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EP 51: Understanding $ALCX (Alchemix) | No Loss Stable Coin?
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TLDR below. This is not financial advice.
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What is Alchemix?
Alchemix is a no-loss stable coin that uses $DAI as collateral. It includes real inflation and real growth in the ecosystem which makes it quite different. It also talks about capital efficiency. In the early DeFi days people didn’t think so much about capital efficiency and were mostly thinking about over-collateralisation, risk management, and yield.
Today things are a bit different we have grown so much further and can think a little bit more about how to efficiently use our capital to get more returns. There is some over-collateralisation in the Alchemix protocol but it also uses your collaterals to help you earn some form of yield so in that way it kind of offsets it quite a bit.
Alchemix is an evolution to stable coins. It mainly uses reserves to back the stablecoin, while using a bond-like mechanism to reward users. Such similar ideas exist, like $DSD and $ESD. The problem with $ESD and $DSD is that it was just level one to stable coin bond market innovation. They had a great concept but the execution was not as robust or as good. I see Alchemix as a way to make it better and evolve to level two of what crypto bonds could be in terms of stablecoin.
Why is the collateralization 200%?
If the protocol had a lower collateralization ratio then loan repayments would take a lot longer. Right now with the current yield, it's around two years to get repaid but with a lower collateralization ratio that might take five, seven, or even 10 years especially if yields start dropping in DeFi. That's like a lifetime especially in DeFi and crypto so having such a long repayment time is a little bit unrealistic.
The other thing is that let's say you borrow $alUSD and sell it for $DAI then you put it into Alchemix and borrow more alUSD. This can be done in a loop right now because of the collateralization ratio which means that you can basically lever your vault up to 2x. If we had a lower collateralization ratio this kind of recursive strategy could be exploited even more and that wouldn’t have a good effect on the system. It might also destabilize the peg because people would over-leverage their vaults so for the health of the system and reasonable debt repayment times the collateralization ratio is set to 200%.
How does it maintain stability?
The big picture here is that there are two big pools. The first one is the collateral pool where you take your $DAI and put it into the collateral pool to get $alUSD out. Then you have the transmuter pool where you can put $alUSD in and get $DAI out.
One of the important things in this entire game is that 1 $DAI equals 1 $alUSD. Sometimes prices change and it is not always one for one. Let's say 1 $alUSD is now worth $1.5 which is a 50% increase. People will now put $DAI into the collateral pool and get $alUSD out because if you put 100 $DAI you will always get 50 $alUSD out as it is 50% collateral and $alUSD will always be equivalent to one $DAI. Now since 1 $alUSD is worth $1.50 then more people will turn their $DAI into $alUSD and increase the supply of $alUSD and reduce the prices back to $1.
When $alUSD is less than $1 you go to the transmuter pool and put $alUSD in it. Let's say your $alUSD is now worth 80 cents instead of $1 and you don't want to spend it because it is not worth that much so you put it in the transmuter pool. Once the pool generates yield and more $DAI then you get to give them 80 cents worth of $alUSD and get 1 $DAI out which is worth $1 because it is one for one in the system.
Where is the fee coming from?
The fee is coming from Yearn so actually, your debt is getting repaid automatically through yearn. Every single time the protocol harvests your debt goes down and there's no interest on $alUSD. Every single time the yield is harvested it will go to paying off your loan which right now takes around two years for a max loan to be completely paid off.
Example: If I put 100 $DAI in and take 50 $alUSD out the yield from Yearn comes in to pay off that 50 $alUSD that I've borrowed.
Transmuter as Risk Management
Lisa: Anyone who wants to gain from being part of Alchemix can either put $DAI in to borrow $alUSD out and allow the system to generate enough yield to be paying off the debt or the other way is when people put $alUSD in the transmuter to take $DAI out.
Scoopy: The only reason to use transmuter is if $alUSD is off the peg. If it is not off the peg then just trade it on Curve as it'll be faster.
The other thing is that the transmuter actually has a beneficial effect to the $DAI depositors because all the balance of the transmuter is also farming yield. We have like 240 million $DAI in the transmuter that's all farming yield and then we have an additional 160 million $DAI in deposits in the vault. We have 400 million $DAI as principal but that's only for 160 million $DAI deposits. Even though we're using Yearn which has rates of around 13% we can offer around 30% because of that extra principal that's being passed on. The yield from this is being distributed to our depositors and helping to repay their debts faster.
Lisa: Does all the yield that's coming in go to the vault or part of it also goes to the transmuter?
Scoopy: The transmuter and the Alchemix vault both have a vault adapter. We harvest the yield from the transmuter and then those $yvDAI or the $DAI vault tokens get sent over to the vault adapter for the Alchemix contract and get harvested. 90% percent of the yield is used for debt repayments and being sent to the transmuter so those are one in the same.
If we have a $100k worth of debt repayment then a $100k goes to the transmuter and 10% of the harvested yield goes to the DAO treasury. We've been averaging somewhere between 150k to 200k DAI per harvest which is a daily thing so our DAO treasury is growing around 15k to 20k dollars a day at this rate and debt repayment's around $130k to $180k a day.
Lisa: 90% of all the harvest coming in goes to the Alchemix vault as well as the transmuter vault so is there a percentage split between those two?
Scoopy: The amount of $DAI from the harvest is spread proportionally amongst everybody by the amount they have deposited into the Alchemix contract and that debt or $alUSD is deducted from the ledger on the app. All of that $DAI is then sent to the transmuter which becomes available for transmutation and also boosts the yields in the system.
The Alchemix takes care of the bookkeeping as far as debts and credit and everything like that goes. Since $alUSD is our own coin whenever we do a harvest we just delete that debt from your own personal ledger or at least reduce it. That $alUSD isn't getting burned but if someone wants to transmute the alUSD that they have in the transmuter then that burns the alUSD and they can then receive equal amount of $DAI that they've burned in $alUSD.
$ALCX: What can people do with this token?
$ALCX token right now is the governance token for the platform. There have been a few votes so far on Snapshot. They have a developer and community multi-sig wallet that is a five of seven multi-sig. There are four devs and three community members on that wallet. At least one community member is needed to go along with the devs to get anything done. There is also a 24 hour time lock on that so there are some different security layers to make sure that nobody from the team or the community wallet or the multi-sig can do anything malicious and it'll be easily spottable if anyone tries to do something like that.
Alchemix is working on version two and with it, they are going to release Alchemix DAO. It will get rid of the whole snapshot with a multi-sig wallet and turn it into an actual DAO that executes code. They are trying to decentralise in that aspect.
Currency Bond System and the difference between Alchemix and Other Protocols
This system works kind of like a currency bond system. In this, you're giving your tokens or $DAI and get to borrow some part out of it and get to use it right now. The amount of money borrowed is going to be repaid through the yields generated in the future so you're bringing forward the future revenues or future profits generated and you get to use it today.
Example: You've got 100 $DAI and you put it in the system and of this, you can borrow 50 $alUSD out and can use it today so you effectively have 150 $DAI worth of tokens. Then the 100 $DAI that is in the collateral will help you to earn different yields and help to repay that 50 $alUSD you've borrowed so that is how you get to tap into the future profits generated.
One of the big differences is that there is real value inflation in the system. When we talk about inflation in the DeFi space we're talking about inflation in terms of real value and not just monetary inflation.
The supply side is quite easy as you just keep increasing the number of tokens out there but if you don't have the demand side for it then there is nothing substantiating the value of the new tokens being added into the system.
In Alchemix when your collaterals are being added into the system it is actually working for you. It works for you in Yearn to get different kinds of returns then it gets added into the system and you can trade your $alUSD out and get $DAI in. In this situation, you're adding real economic value into the system instead of just inflating the supply of tokens.
Impossible to lose money
In a situation where let's say the peg is broken and the transmuter runs out of its reserves then at that point if you want to convert your $alUSD to $DAI it might take longer. Right now it's pretty instantaneous because the amount of people who are staking in at this point is relatively low and is actually less than the amount of yield that we make daily so it's very easy for people to use the transmuter.
In the case where the peg broke and the transmuter was drained it would basically take however long it takes for the yield to drip into the transmuter for that $alUSD to $DAI conversion to take place. If we break the peg then it's more like how $USD becomes a bond but you always have the guarantee that it will be redeemable for one-to-one just that it might take a longer time. Theoretically, it should be impossible to lose money using Alchemix. You might lose a little time value in the worst-case scenario but you shouldn't lose even one penny.
Backed by Correlated assets
The other interesting thing is that it is backed by correlated assets. There are a lot of other stablecoin systems out there like Maker, Frax, and Fei where you're creating stable tokens but it is backed by an uncorrelated asset like $ETH, $wBTC, or $YFI token. Alchemix is backed 100% with correlated assets.. That means $DAI and $alUSD which are worth the same thing. And prices crashing do not affect the mechanism too much.
Listen on podcast if you prefer audio version.
Alchemix is one of the leading stablecoins in anchoring $alUSD to a stablecoin, specifically $DAI. Whereas $DAI is minted by collateralising crypto assets.
If you understand $DAI well, stablecoins are created by debt. That is, you mortgage your property so that you get a debt for various purposes. And $alUSD continues to be made up of these debts. This makes $alUSD complicated and unpredictable risks.
We've seen CDSs created by real estate debt and they broke down during the 2008 crisis. I am not here to say that $alUSD is bad or good, but clearly, past events make us more alert. However, $alUSD still has a meaning for the development of the whole Crypto Space.
Ps: Order the textbook "Economics and Math of Token Engineering and DeFi" today!