Macauley Peterson

Bringing DeFi yields to institutional investors has long been a goal of the crypto industry. Connecting off-chain capital to crypto asset staking brings legal and technical challenges at every step.



Institutional credit infrastructure provider Credora and Polkadot DeFi hub Acala believe they’ve found a path to bridge the gap, starting with a product to bring yield opportunities to bitcoin holders.



Working with Swiss-based market-making firm Portofino Technologies, the initial offering — announced Thursday — targets family offices, credit firms and hedge funds, and expects to return 7%-10% annually.



Past efforts to offer yield to bitcoin (<a href="https://blockworks.co/price/btc">BTC</a>) lenders have not always fared well, with firms such as <a href="https://blockworks.co/tag/celsius">Celsius</a> proving to be opaque, fragile and <a href="https://blockworks.co/news/celsius-to-file-for-bankruptcy-imminently-report">ultimately dangerous</a> places for customers to store BTC.



Credora has devised a legal and technical structure that gives lenders much greater security and transparency, according to co-founder Darshan Vaidya.



“On Acala’s side, it&#8217;s transparency around core yield generation, and on [Credora’s] side, it is around transparency with regards to where exactly funds are at any moment in time, and transparency around the legal structure associated with the loan,” Vaidya told Blockworks.



Their first product is a <a href="https://www.investopedia.com/terms/s/spv.asp">Special Purpose Vehicle</a> (SPV) which generates yield from staking Polkadot’s native currency, <a href="https://blockworks.co/price/dot">DOT</a>.



It works like this: Starting with loaned bitcoin, Portofino exchanges a portion for DOT which is staked with Acala, while hedging price risk using derivatives markets on Bitmex, Bybit or Deribit. Polkadot staking yields fall in the 15%-21% range, Acala’s co-founder Bette Chen told Blockworks.



“For a liquid staking protocol like Acala we aim for, like, a sweet spot — you aim for optimized yield, but at same time [to be] safe for the stakers out there,” she said. Acala uses a variety of dedicated validators including Coinbase Cloud, which provides “slashing protection” — think insurance — for its service.



The trading firm managing the SPV is required to provide its own capital into it as a junior tranche, while bitcoin lenders are senior to it, so their assets are secured by the entire cache of funds.



“What we&#8217;ve created is secured lending vehicles which are, by design, bankruptcy remote, so each SPV is legally only able to do a specific activity,” Vaidya explained.



The “first loss” capital provided by the market maker means “their incentives [are] aligned, such that the trading firm is always incentivized to ensure that the senior tranches paid back first,” he said.



In other words, the strategist has “skin in the game,” to use the southern derby race phrase popularized by Warren Buffet. If they don’t deliver on their monthly yield projections, they lose out on their own profits.



Credora provides real-time monitoring for lenders, which Vaidya said will allow them to track the movement of capital — both on-chain and off — in real-time.



He calls it the “anti-principal-lender approach” — referring to the <a href="https://blockworks.co/tag/lending-platform">lending platforms</a> that ran into trouble in 2022, where “there is no transparency in terms of what the principal lender is doing.”



“It&#8217;s in their incentive to offer higher and higher yields to try and capture as much AUM or TVL as possible, and to continually meet that demand — and still make a profit — you have to go further and further out the risk curve,” Vaidya said.



That’s a flawed model, and the antithesis of DeFi ideals.



The current product offering can be seen as a proof-of-concept, but similar SPVs can be spun up in the future with different strategies or input capital — such as <a href="https://blockworks.co/tag/stablecoins">stablecoins</a>.



Once the model is proven out, and perhaps with additional regulatory clarity, Acala’s Chen said, “the next step is now institutions, including potentially fintechs, [to] actually wrap those products and localize them into their retail customers.”



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Bitcoin lenders have a new regulation-friendly option for yield

Shalini Nagarajan

<div id="highlights-block_62fa20d3a6af7" class="highlights">
 <ul>
 <li>Hackers attacked Acala&#8217;s new liquidity pool to mint more than one billion aUSD tokens</li>
 <li>aUSD crashed almost immediately but has since rebounded, now trading above $0.90</li>
 </ul>
 
</div>



Polkadot-powered stablecoin acala dollar (aUSD) crashed to below 10 cents on Sunday after hackers minted 1.3 billion of the tokens for free.



The stablecoin’s issuing network Acala voted to suspend functionality to address the situation. In a <a href="https://twitter.com/AcalaNetwork/status/1558642849649856512" target="_blank" rel="noreferrer noopener">tweet</a> on Sunday, Acala said it noticed a configuration issue on its stablecoin protocol Honzon, which directly affects how aUSD operates.



Acala, one of the first Polkadot <a href="https://wiki.polkadot.network/docs/learn-parachains" target="_blank" rel="noreferrer noopener">parachains</a>, styles itself as a “DeFi hub” for the network. It had just launched a yield-bearing liquidity pool for aUSD and a form of wrapped bitcoin, which contained a bug dictating how the pool pays out rewards.



On-chain observers <a href="https://twitter.com/alice_und_bob/status/1558959878475075584" target="_blank" rel="noreferrer noopener">found</a> hackers had exploited the flaw to mint 1.3 billion aUSD, with one <a href="https://acala.subscan.io/account/26JmEcghNmggvT46sojckg34Py9zFRKkCcFy3gr49hrFgT2k?tab=extrinsic" target="_blank" rel="noreferrer noopener">attacker wallet</a> holding about 1.27 billion aUSD.&nbsp;



The incident resulted in aUSD, which had held its soft peg since its February launch, <a href="https://www.kucoin.com/trade/AUSD-USDT" target="_blank" rel="noreferrer noopener">crashing</a> as low as $0.07 on KuCoin, echoing <a href="https://cms.blockworks.co/tag/terrausd/" target="_blank" rel="noreferrer noopener">TerraUSD’s</a> collapse in May.&nbsp;



However, aUSD quickly rebounded and now trades for more than $0.90. Blockchain explorers show aUSD’s official <a href="https://blockscout.karura.network/token/0x0000000000000000000100000000000000000081" target="_blank" rel="noreferrer noopener">supply</a> is almost 4.8 million tokens.



While Acala&#8217;s Honzon protocol manages the stablecoin based on various risk management algorithms, aUSD&#8217;s value is also derived from a basket of reserve assets, mostly Polkadot ecosystem tokens. Users can mint aUSD by sending certain digital assets to the protocol.



“This enables people to transact, trade, and facilitate services using aUSD without price volatility,” it said in aUSD’s announcement post.



<h3 class="wp-block-heading">Polkadot networks handle hackers with governance votes</h3>



Acala has labeled the snafu a “misconfiguration,” saying it had been <a href="https://twitter.com/AcalaNetwork/status/1558785363224604672" target="_blank" rel="noreferrer noopener">rectified</a> the same day and wallet addresses that received the erroneously-minted aUSD had been identified.



The network itself hasn’t disclosed the amount of tokens printed throughout the incident, but said it managed to retain over 99% of the tokens involved. 



The remaining illicit aUSD has been locked until a collective governance decision on what to do next has been voted upon, Acala added.



<figure class="wp-block-embed is-type-rich is-provider-twitter wp-block-embed-twitter"><div class="wp-block-embed__wrapper">
<blockquote class="twitter-tweet" data-width="550" data-dnt="true">Next up, we will continue on-chain activity trace, and share the results with the community to facilitate formulation of community proposal &amp; decision making to resolve the error mint of aUSD &amp; restore aUSD peg. Thanks for your patience &amp; support, will update as we progress 8/&mdash; Acala (@AcalaNetwork) <a href="https://twitter.com/AcalaNetwork/status/1558785378101760000?ref_src=twsrc%5Etfw">August 14, 2022</a></blockquote><script async src="https://platform.twitter.com/widgets.js" charset="utf-8"></script>
</div></figure>



Last October, experimental Polkadot implementation Kusama similarly <a href="https://medium.com/kusama-network/kusamas-governance-thwarts-would-be-attacker-9023180f6fb" target="_blank" rel="noreferrer noopener">voted</a> to manage a security vulnerability involving stolen tokens.



Both Acala Network and co-founder Bette Chen didn’t return Blockworks&#8217; request for comment by press time.



Acala’s ACA has shed about 13% since the attack. Binance CEO Changpeng Zhao said in a <a href="https://twitter.com/cz_binance/status/1558731164558442498" target="_blank" rel="noreferrer noopener">tweet</a> that the exchange was “monitoring” the situation. Binance doesn’t list aUSD but does support ACA trade.



David Canellis contributed reporting.



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Start your day with top crypto insights from David Canellis and Katherine Ross. <a href="https://blockworks.co/newsletter/empire">Subscribe to the Empire newsletter</a>.



Explore the growing intersection between crypto, macroeconomics, policy and finance with Ben Strack, Casey Wagner and Felix Jauvin. <a href="https://blockworks.co/newsletter/onthemargin">Subscribe to the Forward Guidance newsletter</a>.



Get alpha directly in your inbox with the <a href="https://blockworks.co/newsletter/research">0xResearch newsletter</a> — market highlights, charts, degen trade ideas, governance updates, and more.



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