Alchemix — Borrowing Magic
Overview
Alchemix Finance is a future-yield backed synthetic asset platform and community DAO. The token's unique value proposition stems from the platform's ability to provide advances on your yield farming capital while removing liquidation risk. In other words, Alchemix gives users a flexible line of credit for their future yield.
How does this all work?
Traditional lending protocols such as AAVE and Compound allow users to borrow funds by posting collateral that is worth more than the underlying loan itself (ie: loans are overcollateralized). This is all well and good but should the value of your collateral drop below the required threshold, the funds are liquidated to repay the debt. Alchemix eliminates this risk through a mechanism which allows users to borrow against their deposited collateral but have the debt automatically paid down via yield from Yearn.
No liquidation risk you say? Let’s dive into how this is achieved. The protocol lets users deposit DAI, used as collateral, allowing users to mint alUSD up to 50% of the DAI value (synthetic stablecoin token with “al” denoting the Alchemix platform. 1:1 peg). It’s under this mechanism that allows users to eliminate liquidation risk as stablecoins are swapped throughout. DAI is then deployed by the Alchemix contract to earn yield in the Yearn yvDAI vault. As yield is harvested from the vault, the cashflows generated are used to pay off the alUSD debt load. Under a long enough time frame, this effectively creates a loan that pays itself off, pretty cool right?
As the protocol automatically repays the debt, a user’s collateralization ratio will increase (debt outstanding against collateral decreases). If at any point a user is more than 200% collateralized, they can choose to either withdraw DAI from their initial deposit or mint more alUSD until their vault falls back down to the minimum 200% collateralization ratio. Should one need access to their underlying capital right away, a user can settle their vault by repaying their alUSD debt using alUSD, DAI, or liquidating a portion of their collateral to cover their debt. Once a user has 0 alUSD debt outstanding, the smart contract unlocks the user's collateral.
How is the Peg Maintained?
The synthetic 1:1 peg that alUSD offers against DAI is achieved through the use of a Transmuter. The Alchemix dApp calls a harvest function on a regular basis, which collects the yield generated by all deposits into the Transmuter pool and acts as a last line of defense, ensuring that users will be guaranteed a 1:1 redemption of alUSD for DAI.
Arbitrage is another strong pegging mechanism as alUSD is repayable in alUSD and/or DAI. If alUSD is under the DAI peg, users can buy it off the market and repay their debt at a discount. If alUSD is over the peg, users can mint and sell alUSD to arbitrage the price down or can repay their debt using DAI.
Tokenonmics
ALCX is the native governance token for the Alchemix platform, giving holders voting rights over the direction of the protocol and use of its treasury. The current primary utility is that of governance but is subject to change based upon community input. This governance token will eventually transition into a complete DAO. The token was launched with no pre-mine and its distribution is set out as follows:
The token distribution allocates a large majority of tokens to those who contribute and participate in the protocol, incentivizing continued use. The 20% of supply dedicated in this “exclusive mining pool” is structured in a unique way as it mimics a traditional vesting structure for founders while also providing incentives for onboarding more developers into its ecosystem. The supply of ALCX is not capped, but the supply emission curve is well defined with distributions decreasing weekly by 130 ALCX for 3 years until it flatlines at 2200 ALCX tokens per week to support ongoing needs for incentivizing ecosystem behaviors.
So, Why ALCX?
In its current state, the ALCX token represents nothing more than a governance token so why should you even consider it? Hear me out:
Current yields on Alchemix farms are quite lucrative, with the low end yielding 85% APR through the alUSD3CRV Pool and the high end yielding 438% APR through the ALCX/ETH Pool (Rates are variable and thus change frequently). These attractive yields encourage users to stake their ALCX and/or alUSD and earn the ALCX DAO reward leading to Total Value Locked exploding higher for its current pools:
On the near term horizon also lies Alchemix V2 which aims to add multiple new features to the protocol such as giving users the ability to borrow against ETH or BTC as well as posting collateral in other stablecoins such as USDT, USDC, sUSD. Additionally, ALCX will transition into a feature complete DAO which will start paying cashflows from generated harvest fees to token holders. As these new features roll out and TVL continues to grow as users are now able to deposit a wider range of collateral, users staking their ALCX will generate more and more cashflows from the protocol through the 10% harvest fee generated from the vaults. Alchemix V2 will transition the token from a valueless governance token to one that holds a claim on protocol revenue and one which will become increasingly attractive to hold.
