ACALA Token Economy Working Paper

Antonia Chen

12 Sep 2020

1 Key Functions of ACA Token

ACA is the native token of ACALA Network. ACAs serve two key functions in
ACALA Network:

• Network Utility Token

ACA is a native fee token (e.g. fee for native transactions and smart
contracts), and also utilized in staking for collator, staking for oracle and
other network activities.
• Governance of the Network
As a governance token, ACA tokens provide their holders voting right in
Treasury governance, Council member election, referendum, network up-
grade, risk management and more, e.g. adjustment of key risk parameters,
such as Stability fee, Liquidation Ratio, and Collateral Type.

2 Minting and Distribution of ACA Tokens

The total supply of A unit of ACA Tokens will be minted at the launch of the
mainnet and stored in the ACA Reserve Pool to be distributed to: 1

• ACALA Team
20.25% will be reserved for the ACALA Team.
• Ecosystem
5% will be reserved for Ecosystem development, e.g. rewarded as grants
and bounties.
1 The distribution plan is subject to change.

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 • Reserved
11.62% will be reserved as Acala Foundation Treasury.
• Strategic Investors
29.13% will be distributed to the strategic investors:

– Seed Investors - 18.33%

– Ventures - 10.8%

• Reward
34% will be distributed as reward, to IPO participants as proposed in
Section 7, and network contributors including liquidity providers, early
participants, oracle operators and collators.

ACA tokens are subject to re-denomination.

3 Governance of Treasury

Network fees from the following sources are stored in the Treasury, which is
under governance of ACA holders.

• Stability Fee
To close a CDP with outstanding debt of n aUSDs, the CDP owner is
required to pay s · n aUSDs as Stability Fee, where s is the effective
interest rate.

• Liquidation Penalty
All open CDPs are constantly monitored by the system. For each collateral
type, a corresponding liquidation ratio is voted by ACA holders, reflecting
the amount of overcollaterization a CDP is required to meet to avoid
liquidation.
Once the value of the CDP collateral has fallen below the requirement
based on the liquidation ratio, the CDP becomes risky and is automatically
liquidated by the system through a hybrid mechanism consist of built-in
DEX and Collateral Auctions.
In a Collateral Auction, a proportion of collateral is sold to cover the
outstanding debt in the CDP, and a liquidation penalty of p · n aUSDs,
with any remaining collateral returned to the CDP original owners.
• System Fees
System fees include native transaction fee, DeX fee, L-DOT protocol fee
and fees for other network activities.

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4 Parachain Auction

We plan to launch our mainnet on a Parachain slot, to be leased from Polkadot,

using DOTs to be crowdfunded. A specially designed Candle Auction is utilized
to sell the leasing right of Parachain slots. It is a mechanism designed for
fairness, e.g. to prevent early sniping and provide bidders with higher valuation
higher chances of winning. Since it will be a challenge to estimate private
valuation distribution of bidders with private bidding strategies, and we plan to
conduct a Crowdfund IPO (Initial Parachain Offering), that we will:

1. Start our DOT Crowdfund at time t − 30

2. Bid W01 , total fund collected for a 12-month lease of a Parachain slot, at
time 0, the open time of the first Parachain slot auction
3. Bid Wt1 , whenever total fund increase at time t < T , before the close time
T of the first Parachain slot auction
4. After the retroactive close time t∗ of the first Parachain slot auction is
announced, if our last bid before t∗ is successfully accepted, Wt1∗ unit of
DOTs will be locked to lease the Parachain slot and the rest of WT1 − Wt1∗
DOTs that are deposited into the crowdfund after t∗ will be returned to
their owners,
5. Distribute ACA tokens as rewards to DOT owners who participate our
first IPO successfully, to compensate their opportunity costs of having
their DOTs locked for 12 months.

5 Parathreads

In case our first Parachain slot auction was not successful, we will continue
to launch our mainnet on Parathreads instead. DOTs raised in IPO will be
returned to their owners, and ACA tokens will still be minted at launch, but
only distributed to ACALA Founders and Seed Investment Partner according
to the original plan, with the rest reserved for future investment opportunities
including IPO in the second Parachain auction.

Compared to Parachain, there are gas costs using Parathreads, depending on

frequency of validation. The more frequent a validation is processed, the safer
the network is, at a price of higher gas costs. ACA holders will vote to determine
the frequency. A small amount of ACA tokens will be released from the reserve
and sold to public for DOTs daily to cover the entire gas costs of the network
daily validation. For say, if the total gas costs are estimated to be 5 ACA
tokens worth of DOTs for the day, 5 ACA tokens will be released and sold by

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the system. Another IPO will be raised to lease a Parachain slot before the
second Parachain auction.

6 Six Years of Parachain Lot Lease

We plan to lease the Parachain slot for six years, in hope to switch to our
independent blockchain bridging to Polkadot after six years.

Assuming that DOTs are estimated to generate a net effective annual return
of r for DOT holders, we will distribute a proportion of ACA tokens reserved
in the Rewards pool, a total of α · A unit of ACA tokens, to IPO participants
during the six years, as reward for locking their DOTs for our lease of Parachain
slot.

The following work-in-progress in Section 6.1 - 6.5 is constantly reviewed and

subject to change.

6.1 Ideal Situation

In ideal situation, when relative cost of leasing a Parachain do not fluctuate sig-
nificantly among Parachain leasing periods. Suppose we won our first Parachain
auction at cost of Wt1∗ that the estimated costs of leasing the same slot at the
second round and third round are Wt1∗ (1 + r)2 and Wt1∗ (1 + r)4 respectively.
all ACA tokens in the IPO Reward Reserve are distributed to IPO participants
in the three IPOs accordingly that there will be zero ACA token left by the
end of the third round of lease (six years after launch). The ACALA network
is expected to be ready to upgrade to an independent blockchain bridging to
Polkadot by then, and all ACA holders will be invited to vote whether to up-
grade to independent blockchain or lease another round of Parachain slot by
minting more ACA tokens as rewards for the fourth-round IPO participants.

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 Three Rounds of Parachain Lot Lease (Ideal Situation)
Round Winning Bid Proportion in ACA Rewards
Reward Reserve when r = 10%
1
1 W 1 = Wt1∗ 1+(1+r)2 +(1+r)4 8.17% · A

(1+r)2
2 W 2 = W 1 (1 + r)2 1+(1+r)2 +(1+r)4 9.88% · A

(1+r)4
3 W 3 = W 1 (1 + r)4 1+(1+r)2 +(1+r)4 11.95% · A

Total W = W1 + W2 + W3 = 100% 30% · A

W 1 [1 + (1 + r)2 + (1 + r)4 ]

However, extreme cases are not uncommon in the world of blockchains, that all
possible scenarios (categorised into four special cases as below) are analysed.

6.2 Special Case I

In situations when rapid growth of the Polkadot network cause exploding de-
mand of the Parachain slots, that W 2 winning bid in the second round of
Parachain auction is much higher than W 1 . When

W 2 > W 1 [(1 + r)2 + (1 + r)2 ]

the system will distribute all remaining ACA tokens in the IPO Reward Reserve

(1 + r)2 + (1 + r)4
· 30%A
1 + (1 + r)2 + (1 + r)4

to IPO participants in the second round. For instance, when W 2 = 5W 1 , all

remaining ACA tokens in IPO Reward Reserve are distributed in the second
round.

Therefore, we have zero ACA tokens left in reward reserve for IPO participants
in the third round. Given the trend of growth, it is very likely that by the end
of the second round of lease (four years after launch), the ACALA network will
be ready to upgrade to an independent blockchain bridging to Polkadot, rather
than leasing a Parachain slot. All ACA holders will be invited to vote whether
to upgrade to independent blockchain or lease another round of Parachain slot
by minting more ACA tokens as rewards for the third-round IPO participants.

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 Three Rounds of Parachain Lot Lease (Special Case I)
Round Winning Bid Proportion in ACA Rewards
Reward Reserve when r = 10%
1
1 W 1 = Wt1∗ 1+(1+r)2 +(1+r)4 8.17% · A

(1+r)2 +(1+r)4
2 W 2 > W 1 [(1+r)2 +(1+r)2 ] 1+(1+r)2 +(1+r)4 21.87% · A

3 Strategy to be Voted TBV TBV

Total W TBV TBV

6.3 Special Case II

In situations when growth of the Polkadot network is faster than expectation

and cause increasing demand of the Parachain slots, that W 2 winning bid in
the second round of Parachain auction is higher than expectation, but not as
extreme as in Special Case I. When

W 1 (1 + r)2 < W 2 < W 1 [(1 + r)2 + (1 + r)2 ]

the system will distribute a proportion of remaining ACA tokens in the Reward
Reserve with respect to ratio of W 2 and W 1

W 2 /W 1
· 30%A
1 + (1 + r)2 + (1 + r)4

to IPO participants in the second round. For instance, when W 2 = 2W 1 , reward

ACA tokens distributed in the second round are doubled compared to the first
round.

Therefore, we have a lot less ACA tokens left in reward reserve for IPO par-
ticipants in the third round, compared to the ideal situation. Given the trend
of growth, it is likely that by the end of the second round of lease (four years
after launch), the ACALA network will be ready to upgrade to an independent
blockchain bridging to Polkadot, rather than leasing a Parachain slot. All ACA
holders will be invited to vote whether to upgrade to independent blockchain or
lease another round of Parachain slot by minting more ACA tokens as rewards
for the third-round IPO participants.

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 Three Rounds of Parachain Lot Lease (Special Case II)
Round Winning Bid Proportion in ACA Rewards
Reward Reserve when r = 10%
1
1 W 1 = Wt1∗ 1+(1+r)2 +(1+r)4 8.17% · A

W 2 /W 1 2
2 W 2 > W 1 (1 + r)2 1+(1+r)2 +(1+r)4 8.17% · A W
W1

3 Strategy to be Voted TBV TBV

Total W TBV TBV

6.4 Special Case III

In situations when demand of the Parachain slots somehow shrink extremely

due to unexpected problems, that winning bids in the second and other future
round of Parachain auction becomes super small or zero that it is free to lease
a Parachain slot. When
W i = 0 ∀i > 1
the system will NOT distribute any remaining ACA tokens in the IPO Reward
Reserve. All ACA holders may vote to decide whether to use these tokens for
other purposes such as raising investment or burn them to remove permanently
from the ACA supply.

Three Rounds of Parachain Lot Lease (Special Case III)

Round Winning Bid Proportion in ACA Rewards
Reward Reserve when r = 10%
1
1 W 1 = Wt1∗ 1+(1+r)2 +(1+r)4 8.17% · A

2 W2 = 0 0% 0

3 W3 = 0 0% 0

Total W = W1 + 0 + 0 = W1 100% 30% · A

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6.5 Special Case IV

In situations when demand of the Parachain slots somehow do not grow as fast
as expected in ideal situation or shrink, that winning bids in the second and
other future round of Parachain auction is smaller than expectation in ideal
situation. When
0 < W 2 < W 1 (1 + r)2
the system will distribute a proportion of remaining ACA tokens in the Reward
Reserve with respect to ratio of W 2 and W 1

W 2 /W 1
· 30%A
1 + (1 + r)2 + (1 + r)4

to IPO participants in the second round. For instance, when W 2 = 0.5W 1 ,

reward ACA tokens distributed in the second round will only be half as many
compared to the first round.

If the weak trend in demand of Parachain slots continue that we will more ACA
tokens left in the IPO Reward Reserve by the end of the second round of lease,
than expected in ideal situation. When

0 < W 3 < W 1 [(1 + r)2 + (1 + r)4 ] − W 2

the system will distribute a proportion of remaining ACA tokens in the Reward
Reserve with respect to ratio of W 3 and W 1

W 3 /W 1
· 30%A
1 + (1 + r)2 + (1 + r)4

to IPO participants in the second round. For instance, when W 3 = 0.75W 1 ,

reward ACA tokens distributed in the second round will only be three quarters
as many compared to the first round.

Therefore, we still have some ACA tokens left in the IPO reward reserve after
the end of the third round lease. If there are enough to reward IPO participants
in the fourth round, the system will distribute them the same way as in previous
two rounds. If there are not enough ACA tokens left, all ACA holders will be
invited to vote whether to mint more ACA tokens as rewards to run a fourth
IPO.

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 Three Rounds of Parachain Lot Lease (Special Case IV)
Round Winning Bid Proportion in ACA Rewards
Reward Reserve when r = 10%
1
1 W 1 = Wt1∗ 1+(1+r)2 +(1+r)4 8.17% · A

W 2 /W 1 2
2 W 2 < W 1 (1 + r)2 1+(1+r)2 +(1+r)4 8.17% · A W
W1

W 3 /W 1 3
3 W3 < 1+(1+r)2 +(1+r)4 8.17% · A W
W1
W 1 [(1 + r)2 + (1 + r)4 ] − W 2
Total TBV TBV TBV

7 Distribution of ACA Tokens as IPO Reward

The ACA tokens reserved as IPO reward are planned to be distributed to IPO
participants during the first six years. It is obvious that these ACA tokens would
be better distributed in a frequent small batches rather than in lump sums at
beginning of each round of Parachain lease, which would lead to sudden large
shifts in ACA supply causing unfavourable large price fluctuations as shown
below.

ACA Tokens Rewarded in a Lump Sum

Valuation
S S0
Sudden Shift

Price
Drop
D

0
Quantity

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We propose that all ACA Reward tokens planned to be distributed in each
round are to be distributed to each successful IPO participant at every second,
according to the proportion of their shares of locked DOTs in the total number
of locked DOTs, for less market fluctuation.

ACA Tokens Rewarded in Frequent Small Batches

Valuation Small Changes in Supply

Supply
Fluctuations

Demand

0
Quantity

Since ACA Tokens are distributed to cover the opportunity cost of the net
yield of these locked DOTs, the initial valuation of one ACA token for a IPO
participant in round one is derivable.

8 ACA Initial Liquidity Injection

After a Parachain slot is secured by winning the first Parachain auction, a small
proportion of ACA tokens reserved in Treasury will be available at public sales
events before the launch of mainnet, to inject initial liquidity to the network.

ACA tokens sold through public sales events will be distributed to the partici-
pants immediately and are ready to be traded at the launch of the mainnet.

9 Distribution of ACA Tokens to Other Parties

ACA Tokens distributed to other parties such as Strategic Partners, are not
allowed to be traded for a fixed length of time (vesting schedule vary from 12
to 24 months after launch of mainnet) for market stability.

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