Alchemix Finance (ALCX) is an innovative DeFi protocol for self-paying crypto loans. Alchemix loans pay themselves off by using your collateral to yield farm on interest-bearing DeFi protocols.
If self-paying loans aren't already radical enough, Alchemix goes a step further. The crypto loan you receive is based on the future yield value of your collateral. In essence, the protocol tokenizes your interest now for what your collateral can yield later.
Is Alchemix rewriting the laws of finance? This guide explains how the Alchemix protocol works so you can get a grip on one of DeFi's most promising projects.
Self-paying loans almost sound too good to be true. But the alchemy going on behind the scenes is rooted in composability, i.e., the ability of DeFi protocols to connect like lego blocks.
Alchemix stacks several protocols on top of each other to generate as much yield as possible using your collateralized assets. Once you deposit inside the Alchemix Vault, the protocol issues alUSD, a synthetic stablecoin you can swap for other stablecoins, cryptocurrencies, or cash.
Before diving deeper into Alchemix's inner workings, it's worth noting how the protocol started.
Scoopy Trooples, Alchemix Finance's founder, is one part anonymous developer and one part crypto insider. Alongside Alchemix, Trooples funded and ideated several up-and-coming decentralized finance projects via eGirl Capital, a rough-around-the-edges venture capital fund composed of an entirely pseudonymous team.
Are Trooples and the eGirl team traditional finance magnates hiding behind cartoonish Twitter profiles, or brilliant teens with excellent programming skills? Perhaps we'll never know — but it also doesn't matter. With nearly $2 billion deposited in Alchemix Vaults, the success of the protocol speaks for itself.
Unlike other DeFi protocols, the way Alchemix works is forgivingly straightforward. Essentially, Alchemix pools together user-deposit collateral, deposits those funds in other DeFi protocols, then harvests the profits to pay off everyone's debt over time.
At the top of the Alchemix flow is your MetaMask crypto wallet. Inside this wallet, you must have some amount of DAI, the stablecoin issued by Maker DAO. After connecting to the Alchemix app with your MetaMask wallet, the app detects your DAI balance and gives you four options.
An Alchemix crypto loan isn't the same as a bank loan. The bank asks you for credit history, identification, and employment data before considering your loan. An Alchemix loan only requires a collateral deposit in the form of DAI tokens.
Depositing DAI in the Alchemix Vault allows you to mint up to 50% of your collateral amount as alUSD. This is made possible by Alchemix taking your DAI and depositing it in the Yearn Finance yDAI vault. As Alchemix harvests yield profits from the Yearn vault, the global DAI pool belonging to Alchemix users rises, thus paying your loan off in time.
As the protocol automatically pays your debt down, your borrowing power increases since you not only owe less, but your original value regenerates. Alternatively, you can begin withdrawing your collateral as the self-paying debt unlocks it.
If you deposit DAI but don't mint alUSD, you have an interesting option available. The protocol yield farms on Yearn with your DAI, but instead of paying off your loan (since you don't have one), your borrowing power increases.
The Transmuter is a tool used by Alchemix to maintain a stable 1:1 peg between synthetic alUSD tokens and DAI. DAI deposits mint alUSD, so it's mission-critical that the two remain in parity.
If DAI is deposited into the Alchemix vault, and the Alchemix vault is plugged into the Yearn yDAI vault, what's backing alUSD?
As the Alchemix protocol harvests yields from the yDAI vault, the Transmuter siphons them. This way, when you deposit alUSD back in the Transmuter to withdraw DAI, there is always DAI ready to pour out, just like a reliable faucet.
The act of withdrawing DAI creates an equal and opposite stabilizing reaction. For every DAI withdrawn, an equal amount of alUSD is burned from the supply. The alUSD supply is elastic, meaning it contracts and expands according to demand to keep a stable value relative to DAI.
Sometimes, alUSD drops slightly below its DAI peg, enabling you to game the system with the following strategy:
The arbitrage opportunity arising from alUSD losing its peg helps the protocol recover equilibrium. As opportunists use the transmuter to collect DAI, they burn alUSD supply and raise alUSD back to the peg.
You deposited DAI and minted an alUSD crypto loan — now what? If you look around most exchanges, alUSD isn't an available trading pair.
To access the liquidity afforded by alUSD, head to the nifty Curve Swap app, a decentralized stablecoin exchange. Once there, you can swap between alUSD and globally accepted stablecoins DAI, USDT, and USDC.
With liquid stablecoins such as USDT, you can swap for other cryptocurrencies at your favorite exchanges or cash the USDT out to fiat currency. Alchemix loans are private by default, but some users have shared their loan-enabled purchases, like one person who bought his parents a boat.
ALCX is the governance token of the Alchemix Finance ecosystem. As an ALCX holder, you can participate in governance votes and help the Alchemix DAO make protocol-wide decisions.
While ALCX doesn't hold value beyond governance utility (at this point), earning a share of the governance is powerful in and of itself. You can earn ALCX tokens by farming them with alUSD.
The reason behind farming ALCX is quite simple. Let's say you deposit DAI in the Alchemix Vault and mint 50% of that value as alUSD. You could do something flashy like buy a Lambo — but cars are depreciating assets. Instead, why not use your self-paying loan to make more money?
This is where ALCX farming comes into play. Alchemix has a staking component built into the protocol that allows you to stake alUSD to earn ALCX tokens. The beauty here is alUSD is a stablecoin pegged to DAI. In theory, no matter how long you stake your alUSD, it should always be worth the same in DAI when withdrawn, giving you an eternal buffer for staking alUSD to earn ALCX.
You can then deposit your ALCX in the Alchemix ALCX pool, the ALCX/ETH liquidity pool, or deposit more alUSD in the alUSD3CRV pool for more ALCX.
To view all the ALCX staking and alUSD pool options, connect to the Alchemix app here.
ALCX and alUSD are both tokens within the Alchemix Finance ecosystem. But, they have very different purposes. Here's a quick guide to understanding the difference between ALCX and alUSD.
The Alchemix DAO receives some of the yield profits from pooled DAI and alUSD deposits into its treasury. Governance over the protocol is decentralized and held by the community of ALCX wallets. In the future, ALCX holders may vote to redirect a portion of those profits pro-rata to ALCX wallets, similar to how xSUSHI holders receive trading fees.
The DeFi industry loves its own. Recently, CMS Holdings and Alameda Research, two VC funds very active in the DeFi space, led a $5 million fundraising round for Alchemix. Besides having an ingenious app for self-paying loans, the pseudonymous team's history of building in DeFi may have finally paid dividends.
Funds like Alameda Research know that composability is the name of the game in DeFi. Base layer DeFi protocols capture the most value as all subsequent apps connect to them. Yearn, Curve, and Sushi are prime examples.
The Alchemix team is building on top of DeFi protocols but may become a significant player itself. Primitive assets like alUSD and future synthetic tokens originating from Alchemix Vaults might find deep liquidity across the DeFi ecosystem.
If Alchemix becomes widely embedded in other open finance tools, it could spur immense growth that helps Alchemix loans pay themselves off more quickly. Alchemix loans might pay themselves off in a month rather than a year. At that point, Alchemix usage would swell, lending credit to the protocol’s claim to rewriting the laws of finance.
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