An Introduction to Alchemix (ALCX)
Alchemix is a yield tokenization protocol in DeFi that lets you take out a loan against future yield.
Have you ever heard of someone take out a loan that automatically pays itself? Well, Alchemix lets you do just that. It’s a new protocol built on Ethereum that presents a unique way to tokenize yield.
Let’s see how it works and how you can buy a Tesla with yield (sort of).
What is Alchemix?
Alchemix is a synthetic asset protocol where the assets are collateralized by yield. You may already know about Synthetix, where synthetic assets can be created by locking up the platform’s native token, SNX (or ETH). You may also know about MakerDAO, where users can mint the stablecoin DAI as debt against the collateral they post.
The key difference with Alchemix is that these synthetic assets are backed by yield instead of debt. In some sense, by creating a synthetic asset in Alchemix, you’re getting your future yield paid in advance. As such, Alchemix offers a new primitive in the Decentralized Finance (DeFi) ecosystem where yield can act as an engine for collateralization.
How does Alchemix work?
First, a bit of an overview of how collateral works in existing money markets. Users post collateral, receive tokens that represent their position, and start earning interest algorithmically. These are cTokens in the case of Compound or aTokens in the case of Aave. Similarly, a user deposits assets into a yearn vault, and they receive yTokens in return that represent their yield-earning position in the vault.
Alchemix yield-backed tokens take this concept a step further. The requirement to create an Alchemix synthetic token (alToken) is that the collateral needs to be yield-generating on its own. If this wouldn’t be the case, and this mechanism wouldn’t already be on-chain, the entire concept wouldn’t work. Remember, the idea is that the tokens are backed by future yield. Simply, if there’s no yield, there’s no future yield, and the collateralization doesn’t work.
The first type of Alchemix synthetic token is called alUSD, and it’s backed by a basket of stablecoins – though the protocol initially only supports DAI. Alchemix plans to introduce alBTC and alETH to cover all three of the best collateral types in DeFi.
What is an Alchemix Vault?
Vaults let users manage their synthetic token positions. In the case of alUSD, they deposit DAI, which is then deposited into yearn and turned into yvDAI by the protocol. A user can mint up to half of the amount they deposited. So, if you deposit 100 DAI, you can mint up to 50 alUSD.
As the yield generated by the Vault is harvested, user debt is decreased. Remember, the position is backed by future yield. The yield starts dripping in, and it decreases the debt incurred by opening the position. In other words, as time goes on, the debt slowly pays for itself! This is the power of backing the debt position by a yield-bearing asset.
So, what happens later? As the position is generating yield, the user can either mint more of the synthetic asset (alUSD), withdraw some of the collateral (DAI), or a combination of the two. If they want to withdraw and close their position, they can repay their debt using both alUSD and DAI. Once they have no debt, they can also withdraw their collateral.
Alchemix regularly harvests the yield generated by the deposits in the system. It’s used to pay off debt in the Vaults, and it’s then transferred to the Transmuter pool. Users can stake the alchemical tokens in the pool, and as a result, slowly convert them into the base asset.
For now, alUSD is only backed by DAI, but the plan is that it’ll be backed by a basket of stablecoins. But what happens if one of them loses the peg? Since the protocol treats alUSD the same way as the collateral, it could be possible to convert the token that lost its peg and is now worth less than 1 alUSD to 1 alUSD.
To try to mitigate this risk, Alchemix uses Chainlink oracles for the price feeds of the supported assets. If one of them is significantly below a certain price, minting, repaying, and liquidating collateral are disabled. Once the peg is restored, this functionality is also restored. Even so, the collateral losing its peg would still hurt the system, so there are limits to how much alUSD can be minted using each collateral asset.
The Alchemix treasury
90% of the generated yield goes to paying off debts and to the Transmuter pool. However, 10% of it goes to the Alchemix DAO treasury. Initially, the DAO is controlled by a multisig wallet, but eventually the treasury should be fully controlled by the DAO.
These funds will be used to support development, pay for developers, core members, and other ongoing expenses. Holders of ALCX, the native token of the Alchemix protocol, will be able to have direct control over these expenditures through Alchemix DAO governance.
As with any DeFi protocol governed by a DAO, it will be key to fund developments that further advance the platform and the adoption of alTokens. Kickstarting a decentralized community has its challenges at the beginning, but we’ve already seen some successful results with projects like yearn, Sushi, and BadgerDAO.
The Alchemix (ALCX) token
ALCX can be earned by yield farming. As we’ve discussed, ALCX entitles its holders to governance rights. What that means will likely be more clear as the products and the DAO surrounding them evolve.
60% of the supply is allocated to a single-token staking pool and some other incentivized pools.
The first one is the alUSD pool, where users can stake alUSD to receive ALCX — the idea is to encourage minting alUSD. The second one is alUSD - 3CRV pool tokens. This ensures that there’s sufficient liquidity for alUSD on Curve, the best place to swap stablecoins with low slippage. The third pool is the ALCX-ETH pair on Sushi for price discovery, and the fourth is a single ALCX pool to encourage holding the token for more rewards.
In addition, 15% of the supply goes to the Alchemix DAO, 5% to bug bounties, while 20% to the development team.
Summary
Alchemix is a synthetic asset protocol that lets users tokenize yield in the DeFi ecosystem. While the features it offers could technically be performed manually, organizing them into a new primitive has some exciting implications, especially when it comes to composability.
The user experience also offers advantages over other ways to take out a loan in DeFi. Slowly seeing debt melt away can have a powerful psychological effect.