Alchemix is a DeFi project that allows users to collateralize their loans. Alchemix’s twist is that it tokenizes collateral as another asset that can be used in other parts of the market. This synthetic collateral is then borrowed, automatically repaying the original loan without incurring any risk of liquidation.
How does Alchemix work?
With hundreds of lending dApps available across dozens of blockchains, it’s difficult to stand out from the crowd. Some use classic interest rate models, while others, such as B. Liquidity, stablecoins equivalent to the blocked loan collateral.
Alchemix offers an automatic repayment loan. Thats how it works:
- The borrower deposits collateral in a smart contract, either ETH or DAI stablecoin, to receive a loan.
- The Alchemix protocol then automatically deposits this collateral on another platform that generates income. For example, the very popular Yield Farming Yearn Finance. In particular, safes from Yearn Finance.
- The collateral then generates its own rate of return to pay off the original loan.
For example, let’s say a borrower deposits $20,000 worth of DAI stablecoin. If we follow the Alchemix rule (ALCX token holders can vote for 150% DAI overcollateralization), that $20,000 would be enough for the smart contract to issue a $13,333 loan. These high ratios are required to issue non-liquidatable loans.
If Alchemix deposited the loan into Yearn Finance’s vault at an annual percentage rate (APR) of 4%, it would take over a decade for the loan to automatically repay itself. However, the borrower can then withdraw the collateral steadily as its value increases in Yearn Finance’s vault.
In addition, Yearn Finance vaults offer customized smart contracts for each vault. For example, they can determine which token to borrow to farm another token and then where to sell those farmed tokens for the best price.
In the right market conditions, Yearn Finance safes can offer double digit returns or better. The Alchemix borrower’s loan would then be automatically repaid much more quickly, or the borrower could withdraw the collateral more quickly.
For this reason, the gradual loan repayment is a separate function in Alchemix.
Alchemix v2 remake
In March 2022, Alchemix upgraded and introduced significant flexibility. Borrowers can choose their own yield strategies and types of token collateral. This means that Alcehmix users can generate their own yield aggregators by combining strategies with collateral types.
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Previously only DAI and ETH were supported. Additionally, Alchemix integrated Vesper and Aave vaults alongside Yearn Finance vaults. Mixing smart contracts with other platforms is a unique DeFi feature called composability, as each individual component creates a new product. In the case of Alchemix, new revenue-generating strategies.
That being said, the newcomer vaults are still in beta. Additionally, bear market conditions in late 2022 have left Alchemix’s returns extremely low, no matter which strategy is employed.
The loan-to-value (LTV) ratio is a maximum of 50% before liquidation can occur, regardless of whether stablecoins are used as collateral. However, because stablecoins are… stable, their value is extremely unlikely to depreciate against the loan issued, making liquidation very unlikely to occur.
You may also have noticed that these vaults have prefixes like DAI + yvDAI indicating that the DAI collateral was deposited in Yearn Vault (yv). This is the integral part of Alchemix innovation.
Borrow future returns with synthetic stablecoins
When borrowers pledge their assets as collateral, be it USDT or DAI stablecoins, Alchemix’s smart contract mints a synthetic stablecoin equal to the value of the collateral plus the yield yet to be earned. In other words, Alchemix tokenizes the borrower’s future rate of return and mints it as a synthetic asset.
This is Alchemix’s unique asset release feature. While the initial deposit is locked in a revenue-producing vault to repay the loan, the $10,000 yvUSDT (+ future return) is then released to be used as you please.
The borrower can convert yvUSDT to USDT using Alchemix’s swap feature, which supports Curve, Paraswap and Zapper decentralized exchanges. The regular USDT stablecoin can then in turn be exchanged for fiat money.
ALCX tokenomics
The ALCX token is the main instrument of the protocol for implementing the DAO governance, i.e. Alchemix’s on-chain treasury. ALCX token holders often vote on how to allocate funding and optimize and evolve the protocol.
ALCX tokens could also be used to earn more ALCX tokens. Additionally, users can stake ETH SLP (Axie Infinity) tokens to earn ALCX. As of November 2022, a third of ALCX will be used for staking while the rest will be used to provide liquidity in Ethereum and Fantom.
By 2027, there should be 2.8M ALCX in total supply, which would bring weekly ALCX issuance down from 11,000 to a steady 2.2,000 in the February 2024 milestone.
In May 2022, after Alchemix v2, the team announced that the token’s role would go beyond pure governance to fund development, drive liquidity and increase Alchemix’s vault integrations.
To support this goal, they released veALCX, which stands for Vested Escrow. You can read more about these new Alchemix tokenomics here.
Surprising implications
If you’ve been following along so far, you might have noticed that Alchemix isn’t what it seems at first glance:
- The LTV of 50% makes Alchemix virtually liquid-proof in addition to using stablecoins.
- Alchemix makes over-collateralization a protocol where borrowers actually borrow from themselves.
- Neither is 50% a liquidity threshold to be crossed (especially for stablecoins), nor is an interest rate applied.
- Since users set their own repayment schedule, it is a risk-free line of credit.
In other words, Alchemix only puts a price tag on the opportunity cost of the collateral posted. It is the borrower who provides his equity for the loan and is therefore both borrower and liquidity provider (lender).
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This implies that the opportunity cost is highly dependent on the revenue-generating strategies employed in Alchemix’s vaults. So the only real danger is that the rate of return is so low that the loan cannot be repaid.
This would not have been possible in traditional finance as there are other costs associated with running a bank, from fees to salaries. In the case of Alchemix, there are no such costs as automated smart contracts replace these traditional costs.
Who Invented Alchemix?
Unfortunately, the names of the team members are unknown and remain anonymous. The team behind it was called Scoopy Trooples and launched Alchemix in February 2021.
Aside from the lack of volatility, there’s a reason Alchemix is so stablecoin-centric. Initially, ETH and DAI stablecoins were supported, with ETH 400% overcollateralized and DAI 200%. Still, an ETH vault was exploited, allowing users to withdraw 2,200 ETH without repaying their debt.
To recover the funds, the Alchemix team launched a rewards campaign that integrated both NFTs and ALCX rewards. Thanks to these incentives, they were able to recover over half of the missing ETH.
Disclaimer for the series:
This series article is for general guidance and information only for beginners participating in cryptocurrencies and DeFi. Nothing in this article should be construed as legal, business, investment or tax advice. Consult your advisors for all legal, business, investment and tax implications and advice. The Defiant is not liable for lost funds. Please use your best judgment and exercise due diligence before interacting with Smart Contracts.
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