What is aUSD, the “stablecoin” that lost its value and is reminiscent of Terra USD?

Stablecoin to USD.

Key facts:
  • Acala Dollar (aUSD) is developed on the Polkadot network.

  • It is a multi-collateralized stablecoin, which bears resemblance to Ethereum’s DAI.

Stablecoins are the talk of the town in 2022. In the first half of the year, Terra USD (UST) attracted millions of investors with returns of 20% per year… until it crashed and its price fell by more than 99%. Now the focus is on the Acala Dollar (aUSD) which, for other reasons, has also lost parity with the US dollar.

As CriptoNoticias reported days ago, a code error allowed to issue an unlimited amount of these coins. Someone noticed the vulnerability and decided to exploit it. Oversupply caused AUSD to go below $0.01 a couple of days ago.

At the time of this publication, after having taken certain measures (the burning of the new generated coins) its price is USD 0.86. It still doesn’t reach $1.00, which it should maintain by design.

What is aUSD and how does it work?

Many learned of aUSD’s existence from news of its crash or subsequent recovery attempt. But the story of this token did not start this week. Acala Dollar was released in February 2022at the height of the algorithmic and decentralized stablecoin boom, with UST leading the way.

Like DAI, aUSD is a multi-collateralized stablecoin. This means that various cryptocurrencies and tokens can be deposited in one smart contract to issue the stablecoin. Coins that can be used as collateral to issue aUSD are ACA, LDOT, DOT and LcDOT tokens.

Stablecoin to USD.
The aUSD stablecoin is collateralized by multiple crypto assets. Font: Acala.

Unlike DAI, aUSD does not live on Ethereum, but on Acala, a parachain by polkadot. Dan Reecer, chief growth officer for Acala, wrote the following at the time of the launch:

aUSD is the core of the Acala decentralized finance ecosystem and will serve as the stablecoin that will power the Polkadot ecosystem.

Dan Reecer, chief growth officer for Acala.

Reecer explained that parity with the US dollar was achieved “with a set of incentives, balance of supply and demand and risk management mechanisms within the protocol.”

Why is the price of aUSD not 1 dollar?

As mentioned at the beginning, a code error allowed unlimited aUSD to be issued. Someone discovered that bug and used that unwanted functionality.

Acala “ambassadors” commented that it was a flaw in the code claim_rewards() in the iBTC/aUSD liquidity pool, which had been running for a day. Whoever discovered the vulnerability was able to claim more than 1.2 billion aUSD.

Later, after Acala developers definitively solved the error, a community vote allowed to return and then burn (destroy) those issued coins. Note the power of reversing a transaction in the aforementioned cryptocurrency network.

After that event, the price of aUSD rose more than 10,000%. In any case, until the moment of this publication, it does not recover the parity with the dollar. The market seems not entirely convinced that the «stablecoin« be reliable. The selling pressure is still strong and the price does not reach USD 1.

Will the price of aUSD go back to $1 one day?

Futurology cannot be made about what will happen. It is and will be the market (due to the clash between supply and demand) that determines how much a crypto asset is worth, even a stablecoin. If the aUSD team manages to prove that your product will not go through a situation like the one it experienced again, it may be able to attract buyers again and its price will return to the established value.

aUSD stablecoin chart.
aUSD did not regain parity with the dollar after the vulnerability was exploited. Font: coinmarketcap.

It will be an arduous task, lost trust is often not easy to regain. In addition, there are now many other stablecoins, some well established for years. Acala faces a lot of competition and the road ahead is likely to be uphill.

See also  Terra projects have already started their migration to Ethereum's lateral network, Polygon

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