What is Acala? What is Karura? | An Introduction to the DeFi Hubs of Polkadot & Kusama

Hey everybody, this is Dan Reecer. I'm VP
of Growth at Acala and Karura  and today I'm going to be giving you an
overview of DeFi,  Polkadot and Kusama, and then most
importantly an overview of Acala   and
Karura.  First I'm going to start with some
basics around what DeFi is,  why this movement has kind of started
and what problems it solves.  Then we'll move into some necessary
context of Polkadot and Kusama,  before we move into Acala and Karura.  Crypto and DeFi of course started around
2008-2009,  and really what decentralized
finance is trying to solve  is this problem of access to the
financial system. So  millions of people around the world,
depending on what country they live in,  have much different access to the
financial system to earn  better outcomes on their finances
than others in kind of more people  who are just a bit luckier.
There's also some issues around  governments: different governments around
the world have  more or less control over the financial
system of their countries  and people who live in places where
the government does have more control  over the economy
and has created problems like inflation,  DeFi creates a way for people to have
access to a new financial system  for better opportunities on their money.
So this new system is more open, it  requires
less restrictions so you can access it  sometimes without
an identification, without a bank account,  without a credit score.
So a much more open financial system  that we're all kind of building together
now.  The main categories of DeFi are really a
reflection of a lot of the  primary categories of the
traditional finance world that have made  their way
into DeFi.

So you've got money markets,  which is kind of like peer-to-peer
borrowing and lending,  derivatives payments, decentralized
exchanges.  Another category here is stable
coins which is very  important for the DeFi ecosystem, because
of course you've got  volatile assets like Bitcoin and
Ethereum that can vary  and then you've got stable coins, which
allow people to hold something that  actually kind of retains the
Stable PEG at a certain value.  This was pretty shocking to me when I
made this slide.  Going back just one year ago, in
April 2020,  the amount of total value locked in DeFi
was around 800 million  and fast forward to today this has done
about an 82 or 83x  on just the previous year in total value
locked in DeFi  protocols. DeFi
in summer 2020, at least Northern  hemisphere summer,
was what kind of set off this trend.  There was a lot of
new teams, new liquidity flowing into  DeFi that really set off this trend that
we we still see continuing today.  Money markets compound is one of the
the best and kind of  pioneering teams in the Ethereum DeFi
space.

This is an example of  of one of the the key use cases of DeFi
now, where  you see here on the left you've got a
supply market and then on the right you  have borrowers.  On the left, if i have Dai as my stable
coin, I could go in and provide  liquidity to that market and earn 6.8
percent,  at least on this day. Same on the right.
If i needed to go out and say I thought  Bitcoin was going to go up or I had
a need for a stable coin, I could go and  borrow
Dai with something as collateral,  as long as I'm willing to pay that
interest rate on that stable coin.  So this is where it becomes kind of this
peer-to-peer lending  pool, hosted by a compound.  Stable coins is another important aspect
of DeFi where you've got  four primary types of stable coins.
You've got  prominent names like USDC, which is
kind of a coinbase  token which is fiat collateralized so
you've got actual US Dollars in a bank  backing every USDC token that is issued
into the market.  And then the third one here you can see
crypto collateralized.

So these are  kind of algorithmic crypto back
stable coins.  MakerDAO DAI is the most prominent
example of this,  and Acala and Karura are both building
our own stablecoin. So we've got the  Acala dollar aUSD, as you can see here on
the slide,  and then kUSD for our sister
network  Karura, which is the Korea Dollar.
One example here value is a team  building out of Colombia.
They're actually building with Substrate  technology, same as
Acala's building with, and they have  proven a really cool example of a stable
coin being used in the real world.

So,  they've got a lot of people in Colombia
who need to send money home to their  family and friends in Venezuela
and they've sent over 8 million  dollars home using the value application,
using stable coins.  Uniswap is another primary example of a  major DeFi protocol
on Ethereum,  which is a what's called an automated
market maker  decentralized exchange. So this is a
simple swap from one token to another  and the way that's made possible is
because on the back end there's people  providing liquidity to every pair on
Uniswap.  In return for providing liquidity to
that pair,  they actually earn LP tokens and earn
rewards on these liquidity provider  tokens.

So now that we have some
background in  in DeFi and in that whole ecosystem,
prominent examples of Ethereum DeFi, let's  move on to
Polkadot and why Polkadot was created.  So the person who invented the Ethereum
virtual machine  and the person who created the Solidity
programming language itself,  he, being Gavin Wood, realized
very early on that Ethereum was not  going to scale, it wasn't going to work
and  fast forward to now 2021 he was right:
look at the gas fees on Ethereum.  Ethereum can't scale.

Everyone's waiting
on Ethereum 2.0,  which is going to take years to deliver.
So in the meantime Gavin,  Robert Habermeier and Peter Czaban
co-founded Polkadot.  They also built Kusama, the kind of
wild cousin network to  Polkadot, which I'll get into next. Gavin
created polkadot because there was this  need to  create a multi-chain ecosystem versus
these individual  isolated blockchains like Bitcoin and
like Ethereum.  There was also a need to add
customization to blockchain building.  Platforms like Ethereum are this let's
call it a layer-one blockchain but  they're trying to do everything with
just one chain. It wasn't customized nor  optimized for any specific purpose.
With Substrate, which is the framework  that Gavin created for building on Polkadot
and Kusama,  with Substrate we can actually custombuild
blockchains and  and alter the blockchain at the core
level  for a specific use. So in Acala and Karura
case we have  optimized the core of our blockchain
platform,  which is a layer one equivalent to
Ethereum, we've optimized that  for DeFi specifically. When we
launch  on Acala and on Polkadot, we'll be plugging
into this  existing network of other blockchains
that we can communicate  value and data with and also, potentially
even more importantly, the security of  Polkadot.

So, Polkadot is now
a 40 plus billion dollar network, so all  of that value
is held within these validator nodes  and all those validators are able to
help  validate transactions for
accuracy and also secure  all the parachains that connect to the
Polkadot relaychain, as you can see in  this
diagram here. Polkadot will also,  not only connect blockchains within
Polkadot, but it will also bridge to  existing networks like Ethereum
and like Bitcoin. And then, as I mentioned,  we've got Kusama as well. Kusama is the
exact same code base,  the same architecture as Polkadot with
this  relaychain in the middle and then all
these parachains are  these customized blockchains built
on top of Kusama's Layer 0  meta-protocol,
as we call it. Polkadot and Kusama will  exist
together and this pink dot in the middle  is meant to show you that these two
networks will be bridged as soon as both  are live.

So
anything built on Kusama will be able to  communicate with any
parachain or application on Polkadot.  Kusama is slightly different than Polkadot
in that  one, it's faster and not in terms of
transaction speed, but in terms of  how quickly you can get things done and
approved through governance. So  developers love Kusama because you can
actually push code changes much quicker.  It takes seven days to upgrade Kusama
versus  28 days to get approvals through
governance on Polkadot.  Kusama is also what I like to call an
innovation network,  also sometimes called a canary network,
but this is where  innovation will happen. You can test
things on testnet  and then bring them to Kusama,
which is a real world environment  with real value, and on Kusama is where
you really start to see how things work  out in the wild. Just like Polkadot,
Kusama is a proof-of-stake   network
so  the validators are running proof of
stake and then you can also stake KSM to  earn
staking rewards as you hold KSM.  As I mentioned, where Polkadot and
Kusama will be bridged,  we've used this strategy also in the way
that we launched our network.

So  we're building Acala, which is
the DeFi hub of Polkadot.  We are also building Karura, which is the
DeFi hub of Kusama.  A lot of times people ask what will
the future be for Karura once Akala  launches, the answer is that both Acala
and Karura will be running in parallel  together.
Acala will make Karura better and Karura  will make Acala better,
just like the relationship between  Polkadot and Kusama will
continue to operate in parallel together.  Acala and Karura were both founded by
these four people on the slide.  You've got Ruitao, our CEO, Bette
our COO. I work with them quite a  bit they're both more on the business
side  but both are also very technical
engineering minds,  product people with great experience
not only in the blockchain world but  also in traditional product development.
Then you've got Fuyao on the upper right.  So Fuyao is
leading and managing  everything in China, based in
Shanghai.

He's also the Founder and CEO  of Polkawallet  and met up with the with Ruitao, Bette and
Bryan  I think about a couple years ago at a
hackathon and the four of them created  the networks Acala and Karura together.
And then last but not least you've got  Bryan Chen. Bryan is one of the best
substrate developers in the world.  He's our CTO and that leads all of our
development.  Bryan also founded and leads the
Substrate Developer Academy  and continues to build and give
back to the Substrate Community as he  grows  the number of developers who are
building with the Substrate framework.  Acala is backed by several top firms so
Pantera,  coinbase Ventures, DCG,
Polychain Capital, just to name a few,  Hypersphere from
our friend Jack and several others on  the slide here and then
many others as well.  So let's get into Acala and Karura.
Acala is  two things: it's a platform for
building  applications on top of, as well as our
own set of applications that we've built  on our blockchain.
This is kind of a new category  development that I haven't seen done
before,  where our team is actually launching the
blockchain itself a Layer 1 blockchain  like Ethereum,  while also launching applications on top
of that chain.  Our decentralized exchange you could
think of as similar to Uniswap,  our borrowing market for the Acala Dollar
and Karura dollar, you could think of as  similar to Maker
and then we've got liquid staking as  well.

This is essentially like a Layer 1
blockchain,  like Ethereum launching from day one
with Maker and Uniswap on top,  plus liquid staking. Very excited to
get this out in  in live. This diagram helps illustrate
what i just mentioned.  The Acala DEX, the liquid staking
product and the aUSD stablecoin are  built into the Layer 1 blockchain
itself and then on top of our blockchain  we've built front-end applications
that leverage  these DeFi primitives, as we call them,
that are built into the blockchain.  When Acala launches,
you'll not only be able to build  applications on Acala, but you'll be
able to use  all the applications that we've built
ourselves. Then of course at the  bottom here you've got Polkadot, which
is the  the multi-chain network kind
of securing  Acala and providing cross-chain
capability.  These are the three products that I have just
mentioned and then the fourth one I'll  just mention it very quickly.
The Decentralized Sovereign Wealth Fund  or our treasury
will be built up over time in order  to help create
self-sustainability for Acala and for  Karura.
In Acala's case, we hope to build up this  Decentralized Sovereign Wealth Fund
enough so that in the future,  when we need to bid on a slot in a
parachain auction,  we can actually bid with our own
Sovereign Wealth Fund instead of  needing to raise KSM or DOT through
a crowdloan.  When Ruitao, Bette, Fuyao and Bryan
were deciding  where to build Acala, there were several
options: there was Ethereum 2, there was  Cosmos.
There were several different choices  that they evaluated, but of course
they decided to choose Polkadot.

But why  did they choose Polkadot? It's because
of these  kind of six core things: the crosschain
ability and interoperability,  the ability to use Substrate to
customize the chain specifically for  DeFi,
the ability to handle extremely high  transaction rates or transaction volume
through Polkadot,  the ability to govern the network on
chain, so  getting the whole community of ACA
holders to help take part in governance,  versus with Ethereum just one person or
a group of Founders  get to decide the future of the network.
The plug-and-play security is a huge  aspect where we don't have to actually
go out and recruit our own set of  validators to secure our network.
That's why we want to earn a slot on  Polkadot and plug into this existing
network of security.  Last in the bottom right is the
ability to upgrade  without forking.Over time we'll be
able to upgrade the blockchain itself  without needing to fork the community
like we've seen with  maybe ETH and ETH Classic and other
communities over time.  Here's a few of our products, just some
screenshots of them.  On YouTube you can see some product
demos of our products and also  on our applications website
apps.acala.network you can actually go in and  use them live on testnet.
This is what our aUSD product looks  like where people can actually come in
and collateralize, for example, Bitcoin  and take out a loan
of aUSD with their Bitcoin as collateral  without ever having to sell
their Bitcoin.

Liquid DOT staking is the  process of staking DOT
to earn interest on your DOT, but, while  your DOT
is staked in earning staking rewards,  you also receive what's called LDOT or
liquid DOT  and this is kind of like a receipt for
your DOT that is  staked and the LDOT that you hold will
actually increase  in value, the number will increase,
because it's going to be reflecting  the returns that your underlying stake
DOT are earning.  With that LDOT you can actually, just
like the name says, it becomes liquid, so  you can
come and use your LDTO and use that  within
all of our DeFi platforms, like the last  slide that i just showed you with aUSD.
I could stake DOT, take out LDOT  and then with the LDOT I could
collateralize that and take out a loan  for aUSD and use that
for whatever purpose I wanted.  The Acala DEX looks
some looks like this: so there will be  trading pairs that you can trade, so in
this example it's Acala  ACA, an aUSD stablecoin,
and the way this is is enabled is  because on the back end there's a whole
pool of liquidity where people are  earning rewards for providing liquidity
to certain pairs.  In this case if I'm trading on the ACA
and aUSD pair,  I would be using liquidity from people
who are providing liquidity to that pair  on the back end.  I won't go through all these token
utility  use cases for ACA, but at its most basic
level, ACA is the governance token for  Acala  and will be used for processing all the
transaction fees on the network.  Now let's get into Karura.
Karura is a platform just like Acala,  a blockchain platform and a set of
applications  all optimized for innovation
and experimentation on Kusama.

This is  going to be a really fun
network to be involved in because  there's going to be a lot of new
products launching here,  trying out new risk parameters, new
features  that will go to Karura and then, if proven,
we'll move on to Acala.  We will be launching this
first  on Kusama and the upcoming parachain
auction is all about  Karura. Karura will be launching on Kusama
and this Layer 1 blockchain will have  the same DeFi primitives as Acala does.
In this case the Karura DEX, the liquid  staking for KSM,
instead of for DOT on Acala, and then the  Karura dollar kUSD as the stable coin.
The Karura apps that  we've already built on top of our
blockchain will leverage  all those products that have built been
built into the blockchain itself.  Here's a look at the UI at the
application layer.  On the last slide what I showed you up
here,  these apps look like this:
this would be like creating a loan on  the left you could go and do a swap,
do your liquid staking.

This will all  be ready
the day we launch on Kusama.  Just to reiterate, Kusama and
Polkadot will be bridged and  and Karura and Acala will continue to  operate together even after Acala
launches.  After Acala launches, we will be
operating two networks in parallel  and those will continue to operate
together.  The distribution of the KAR supply looks
like this:  so we reduced the amount of tokens going
to the founding team and and shifted  that to the community.
We've also got some backers and early  backers from
when we first started the project and  then, when you break down the community
side,  we have auction rewards for the
parachain auction  and liquidity program, which I'll walk
through next,  some ecosystem development and some
rewards that are  being kind of reserved, as well as
treasury  allocation to keep in the Karura treasury for
the development of the network. Same  token utility for Karura as Acala. This
will be used for transaction fees and  governance of the network as well as
several other different use cases like  deploying smart contracts and other
use cases.  How do we launch on Kusama?
We need to win an auction against  other pairchain teams in order to
launch in this  slot here on Kusama.

That process
looks like this.  What you can see here, where this
trophy, is this is the the biggest event,  from here  to here. This is the parachain auction,
where we  and other teams are bidding against each
other in an auction  to try to win this first slot on Kusama.
The goal for the Karura team is absolutely  to win
the auction number one.  We want to be the first team to launch on
Kusama.  Before the auction starts, there will
also be this thing called a crowdloan  that opens.
A crowdloan is actually how the  community can contribute KSM as you see
here  to our crowdloan, so that we can use all
the KSM  that we have in our crowdloan as our
bid  in the auction. When we win the
auction,  Karura will then launch on Kusama and
when that happens all the KSM that was  contributed back here
to the crowdloan will be locked in the  Kusama
relaychain. It will not be touched, it  can't be touched by the team at all.
And then at the same time the native  token of Karura will be issued
to all the contributors at a 12 to 1  minimum
ratio.

KAR gets distributed to everyone  who contributed KSM and then Karura would
launch,  all the DeFi applications would be live
and we would be  kind of in business. At the end
of the 48-week slot,  all the KSM that was contributed by
anyone who  participated in the crowdloan would then be
returned to them.  This is what the Karura crowdloan will
look like.  We will start with a minimum of 12 KAR
for every 1 KSM.  This is the reward that everyone who
contributes KSM in the   crowdloan would
get  in KAR. So depending on the participation,
the amount of KAR could be much higher  than 12 but this is just the baseline
that we've set.  Down here you can see the
30%.  What this is referring to is that 30%
of the tokens, that are  distributed to contributors, will be
liquid when the network launches, the  other 70% will then
will then vest over the remainder of  the 48 weeks, so gradually
every day.  Now, in terms of the liquidity mining
program,  another thing that I'm really
excited to get started, so 19%  of the first year's circulating supply
of KAR  will be distributed in the form of
liquidity mining or liquidity provider  programs.  This translates to 6% of the
total supply  and just keep in mind the supply of
Karura is fixed, it will never increase.  So pretty significant opportunity to be
involved in  the early liquidity providing program.
Liquidity mining rewards can be  distributed in 3 primary ways:
through  providing liquidity in the DEXs, through
minting kUSD stablecoins  and then for staking KSM
for liquid KSM or LKSM.  These interest rates or these APY
will that will definitely vary over time.  There's going to be times when certain
trading pairs or certain  protocols need more liquidity and in
that case  the APY would be would rise
for the ones that need more liquidity  and potentially decline for the ones who
are sufficiently liquid at the time.  This is an example of of one person
and  having the ability to earn these
liquidity mining  rewards through these three main
mechanisms, minting stable coins  for a specific APY at that time,
providing liquidity to the DEXs,  and then minting LKSM.  These numbers here are not final
or set and these will  continually vary and be
adjusted,  but this is what the decks could
look like.

One of the first pairs that  will go live is
the KAR to KSM pair. There will be  rewards for that pair
at some APY given the day.  There could also be other pairs like KSM,
kUSD,  kUSD BTC, and this will all continue to  evolve
over time. Also  with the stablecoin we will see
liquidity mining rewards for people who  actually go
and take out a loan of KUSD.  For minting a stablecoin by taking out
a loan you would earn additional  kUSD on that reward.  And then last LKSM. So there will be
additional incentives for minting  LKSM through the action of actually
staking  KSM and those rewards would be  distributed in
KAR.  There's also crosschain assets that
will be making it their way to  Karura. These are yet to be finalized,
but things like Bitcoin and Ethereum,  if we needed more Bitcoin liquidity from
say one of the bridges, we could also  incentivize people to bring Bitcoin over
to  Karura. That's it.
Thanks for for the patience and  sitting through this. I hope you learned
something new.  I know we have a team
watching at the meetup here in China,  we've also got our team online,
we're always on Discord  or on Twitter.

So feel free to ask us
questions.  One thing that I would encourage you to
do after today is to go to  apps.akala.network
Everything that you've seen today is  live on testnet and ready to launch as
soon as we win  the auction on Kusama and the
auction on Polkadot.  So definitely go in and test out these
things. You can get testnet  tokens through that website
and then try things out. Our goal is to  win
the first parachain auction on Kusama  with Karura and our goal is to win the
first parachain auction on  Polkadot with Acala, so we really
appreciate your  support in helping achieve this this
goal.  If you have the desire to follow us on
any of our Social channels, there's  the linktree for Acala and a linktree
for  Karura. We've basically put every different
link that we have in the community  on these websites, so you can
find anywhere to follow us there.  So that's it. Hopefully you guys have a
good day/good night.  Thanks for watching and we'll talk soon!
Bye.

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