Acala resumes operations after accidentally printing over $3B in Stablecoins 

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Byline: Craig Brogan

Who is Acala?

The decentralised finance (DeFi) network and liquidity centre for Polkadot comprise the smart contract platform Acala, which is compatible with Ethereum (LDOT). The infrastructure of Acala consists of a platform for liquidity staking and a stablecoin network.

The stablecoin network of Acala serves as the foundation for Polkadot’s decentralised finance (DeFi) system. Users can send value across the blockchains that Polkadot connects, known as parachains, by using the cross-chain protocol, which uses the relay chain, a shared security layer.

The decentralised exchange (DEX) in the Acala ecosystem enables users to stake DOT tokens for LDOT and is supported by an automated market model. LDOT can therefore be used to invest in, lend, or collateralise the Acala Dollar (aUSD), a decentralised algorithmic stablecoin that is native to the Polkadot platform.

The Polkadot analogue of Karura is Acala. New features can be tested on Kusama, Polkadot’s so-called “canary network,” before being introduced to the Polkadot ecosystem. During the parachain slot auction process that took place in the summer of 2021, Karura was the first project to secure a parachain on Kusama.

Acala’s native utility token, ACA, facilitates the execution of smart contracts and allows holders to cast votes for network expansion.

What Happened with Stablecoins at Acala?

Some blockchain platforms, like Acala, must negotiate and plan with their designers themselves, while others must deal with hackers. A few weeks ago, a “human error” almost wholly destroyed the task made by Acala. However, the problem has been rectified, owing to the community’s and the designers’ collaborative efforts.

Acala network announced the resumption of its activities in late September 2022 after recovering $2.970 million in USD of the $3.022 million that its team unintentionally printed a month prior.

“The community referendum for Stage 1 of resuming Acala operations has passed and been executed. LPs who choose to unstake LP tokens or withdraw liquidity on Acala now have the option to do so.” — Acala (@AcalaNetwork) tweeted on September 26, 2022

Acala claims that the community decided to resume network operations after nearly all of the produced tokens were burned — approximately $2.7 billion USD.

An Expensive Error

The DeFi platform Acala released a report on August 15 2022, detailing how they accidentally printed over 3 billion of its aUSD stablecoin, which led to its instant collapse. At that point, the price of a USD coin fell by more than 99%, to less than $0.01 per coin.

“2nd batch trace results + summary below. A total of 3.022B aUSD error mints were claimed by 16 addresses. Acala referendum #21 burned ~1.292B. 1.682B aUSD error mints in iBTC/aUSD LP tokens, obtained after the incident happened, remain on 16 Acala addresses.” — Acala (@AcalaNetwork) tweeted on August 17, 2022

The network chose to halt oracles, swap operations, and inter-chain communications on Polkadot as a result of the failure. The team added that after the problem was fixed and parity with the US currency was restored, operations would be restarted “safely and gradually.”

The network has since entered maintenance mode and frozen user funds to retrieve unsecured tokens. Even while the value of the aUSD remains at $0.77, considerably below the appropriate $1 reference, the community later decided to identify and burn tokens that had been incorrectly created, which helped restore operations.

What Does aUSD Look Like Now?

The network now has a total circulating supply of 10,961,589 USD. The Acala Foundation collateralised a total of 5,837,712 aUSD of that.

Acala Swap’s liquidity pools have also been recapitalised and rebalanced owing to the protocol, which received help from the Acala foundation, contributing 2,489,614 ACA, 80,853 DOT, 0.164 iBTC, 995,020 INTR, and 530,700 LDOT.

While some assets are locked in a number of centralised exchanges (CEX) that backed the aUSD recovery effort, some assets are still frozen by community vote. Even better, Acala is rewarding users who refund the monies associated with the incident with prizes of up to 5%.

Centralisation and Decentralisation

The Acala team responded promptly, but to maintain control, they had to freeze user funds. This runs counter to the protocol’s decentralised, censorship-resistant design.

The CEO at Coin Insider was quoted saying that, despite some social media users criticising Acala’s choice, the collapse of another stablecoin, like aUSD, may have caused havoc on the cryptocurrency market.

Bitcoin Revolution recently reported that many investors are questioning whether Acala is worth it owing to the recent events with minting errors and hacking. Interlay’s co-founder and CEO, Alexei Zamyatin, stated in an interview with CoinDesk that the operations remain functional. Acala has restarted network operations, but it must now work to win back users’ trust. The smart contract coding is not always straightforward as that, and an investigation following the ‘error mints’ is still underway.