Polkadot, Acala, Karura, and Wormhole
- Polkadot is a network of interconnected blockchains (parachains), and Acala aims to be Polkadot's primary decentralized stablecoin and DeFi parachain.
- Karura is Acala's sister network built on Kusama, serving as an experimental network where Acala launches its products first.
- Wormhole can enhance Acala and Polkadot's usage alike, by bringing new collateral and users onto the platform and exporting Acala's native tokens onto other chains.
Abstractly, a blockchain — as a shared and distributed public ledger of transactions — makes sense. But in practice, blockchains are filled with heterogeneous and disjointed transactions, each of which is optimized for different types of chains. Gaming applications, for instance, generate many low-value transactions. Decentralized exchanges, in relative terms, generate few high-value transactions. A single monolithic blockchain cannot tailor speed and security requirements — and in fact directly forces these differing applications to compete with one another for block space.
This tension has spurred a wave of innovation around chains that can run in parallel and thus allow different applications to migrate to different chains. But how connected or disconnected should these various blockchains be? Sharded chains are at one end of the spectrum: a single blockchain with a single codebase and a single set of validators that is just processed in parallel. At the other end of the spectrum are several distinct blockchains with their own codebases and validators that just pass messages between one another.
What is Polkadot?
Polkadot — and in particular its parachain model — stand in the middle of this tradeoff: an ecosystem of separate blockchains that are locally distinct and globally secure. Polkadot consists of (up to) one hundred individual blockchains, called parachains, that are customized for their particular applications. Parachains individually maintain their own state using their own block creators, rules, and consensus algorithms. But parachains are not fully free: they are all connected to the Polkadot network's "relay chain," secured by the network's primary validators. The relay chain is responsible for maintaining the overall state of the chain, and this ensures that each individual parachain shares the network's security guarantee.
The Polkadot consensus algorithm takes place on the relay chain, and there are nodes that fall under three different roles that matter in the context of Polkadot consensus. Nominators on the Polkadot network select trustworthy validators and stake some of their DOT behind them. Validators running on the relay chain perform normal validation functions with regard to transactions coming in from all of the parachains. A collator aggregates transactions on a particular parachain and proposes a candidate block of transactions, along with a state transition proof, to validators. A collator maintains one node on the relay chain and one node on the specific parachain it is working on. Parachains need a reasonable number of honest collators — though not necessarily a majority — in order to avoid censorship issues.
What is Acala?
Acala is the first official parachain of Polkadot and operates a decentralized finance network that powers its stablecoin, aUSD. In particular, Acala's specialized DeFi platform serves as a liquidity and financial hub for the Polkadot and Kusama ecosystems. Acala provides the native, decentralized stablecoin of Polkadot and Kusama, as well as a comprehensive set of financial applications integral to the success of any DeFi ecosystem.
In addition to its core product in aUSD, Acala also offers three unique functions and features to the Polkadot ecosystem:
- Acalaswap: Acala includes an AMM-powered decentralized exchange and an intra-network bridging feature, which are important tools for any comprehensive DeFi protocol. Built into Acala's blockchain, the DEX also serves as a means for operating liquidations for the aUSD stablecoin protocol.
- Liquid Staking: Acala powers liquid staking for DOT and Karura for KSM, which are the native tokens for the Polkadot and Kusama networks, respectively. This creates yield farming opportunities for ecosystem stakeholders, as well as a collateral asset for minting aUSD.
- EVM+: Acala has built a custom EVM environment that combines the Ethereum Virtual Machine with Substrate, the blockchain development framework native to Polkadot and Kusama. This allows EVM DApps to interact with features built at the blockchain layer and allows seamless movement of tokens from Substrate to ERC20, for example moving DOT from its native Substrate form into the EVM and Metamask as an ERC20.
What is Karura?
Founded by the Acala Foundation, Karura is an EVM-compatible network optimized for DeFi, and built on Kusama (Polkadot's "canary" network meant for speed and experimentation). Karura, in tandem with Acala, is built in support of the aUSD stablecoin and the broader DeFi ecosystem. aUSD is multi-chain by nature, and can be minted on both Acala and Karura. More broadly, Karura provides a DeFi platform for the Kusama ecosystem, including a trustless KSM staking derivative (LKSM), an AMM DEX supporting stablecoin liquidations, and the EVM+ environment giving Etheruem-compatible DApps a place to deploy while also being able to leverage the lower-level Substrate functionality.
What is Wormhole?
Wormhole is a generalized cross-chain messaging platform that supports Portal, which bridges assets across chains. It does this by holding native assets from one chain and minting "wrapped" versions of that asset on another chain. For example, one could use Portal to transfer native ETH from Ethereum to an equivalent amount of wrapped ETH (wETH) on Solana, Fantom, and many other chains. Portal-wrapped assets have often achieved canonical status on non-native chains. Assets like wETH on Solana and wSOL on Ethereum are extremely liquidly traded and have similar fungability and exchangeability to their native versions.
How does this come together?
Thus far, we have introduced Polkadot, Acala, Karura, and Wormhole as largely independent protocols. But in fact, the combination of these four is potent. Acala is poised to achieve the future of DeFi on Polkadot directly, while Wormhole has the potential to connect the Polkadot universe to the rest of the crypto multiverse.
We believe that there are three primary advantages to integrating Wormhole to Acala and Polkadot — as well as Kusama and protocols on Kusama, like Karura.
First, the bridging of other chains' native assets to Acala will enable the stablecoin protocol in particular to accept a much broader collateral base. This facilitates a greater diversification of collateral risk and an expansion of the notional value of all the aUSD collateral. To introduce even more synergy, the ability for aUSD to be bridged over to other chains and used as collateral or in trading contexts will further drive adoption of aUSD, creating a sort of flywheel effect.
The second effect relates to Acala's DEX. In particular, bridging Polkadot over to the rest of the multiverse will enable more assets to be traded on Acala's DEX. This will serve as a strong foundation for other applications to be developed in the ecosystem. For instance, Wormhole integration reduces friction for Ethereum users to participate in NFT marketplaces, liquid staking platforms, or other protocols in Polkadot via Acala's DEX.
Finally, Wormhole can take these two advantages and multiply them! By reducing friction, tackling user pain points, and significantly broadening the scope of activity that can take place on Polkadot, Wormhole can introduce new users from other chains and the sidelines to Polkadot. We're excited about the prospect of Wormhole turbocharging user counts and protocol growth across Polkadot, using Acala as the front door to the ecosystem, and unleashing DOT liquidity onto the rest of the cryptoverse.
To run a parachain, a new entrant must lock up a certain number of DOT tokens (determined via an auction) for some period of time. ↩︎
The Polkadot consensus algorithm is broken into two parts: the chain growth system and the finality gadget. The former is instrumental in adding transactions to the ledger and is composed of the model whereby collators propose blocks to validators that choose whether to accept them. This procedure is called Blind Assignment for Blockchain Extension (BABE) and is described in more detail here. The finality gadget is a mechanism to determine when blocks are finalized and can no longer be removed from the chain's history, and Polkadot uses a finality gadget called the GHOST-based Recursive ANcestor Deriving Prefix Agreement (GRANDPA). GRANDPA incorporates a voting process that takes place off-chain, and finality is not registered on chain, but because validators are staked on-chain, conflict proofs of finality will lead to slashing of validators that double vote or otherwise misbehave. This is true as long as at most 2/3 of the validators are malicious. The full details of GRANDPA can be found in its whitepaper, but the fundamental premise is that instead of always finalizing one block at a time — which can be incredibly slow in times of network degradation or congestion — GRANDPA has the potential to finalize multiple blocks at once. Validators can vote on the highest block they think is valid, and GRANDPA applies that vote toward all ancestors of that block. Subsequently, the algorithm determines the block with the highest block number that has a 2/3 supermajority vote in favor of it and finalizes this block along with all of its ancestors. In this way, the network could keep running in times of congestion and have finalization occur afterward much more quickly than serial block-by-block finalization. GRANDPA satisfies both asynchronous safety (eventually, any two honest validator nodes will not disagree on two conflicting blocks) and accountable safety (in cases where the number of dishonest validators is less than 1/3 of the whole set, those that misbehave can be identified and slashed). ↩︎
Similar to Polkadot, Kusama is comprised of network heterogenous blockchains, known as parachains, constructed using substrate. The network aims to be an "experimental development environment" for teams to experiment with new economic models and test run prior to Polkadot deployment. ↩︎
The mechanisms behind stablecoins can be very complex, in particular crypto-collateralized stablecoins like aUSD. Here is a short primer. aUSD is minted when Polkadot's native token DOT or other select tokens are deposited into an Acala vault. This serves as collateral, and aUSD is minted against this as a loan. As such, many refer to these systems as collateralized debt positions (CDPs). Risk-seeking speculators might do this to gain leverage, as they can sell the newly-minted aUSD to finance additional purchases of other tokens (such as DOT). Moreover, those speculators can repeat the same process over and over, multiplying their leverage several-fold! However, it is important that the aUSD minted is less valuable than the collateral deposited. In an event where the value of a vault's collateral drops below the minimum collateralization threshold, a liquidation mechanism is trigged – whereby, the collateral is sold in exchange for aUSD to the highest bidder in a public collateral auction. Liquidations maintains the health and solvency of the aUSD ecosystem. ↩︎
Ani contributes to R&D efforts at Jump Crypto. Among other things, he’s worked on smart contract development, incentive and protocol design, and future potential use cases of crypto in the real world..View all posts (5)
Maher contributes to Jump Crypto’s R&D efforts and previously worked on monetary policy research at the Federal Reserve Board. He is also a Fulbright and Schwarzman Scholar..View all posts (4)
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