projects and investors that have DOT crowd loans with the ability to compound their entire crypto capital, without needing to place DOT tokens directly on the market. The protocol is designed this way to resolve the illiquidity issues that come with staked DOT tokens.
Why Is Acala Popular?
While Acala doesn’t necessarily revolutionize DeFi, it does have some unique aspects that differentiate it from other DeFi hubs. First of all, the Acala crypto network focuses on collaboration through its cross-chain DeFi infrastructure, which makes it beneficial for the entire industry. Investors can take out loans and fully collateralize them with crypto that comes from other blockchains. You can also use the AMM to swap cryptos without needing to wrap them beforehand, which simplifies the entire process.
If you’ve previously invested in the Polkadot platform, the Acala crypto network has essentially facilitated a Polkadot DeFi platform. The most modern and advanced DeFi features are supported with Acala. If you hold the Acala crypto token, you have the ability to obtain passive returns with it specifically. The returns you obtain are based on the number of tokens you stake. All of your staking rewards are paid with ACA.
How Was Acala Exploited?
Despite Acala’s ample security features, as well as those of the entire Polkadot DeFi platform, an Acala DeFi hack occurred on August 14, 2022, resulting in a large portion of aUSD stablecoin being minted. In turn, aUSD lost around 99% of its value, which is why the Acala DeFi hack is among the most severe crypto attacks to have occurred in years. The exploit experienced by the Acala network was so strong that it caused aUSD’s price to drop to practically zero. Before, it was effectively pegged 1:1 with the U.S. dollar.
The team at Acala quickly determined that the Acala DeFi hack resulted from a misconfiguration of the aUSD/iBTC liquidity pool, which had gone live just earlier that day. This issue resulted in a minting error with a sizable amount of aUSD. One hacker involved with the Acala DeFi hack was able to mint around $1.28 billion in aUSD, which was swapped for a much smaller amount of the ACA token.
Shortly after the Acala DeFi hack began, Acala placed the parachain into maintenance mode, which paused all swaps. Oracle price feeds and cross-chain transactions were also paused, which resulted in the hacker being effectively stranded with $1.28 billion in aUSD tokens that were no longer worth anything.
A few additional users mimicked the initial hack to mint anywhere from $25,000 to $80 million in aUSD. The total sum of stolen funds is less than $10 million when not taking the aUSD depeg into account. After the Acala DeFi hack, many crypto investors began to raise questions about the Acala network’s viability.
Acala’s Recovery
Since the breach of the Acala network in mid-August, the team has managed to recover around 3 billion aUSD to help push the value closer to the 1:1 USD peg. During the second trace, following the Acala DeFi hack, they were able to recover around 1.68 billion aUSD. The first trace allowed for the recovery of 1.29 billion aUSD. Additional trace reports are expected to occur in the weeks to come, which may lessen the severity of the Acala DeFi hack.
While the Acala DeFi hack was severe, the team at Acala was able to quickly freeze all services, which effectively lessened the impact caused by the hack. Around 16 separate users who contributed to aUSD liquidity pools received aUSD that was minted during the Acala DeFi hack. Along with the trace reports, Acala will publish a postmortem. While aUSD was initially valued at around $0.01 after the Acala DeFi hack, it’s now valued at around $0.85 because of recent recovery efforts.
ACA Tokenomics
As the Acala platform token, ACA has been allocated for rewards, strategic investors, the Acala team, further ecosystem development and a certain amount of reserves. By the end of 2026, more than $800 million of ACA will be distributed. The amount that’s distributed to crowd loan participants, strategic partners and the Acala team will grow over time.
ACA is currently priced at $0.235 and has a circulating supply of more than 508 million tokens. The market cap is right around $120 million. Acala aims to soon release a final trace report that goes into more detail about the recent DeFi hack, which can be verified by the community with on-chain data. Proposals will then be formulated by re-collateralizing aUSD. The community will be able to make decisions and formulate service resumption plans.
Is Acala a Good Investment?
The Acala DeFi hack was immediately damaging to the value of aUSD. While steps have been taken by the Acala team to remedy this issue, the extent and severity of the hack means that you should take some time to determine if Acala is a good investment for your portfolio.
While the hack has put a pause on the Acala team’s road map, the map is still ambitious and may eventually be able to help crypto investors gain confidence in the platform. For instance, Acala eventually wants to enable balance transfers and is working to further invest in ecosystem development over the next few years.
Before investing, consider focusing on what the Acala team says about additional steps they’ll take to resolve the issues caused by the Acala DeFi hack. If they correct these problems, you should be able to invest without worrying too much about your crypto portfolio.
How to Invest in ACA
If you’d like to invest in ACA, you can do so on Bybit with Spot trading. All that’s required for you to get started is for you to sign in or create a new Bybit account.
From there, you’ll notice a search box at the top center of the page. Once you type in “ACA,” you’ll be shown an ACA/USDT Spot trading option. Click on it to be taken to the main ACA page. On the right side of the page, you can enter the amount of ACA you’d like to purchase. Make sure that your wallet is connected to Bybit before you begin.
Final Words
Despite the severity of the Acala DeFi hack, the team at Acala has taken numerous steps to recover the minted aUSD and stem the issues caused by this hack. However, some crypto investors still distrust Acala because of the belief that the platform isn’t as decentralized as it had been advertised to be. Whether you choose to invest in the aUSD stablecoin, or decide to take your crypto assets elsewhere, it’s clear that the Acala DeFi hack has caused a considerable amount of damage to the platform’s reputation, as well as the value of aUSD.