Background

It looks like Acala might have been up to no good. There’s some signs of questionable usage of funds from the users that contributed to Build Acala, and the aUSD error print (there’s literally a line in the code about issuing unbacked aUSD) looks like it might have at the very least been negligence on Acala’s part. Giotto’s proposed investigation into the incident will offer answers to those questions. This post however does not address that issue.

Impact of the error print on Polkadot

The reality is the liquidity problems many parachains are having today is the result of that error print. The people trying to repeg aUSD on Kucoin used their funds to buy up the aUSD on there, under the expectation that Acala would cover them, and not get into a legal fight with Kucoin, which even if they were in the right, the opportunity cost would threaten their future viability as a business. They were squabbling over $5 million in the present, while putting at risk billions in five to ten years. There was easily a couple million injected into Kucoin in an attempt to recover it that would have otherwise flown into other parachains.

What can be done?

I think it would be wise for the Dot holders to vote on using the treasury to compensate the holders of aUSD, on Kucoin. Kucoin is covering ~0.045. So, ideally make a full buck with ~0.955 in Dot given per aUSD held. Debating over a haircut would be perfectly acceptable too, as long as holders receive some form of compensation.

Why provide compensation?

If we do not provide compensation Polkadot loses liquidity. It would not surprise me at all if the liquidity problems Parallel is having currently are largely the result of the error print. I know personally if I was compensated I’d use that money to add liquidity to Parallel, and other parachains. So, in fact it’s more of an investment in the ecosystem to increase liquidity for the various parachains. I’m sure others will mostly hold onto the Dot as well. Maybe, sell some to buy other Dot tokens so they can provide liquidity. But, overall it would be beneficial for the health of the ecosystem.

Think of it as a $5 million liquidity injection. A bailout for aUSD holders that would lead to the ecosystem having greater liquidity, and the Dot treasury would be able to collect more from fees over the next couple of years from the increased revenue from all of the transactions it enables.

How to determine who receives compensation

The users on Kucoin could submit their acquirement forms, or other acceptable proof of holdings, which we agree upon here. After submitting that just share their Polkadot address to receive compensation.

The details still need to be ironed out. If anyone knows how to calculate potential fees gained from the Dot being reinvested back into the ecosystem I'd appreciate that. I know Warren Buffet bailed out Goldman Sachs with $5 billion once, and he made a $3.1 billion return on it within two years. So, this is potentially a well thought out investment for the treasury.

Anyone have any thoughts?