Building DeFi protocols on Polkadot: An Interview with Bette Chen, Co-Founder at Acala Network
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@Ishan PandeyIshan Pandey

Student of legislation working on code and all the things legislation.
Founder: Blockchain Research

I sat down with Bette Chen, co-founder of Acala Network to speak about DeFi and constructing decentralized protocols on the Polkadot community.

Ishan Pandey: Hi Bette, welcome to our sequence “Behind the Startup.” Please inform us about your self and the story behind Acala Network?

Bette Chen: I’ve a background in Engineering specialised in Software. I used to be a developer earlier in my profession, then turned – to arguably the darkish facet – and have become a Product Manager. Like many others, a number of years in the past, I used to be drawn to the Bitcoin rabbit gap for its know-how and beliefs. Quickly, I found Ethereum and spent most of my spare time studying and constructing. Close to three years in the past, I began working within the blockchain full-time as a product supervisor, the place I met my co-founders Ruitao and Bryan.

Acala was co-founded by members of two Polkadot ecosystem groups – Laminar and Polkawallet. Laminar is constructing an artificial asset and margin buying and selling platform desiring to bridge on-and-off chain liquidity and merchants. Polkawallet is likely one of the first cell wallets within the Polkadot ecosystem. The founders (Ruitao, Bette, Bryan, Fuyao) met in Hangzhou China in 2019 at the first Substrate Hackathon, the place Bryan was one of many judges alongside Dr. Gavin Wood.

There was this ‘love at first sight’ of the 2 groups – our values are extremely aligned, each are hardcore blockchainers believing in Web 3.0 and decentralization; each are devoted builders who really perceive Substrate/Polkadot’s imaginative and prescient via its code.

The groups bought to know one another by coding collectively for a month or so, earlier than partaking in a proper relationship and co-founding Acala in October 2019.

Ishan Pandey: What is parachain financial modeling, and what’s the governance structure?

Bette Chen: A parachain is a distributed database distinctive to the globally coherent framework and validate by the Polkadot Relay Chain validators. A parachain will most normally take a blockchain’s form, though there isn’t a specific need to be actual blockchains for it. The concept of parallelized chains working parallel to the Relay Chain derives its title from it. They can parallelize transaction processing attributable to their parallel design and obtain the Polkadot system’s scalability.

A community maintainer, referred to as a collator, oversees Parachains. The collator node’s process is to protect the entire parachute node, retain all required parachute information, and generate new block candidates to switch to the relay chain’s validators for verification and inclusion within the shared Polkadot state. An implementation element of the parachain is the incentivization of a collator node. They are usually not allowed to be staked on the Relay Chain or personal DOT tokens till the parachain implementation stipulates.

Let’s Talk About Governance

Polkadot makes use of a specialised governance system that allows it to gracefully develop at absolutely the behest of its mobilized stakeholders throughout time. The specified goal is to reinforce that the plurality of the stake will nonetheless command the infrastructure.

To accomplish this, a number of new buildings are introduced collectively, together with an amorphous state-transition characteristic saved on-chain and laid out in a platform-neutral intermediate language (i.e. WebAssembly) and a number of on-chain voting mechanisms, like adaptive super-majority necessities and batch acceptance voting referendums. Any protocol modifications have to be determined upon via stake-weighted referendums.

There might be a number of Councils managing varied features of the community: the General Council and ACA Referendum are the overarching chambers that govern the Acala Network. Governance on Acala is each choice making and choice execution equipment. Network improve, sensible contract improve, protocol parameter change, a state change can all be managed by way of governance with out forking, e.g. the DAO hack loss can simply be reverted via Governance vote.

Then there are specialist Councils, for instance, the Honzon Financial Council will handle stablecoin associated parameter adjustments, the Technical Council can submit emergency bug repair or veto unanimously harmful proposals. 

Acala additionally takes a phased method to make use of varied governance mechanisms that may permit it to progressively decentralize and finally be commanded by the bulk community stakeholders. The General Council will initially be appointed, then elected by token holders, and ultimately, Democracy kicks in with referendum enabled.

Polkadot and Smart Contracts & Storage Rent

The Polkadot Relay Chain wouldn’t explicitly implement sensible contracts. Smart contracts might be enabled by parachains on Polkadot, in any case. Projects like Edgeware have already been revealed and additional might embrace this performance because of the Substrate built-in contract pallet.

Consequently, the EVM pallet allows the Ethereum Virtual Machine to be deployed by a parachain, thus enabling virtually particular Ethereum contract ports.

Storage lease restricts the impression a transaction might have on the processing of a blockchain.

A contract applied to the chain creates a code hash from which it’s doable to construct new chain examples, however there isn’t a lease paid to the code hash itself. The lease solely extends to circumstances on this association who’ve their contract accounts. A one-time byte-fee is at the moment added to the transaction to deploy a code hash, however no ongoing expense.

The steadiness of an occasion of a contract is paid proportionally to the amount of storage utilized for its account. If the steadiness of a contract falls past a given quantity, the steadiness of the contract is transformed right into a “tombstone” (a hash of the present state of the contract) and its storage is cleaned up. By supplying the info that was cleared away earlier than it turned a tombstone, in addition to any additional funds mandatory to carry the deal intact, a tombstone contract could also be resurrected. For missed lease instances, this cost would happen retroactively.

Ishan Pandey: Can you clarify what a Parachain Lease Offering is, its benefits, and real-world implications?

Bette Chen: The free and accessible design of blockchain networks opens up assault vectors in typical bidding codecs which are non-existent. In particular, when deployed over the web or on a blockchain, conventional clear auctions could also be vulnerable to public sale sniping.

In anticipation of charging lesser than they worth the commodity, public sale sniping happens each time the top of an public sale is acknowledged and bidders are reluctant to supply their correct value early.

It should fill one of many usable parachain slots for a parachain to be utilized to Polkadot. A slot on Polkadot is a finite useful resource and solely a small quantity can be accessible. There may solely be a number of slots which are unlocked each few months as ramp up. The goal is to have 100 parachain slots accessible on Polkadot ultimately (these might be break up between parachains and the parathread pool). If a parachain must have block inclusion assured on every Relay Chain block, a parachain slot have to be obtained.

Polkadot’s parachain slots might be bought in keeping with an unpermitted candle public sale which has been modified marginally to be protected on a blockchain.

A candle public sale is a kind of open public sale the place bidders ship affords which are progressively greater and the winner is deemed to be the highest bidder at the shut of the sale. Initially, within the sixteenth century, candle auctions had been used to promote ships and get their title from the “inch of a candle” that described the public sale’s opening time. The public sale would abruptly cease till the flame was extinguished and the torch went out, and the standing provide would win at that second.

They want a random quantity to find out the second of termination when candle auctions are used on-line. The slot auctions of Parachain would range barely from an ordinary candle public sale in that the random quantity will not be used to judge the size of its opening course of. Instead, it has a recognized open stage that may be retroactively dominated to have stopped at any time up to now (at the same old shut). Thus, affords might look like accredited all through the open stage. However, future bids usually tend to fail when the retroactively determined close to second may very well be thought of to have adopted the time a suggestion was despatched.

As talked about to entry Polkadot’s community safety, tasks might want to acquire a parachain slot. The variety of slots accessible is proscribed and subsequently a market mechanism is required to compete for a slot, which is by way of a candle public sale, by locking DOTs all through the parachain lease.

Parachain auctions might be approached in some ways, Acala plans to bid for the primary parachain slot on Polkadot (additionally on Kusama, however for simplicity, will solely speak about Polkadot hereafter) and be the pioneer on this new crowdsourced community safety paradigm – the Parachain Lease Offering (PLO).

Ishan Pandey: How is Polkadot completely different from Ethereum? What are its benefits?

Bette Chen: Polkadot is a layer 0 community – it’s designed each to simply combine with different blockchains like Bitcoin and Ethereum (by way of bridges like Interlay and RenVM) and to host a number of heterogeneous (unbiased) however interconnected chains (referred to as parachains, like Acala). Polkadot empowers an ecosystem of domain-specific chains optimized for his or her use circumstances. Substrate-based chains like Acala take pleasure in full-tech-stack, e.g., EVM and sensible contract functionality, in addition to steady innovation and forkless upgrades. Acala occupies the area of decentralized finance (DeFi).

Apart from being cheaper, sooner, and interoperable, specialization additionally means you are able to do issues much better and create categorically completely different improvements than generalized options.

Ishan Pandey: What is Decentralized Sovereign Wealth Fund? How would it not work?

Bette Chen: Acala is a DAO3.0 that, by its on-chain decentralized Sovereign Wealth Fund (dSWF) and governance, obtains monetary and commerce (rational choice – making) sovereignty. The assets within the dSWF are Asset Under Control, however you can’t fork the AUM whilst you nonetheless can fork the code, the liquidity, and even the surroundings.

A decentralized sovereign wealth fund will provide a mechanism for its individuals to ship worth, however with the openness and inflexible obedience that blockchain allows to structured logic. It might additionally go sooner. A standard wealth fund solely consists of elevating in valuation, however it could additionally acquire entry to options in different blockchain networks relying on its investments in a system the place a number of tokens have usefulness.

What About The Operation of Funds?

An on-chain account displays the portfolio itself. This account doesn’t have a non-public key related with it. Instead, the final council and community administration have the appropriate to deal with the funds within the account.

Funds journey 3 ways into the funds. The first two come from the Honzon protocol of Acala, which features near Builder. Honzon affords a discussion board for multi-collateral loans that embraces a number of collateral varieties in return for a USD deposit, the stablecoin of Acala that’s pegged to the US greenback. Borrowers should pay a stability cost on their mortgage, a lot as at Maker.

Unlike in Producer, Acala invests the costs into its sovereign wealth fund as an alternative of burning the charge.

Second, if a mortgage’s fairness falls beneath a sure threshold, the Acala community takes a penalty cost. This premium removes below collateralized debt that as an alternative occurs the place any fairness needs to be liquidated by the community. However, as an alternative of getting fried, a lot of the stabilization tax falls via the wealth pool.

Third, a liquid staking process referred to as Homa can be run by Acala community. On its personal, Homa deserves a complete publish, nevertheless it must be nutshelled right here just like the lending website. As different Evidence of Stake networks, Polkadot locks tokens to guard validators and save the community. Such tokens permit any return if all goes proper, but when the picked validators misbehave, the tokens are chargeable for slashing.

This scheme could be very a lot related with community stability, though very a lot in distinction with the thesis of Acala that funds must be worthy of fulfilling new functions. By constructing a staking pool the place customers can deposit DOT in trade for any freely transferable L-DOTT, Homa aligns this stress (though not essentially at a one-to-one ratio). For choices resembling a validator allocation coverage, the pool is managed by the Homa Council (once more, entire different article), and L-DOT holders will return their L-DOT to the community and get well the underlying DOT plus its share of the pool’s staking earnings and minus any cost that goes into sovereign wealth fund.

Acala might be seen as a sovereign blockchain, as a sovereign nation or entity. The dSWF helps it to attain financial sovereignty, by re-investing community surplus in international belongings resembling DOT and KSM, to achieve entry to community safety, long run wealth era for ACA holders (e.g. DOTs might be staked and generate yield), strategically holding stakes of precious sovereign networks, identical to Norway’s Sovereign Wealth Fund.

Ishan Pandey: Recently, $100 million of investor’s funds had been liquidated from the DeFi protocol Compound following the oracle exploit. What are your views on it?

Bette Chen: The incident’s root trigger was Compound (to my nice shock) utilizing solely Coinbase Oracle as a single value feed for DAI pairs. Hence when the Coinbase trade had a big value fluctuation on DAI pairs, many loans had been being liquidated on Compound. A couple of classes realized from our facet as builders in DeFi

Oracles stay the only most important part in a DeFi protocol that requires exterior value feeds. And virtually all oracles have been exploited to some degree at one level or one other, and nobody has a fairly ‘perfect’ resolution but.

Folks within the business have a lot respect to compound their professionalism, rigidness in design, and many others. This incident reminds us DeFi protocols are difficult, any assumptions, any stones left unturned, can simply develop into an oversight that results in exploits and vital monetary losses.

Ishan Pandey: According to you, what rules will we see round stablecoins sooner or later?

Bette Chen: That relies upon on the character of the stablecoin mechanism. But in fact, in any case, regulation on stablecoin will not be a query of if, however a query of when and the way.

For a decentralized stablecoin, the rules are prone to be utilized for particular jurisdictions the place the know-how is being utilized and distributed via centralized companions, resembling bank card suppliers, retailers, CeFi suppliers. These companions are most certainly required to be regulated, quite than the core protocol. This might be the present pattern of regulation on the perimeters. But this may change as CeFi merges with DeFi.

Another facet to think about is ‘decentralized’ stablecoin may merge with centralized stablecoin. In Maker’s case, a good portion of DAI is now collateralized utilizing centralized stablecoin USDC. Many of the normal banking system guidelines are utilized to USDC. As a ‘customer’ of USDC, the implication is that a few of these guidelines may be utilized to Maker.

Ultimately, we (builders in DeFi) additionally bear the duty of bringing others (e.g. the regulators) alongside our journey, and we will’t do all of it alone. Many present rules don’t make any sense if utilized immediately to those DeFi/CeFi fusion merchandise. Education could be the important thing to increasing consciousness, fostering extra in-depth understanding, understanding what advantages this business brings to everybody, and serving to regulators higher adapt/create their insurance policies to/for this categorically completely different business. 

The goal of this text is to take away informational asymmetry present at the moment in our digital markets by performing due diligence by asking the appropriate questions and equipping readers with higher opinions to make knowledgeable choices. The materials doesn’t represent any funding, monetary, or authorized recommendation. Please do your analysis earlier than investing in any digital belongings or tokens, and many others. The author doesn’t have any vested curiosity within the firm. Interviewer – Ishan Pandey.

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