This article is translated from: "Acala's Decentralized Sovereign Wealth Fund — A Next-gen DAO & Unforkable AUM" By Joe Petrowski & Bette Chen
# TLDR
Acala is committed to building a brand new DAO 3.0 system, through the decentralized sovereign fund (decentralized Sovereign Wealth Fund, abbreviated as dSWF Fund) and network governance to obtain economic and decision-making independence. The assets in the dSWF fund can be understood as AUM (Asset Under Management) in essence, which is to realize the sustainable development asset management model. Even if others copy the project's open source code, liquidity, or even the entire community, the asset management scale will become a barrier that is difficult to copy. This means that Acala can continue to combine technology drive, brand advantage, and capital utilization into a joint force to promote the continuous appreciation of asset value and achieve long-term success.
Polkadot and Substrate provide a new paradigm for new forms of social organization and decision-making. Acala makes full use of Substrate's on-chain governance and treasury management, combined with Polkadot cross-chain information communication, to create a decentralized sovereign fund (dSWF). This fund will allow Acala to obtain a parachain slot and achieve long-term sustainable development after the initial auction.
Before discussing the Decentralized Sovereign Fund (dSWF), let's understand the traditional meaning of the fund. Like much of open finance, most decentralized financial services have their roots in traditional finance.
As we all know, large exporting countries usually establish national sovereign funds to manage their fiscal surplus and adjust the imbalance of currency import and export. Foreign currency (such as US dollars) is usually accepted for settlement of country's export goods, because overseas consumers are used to purchasing in their own currency. However, the exporting country still needs to use its own currency to pay for labor costs. At this time, they usually face two choices: one is to sell foreign currencies such as US dollars held and repurchase domestic currency in the open market, and the other is to issue more domestic currency. For central banks and government departments, the former is not advisable, because if foreign currencies such as US dollars are used continuously for repurchases, the value of the domestic currency will increase, resulting in a decrease in future expected income. Therefore, usually the government will take these two measures at the same time, and repurchase as little as possible. Then, what can be done with the remaining money? National sovereign funds, as national generalized funds, usually own foreign exchange and other assets, such as rare precious metals, stocks, bonds and real estate. Whatever you think about the size of Wall Street's billions, knowing that even a modest sovereign fund can give the impression that the entire hedge fund industry is always run by the same people.
Government-managed investment funds appear to have been linked to corruption and become the playthings of unscrupulous lawmakers. In other words, there are only a few national sovereign funds that provide real value to citizens. For example, in Norway, the total amount of sovereign funds exceeds one trillion U.S. dollars and has become the source of pensions for every citizen in Norway.
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01 Blockchains as Sovereign Entities
The topics here revolve around a core concept - the blockchain network can act as a sovereign entity. Sovereignty implies a new paradigm of agency, the ability to make decisions and execute them efficiently. While sub-entities in the blockchain like smart contracts have limited agency, the blockchain network itself has no agency or sovereignty. For example, using "cross-chain bitcoins on Ethereum", smart contracts on Ethereum can own some cross-chain bitcoins, but the Ethereum network itself cannot own native bitcoins.
Substrate's governance allows chain developers to formulate an advanced governance system from the beginning, which includes voting by general asset holders and on-chain collectives with special management rights. In addition to being able to make decisions at the abstract level, the bottom layer can autonomously enforce the results of governance decisions, including upgrading the chain itself.
The step-by-step automation of updates is an essential element of a sovereign Substrate-developed blockchain. Because network decisions can be automatically upgraded through governance, it is not dependent on network hard forks caused by other roles such as miners and verifiers. Moreover, Polkadot allows parallel chains to be managed independently, make decisions independently, and exercise complete independence and sovereignty over their own chains. Therefore, each parachain and relay chain on Polkadot can be regarded as an independent sovereign entity owned by network stakeholders.
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02 Fund Operation
The assets in dSWF are controlled by an account on the chain, which does not have a private key associated with it, and the general council and network governance can manage the assets in the account.
There are three ways for dSWF to earn money. The first two methods come from the Acala Honzon stablecoin protocol. The Honzon stablecoin protocol provides a multi-asset over-collateralization platform that accepts multiple assets as collateral in exchange for Acala’s USD-linked stable asset aUSD. Just like Maker, borrowers need Pay a stability fee on their loan. Unlike Maker, Acala does not burn the fee, but deposits the fee into dSWF.
Second, the Acala network charges a penalty in case the collateral of the loan falls below a certain threshold. This fee prevents malicious arrears and is only applicable in cases where the network needs to liquidate some collateral. And, like the Stability Fee, it goes to dSWF instead of being burned.
Third, Acala also has a Homa liquidity release protocol. The mechanism details of the Homa protocol need an article to tell everyone, so I can only briefly introduce it like the above-mentioned Honzon stable currency protocol. Like other PoS networks, Polkadot needs to lock DOTs through verifiers to protect the security of the network. If all goes well, these locked assets will generate staking benefits, but if the selected validators misbehave, the staking benefits will not exist, and the pledged DOT will be Slashed. The incentive model of the PoS network is to maintain the security of the network, but this does not apply to Acala's view of high asset utilization. The Homa protocol coordinates and balances the relationship between users and network security by creating a Staking fund pool, where users can deposit DOT in exchange for some freely transferable derivatives L-DOT. The Staking fund pool is managed by the council of the Homa protocol, which decides the strategy for validating node selection (same as mentioned above), and L-DOT holders can return their L-DOT to the network and recover DOT, You can also get the income generated during the Staking period. The transaction fees generated will also enter dSWF.
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03 Value Creation
It's not hard to see that dSWF is very creative in its own right. The dSWF account actually has a variety of network assets, not only from its own network itself, but also from other blockchain network assets. Moreover, this account does not represent a certain contract, nor does it represent any user, enterprise or entity, but belongs to the chain itself. If you stop and think about it, the chain does not distribute the assets of the external chain to users or contracts; instead, a blockchain network itself (here specifically referring to Acala) owns part of another blockchain.
Currency or Token can have multiple uses, so Acala Network Token holders can decide how to use it. Acala first plans to use these funds to obtain a parachain slot, because the number of Polkadot parachain slots is limited, and whenever there are new available slots, all teams can lock the corresponding number of DOTs to win the slot bidding Get access to slots. Most teams do not have enough DOT to obtain a Slot, so they need to turn to the community to let community users vote to lock their DOT to help the project team bid. Acala will do the same in its first parachain auction, bidding for parachain slots.
But it is not sustainable for the same project to win the auction by raising DOT from the community multiple times. If dSWF can have enough funds, the blockchain network itself can use its own DOT to bid for its own parachain slot, and return the DOT of all previous community supporters.
When the network income enters the dSWF fund account, Acala plans to exchange all of it for DOT and participate in Staking to increase the fund income of dSWF. When the first parachain lease period is over and the renewal auction is about to take place, dSWF will retrieve the pledged DOT and use it for the renewal slot. Eventually, when dSWF has enough DOTs to lease parachain slots, there will be no need to lease from the community.
After Acala has its own parachain slot, dSWF will keep pursuing other practical values. Instead of accumulating DOTs for a parachain slot, it can occupy other parachain slots for services or partnerships in their networks.
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04 Looking Ahead
Through dSWF and on-chain governance, Acala will become an entity of economic and policy sovereignty (decision-making and execution). It will create a new generation of DAO - DAO 3.0. Like the Norwegian Government Sovereign Fund, Acala's dSWF will reinvest its network surplus in off-chain assets - starting with DOT and KSM, and gradually diversifying into other assets, with the aim of network security, long-term wealth creation, and strategic Hold a valuable stake in the sovereign network. ACA holders not only jointly own dSWF, but also collectively decide how to use dSWF. Funds in dSWF are Assets Under Management (AUM) managed by the Acala Network. Perhaps, in the future, you can reproduce open source code, liquidity, and even migrate the entire community, but the asset management scale will become a barrier that is difficult to replicate.
Acala Encyclopedia
Assets under management (AUM)
Asset Under Management
The scale of assets under management refers to an indicator to measure the scale of asset management business of a financial institution, and it is the total market value of client assets currently managed by the institution. This indicator is mainly applicable to measure the scale of asset management business of fund management companies and investment banks, commercial banks or financial holding companies. The larger the AUM, the stronger its industry position. For example, the AUM of the world's largest financial institutions such as UBS, Credit Suisse, and Citigroup are all in the trillions of dollars or more.
*SOURCE：wiki.mbalib.com
