Acala DeFi Hack: Is aUSD Still Valuable Following the Exploit?

By CoinUnited.io Research Team

19 Dec 2022

3 min read

Acala is a platform for Polkadot DeFi that includes a liquidity hub built to support Polkadot DeFi and modular financial services. The Polkadot ecosystem benefits from the addition of borrowing, lending, and stablecoin features. An all-inclusive Web 3.0 based decentralized finance (DeFi) platform is what Acala is. Due to its pioneering role in integrating Polkadot parachain auctions into a DeFi protocol, the Acala network is sometimes referred to be the "hub" of Polkadot DeFi. Since the Acala network uses a virtual machine that is compatible with the Ethereum virtual machine, developers may quickly and simply move their work from Ethereum to Acala. The Acala network has two types of tokens: the ACA token used for governance and the aUSD token used as a decentralized stablecoin. On the Acala network, transaction fees can be paid with a range of tokens in addition to ACA. Where Acala Came From Acala is a deep partnership between Polkadot DeFi's two development groups, Polkawallet and Laminar, and was created by the Acala Foundation. To this end, the Acala network was built as a community-owned and -operated financial layer based on Polkadot's Substrate protocol. Even though Acala is a financial application, its primary focus is on enhancing development capabilities and interoperability projects. After receiving a development grant from the Web3 Foundation in 2019, work began on the Acala network. Since then, crypto investment firms Pantera Capital and Polychain Capital have provided more funds for the Acala network. More than $8 million was raised in private fundings by August 2020, and by the end of 2021, the Acala network had gone live on Polkadot.

An all-around crypto project that contributes to Polkadot DeFi, the Acala network includes a decentralized exchange (DEX), a liquidity staking protocol, and a stablecoin. Acala crypto holders may benefit greatly from the EVM's wide adoption because the Acala network is entirely compatible with it. The platform provides users with access to decentralized assets (DApps), crypto, and derivatives based on the DOT protocol. As of right now, AcalaSwap, Honzon, and Homa make up the Acala network.

You may trade multiple crypto assets in liquidity pools with the help of AcalaSwap, an automated market maker (AMM) based on a standard swap interface. The fees earned by liquidity providers for contributing Acala crypto to the pools are not limited to any one group. Although the Acala DEX follows a conventional design, there is no need for it to change decentralized trade. But now, thanks to the Acala network DEX, native trading of cryptocurrencies is feasible across all Polkadot-connected blockchains. Parachains are a common way for high-profile projects to communicate their intention to join Polkadot. As a result, the consensus is that Acala DEX's cross-chain liquidity will hold stable. As a high-throughput blockchain, Polkadot supports extremely little gas costs. Acala crypto and many other cryptocurrencies are accepted for these fees.

Among the Acala crypto network, the Honzon stablecoin protocol is the most important. The aUSD stablecoin was created by Acala, a network that is known for facilitating interoperability across different blockchains. It is an algorithmic stablecoin that is 1:1 fixed with the US dollar. However, it has full crypto collateral backing. The Honzon protocol was developed for minting stablecoins whenever these coins are placed by crypto users as collateral, and this is what makes the aUSD stablecoin platform possible. The aUSD stablecoin platform now acknowledges ETH, BTC, and DOT as collateral thanks to the introduction of this protocol. In order to open a collateral debt position, aUSD must first be coined after collateral is deposited in the form of Acala crypto (or a range of other currencies). By accepting this role, you will incur a direct financial money to the protocol, which will need to be returned with interest at a later date. In order to lower the total supply of aUSD stablecoin, the protocol described above will cause the equivalent amount of aUSD stablecoin to be burned whenever a collateral loan position is redeemed. If you're thinking about putting money into the aUSD stablecoin, you should know that Honzon offers even more reliability and security.

Your tokens will be bound to a smart contract for a certain period of time during the bonding procedure. Bonding your Acala crypto tokens will result in interest payments. It was challenging to locate platforms that utilized staked assets prior to the advent of decentralized finance. These assets, even when they did, were inaccessible as liquidity. After the development of staked derivative assets, crypto platforms may now use staked liquidity. To go even farther, the Acala network offers LDOT to DOT holders using the Homa protocol. LDOT, or Liquid DOT, is a token that stands in for your staked liquidity. If you want to utilize your LDOT as collateral for aUSD stablecoin through Honzon, you'll need to get it withdrawn from the Homa protocol first. Without having to deposit DOT tokens on the market directly, Acala enables developers, projects, and investors with DOT crowd loans to maximize their whole crypto capital.

However, Acala does offer several features that set it apart from other DeFi hubs, even if it doesn't completely reinvent DeFi. First, the Acala crypto network's cross-chain DeFi infrastructure prioritizes cooperation, which is good for business generally. Loans may be taken out by investors and entirely secured by crypto from other blockchains. The AMM also allows you to swap cryptocurrencies without first having to wrap them, streamlining the procedure significantly. If you've put money into the Polkadot platform before, you should know that the Acala crypto network has effectively enabled a Polkadot DeFi platform. The Acala crypto token may be used to earn passive income if held.

Acala DeFi was hacked on August 14, 2022, leading to the creation of a sizable amount of the USD-pegged stablecoin. This occurred despite the fact that both Acala and the Polkadot DeFi platform boast robust security measures. As a result, the value of aUSD dropped by close to 99%, making the Acala DeFi hack one of the most devastating crypto assaults in recent memory. The Acala network suffered such a severe attack that the value of one aUSD dropped to almost nothing. Back then, it was virtually tied at par with the US dollar. Quick investigation by the Acala team revealed that the Acala DeFi hack was caused by an oversight in the setting of the newly launched aUSD/iBTC liquidity pool. Following the Acala DeFi hack, one hacker was able to generate almost $1.28 billion in aUSD, which was then traded for a significantly lower quantity of the ACA token. Maintenance mode on the parachain halted all swaps shortly after the Acala DeFi hack began. With Oracle price feeds and cross-chain transactions halted, the hacker was essentially left with $1.28 billion in worthless aUSD tokens. A small number of other individuals duplicated the hack and made between $25,000 and $80,000,000 aUSD. The Acala DeFi hack caused many crypto traders to question the long-term success of the Acala network.

Around 3 billion aUSD have been recovered by the team since the Acala network breach in mid-August, bringing the value closer to the 1:1 USD peg. After the Acala DeFi hack, they were able to get almost 1.68 billion aUSD on the second trace. In the next weeks, more trace reports are anticipated, which might mitigate the impact of the Acala DeFi hack. Although the Acala DeFi hack proved devastating, the Acala team was able to swiftly halt all services, significantly reducing the hack. During the Acala DeFi hack, a total of 16 different individuals received freshly minted aUSD after contributing to aUSD liquidity pools. Acala will release a postmortem analysis in addition to the trace reports. Following the Acala DeFi hack, the value of an aUSD was about $0.01, but recent efforts to recover have pushed that number up to over $0.85.

As the token for the Acala platform, ACA will be used for things like bonuses, investments in the Acala team and the ecosystem as a whole, and future growth. More than $800 million in ACA funding will be doled out by the year 2026. Over time, more and more money will be shared among crowd loan backers, Acala's strategic partners, and the Acala team. Acala plans to release a definitive trace report that details the latest DeFi hack, and this report will be verifiable by the community using on-chain information, very soon.

Although the Acala team has made measures to address the problem, the scope and severity of the hack need careful consideration before deciding whether or not to include Acala in your portfolio. Even though the hack has halted the Acala team's plans, they are still ambitious and might eventually make crypto investors feel more secure with the platform. For instance, Acala plans to invest investing in ecosystem development over the next years in order to eventually facilitate balance transfers. Investing in Acala before hearing what the team has to say about what they plan to do to fix the problems caused by the Acala DeFi hack is risky. If they resolve these issues, investors would be able to invest money into the crypto portfolio with less anxiety.

Spot trading on CoinUnited.io allows you to invest and sell ACA if you're interested in making an investment in the cryptocurrency. The page's search bar will be visible in the top right corner from there. After entering "ACA," a Spot ACA/USDT trading option will appear. A space for selecting the desired number of ACA to buy will appear on the right side of the page.

Even though the Acala DeFi hack was devastating, the Acala team has been working tirelessly to restore the stolen aUSD and mitigate the hack it caused. However, there are still crypto investors who don't trust Acala because they believe the platform isn't as decentralized as it claims to be. Whether you opt to invest in the aUSD stablecoin or move your crypto assets elsewhere, you can't deny the harm done to the platform's image and the value of aUSD by the Acala DeFi hack.

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