Alchemix is a DeFi dApp (decentralized application) that runs on the Ethereum blockchain. Alchemix’s unique value proposition is that borrowers can take out a loan that is automatically repaid over time via yields generated by the deposited collateral. Here’s how it works.
Alchemix is a decentralized borrowing platform that allows investors to take out loans that are automatically repaid over time. To take out a loan an investor must deposit one of the supported assets, primarily ETH and DAI.
Alchemix will likely accept other coins in the future, however, for an asset to be supported it needs to have yield generating opportunities. The whole premise behind Alchemix only works if the deposited collateral can earn a yield.
There is an overcollateralization ratio of 150% for DAI which means that to borrow $0.66 you must deposit $1. For ETH the ratio is 200%, which means that borrowing $1 requires $2 of collateral.
Similar to how MakerDAO generates the DAI stablecoin, when investors deposit collateral in Alchemix they can mint the alUSD stablecoin. alUSD can easily be swapped for DAI using the Alchemix “transmuter”; an exchange protocol designed for swapping stablecoins.
Other protocols have offered collateralized borrowing for years, but it’s Alchemix’s self-repaying feature that makes it unique. After an investor deposits collateral to take out a loan, Alchemix automatically deposits the collateral in a yield generating protocol like Yearn. The collateral earns a yield which is used to pay off the loan. Alternatively, an investor can also gradually withdraw their collateral over time since its value is constantly increasing from the yield that it’s earning. Here’s a real-world example of how a loan could get paid off.
An investor deposits $10,000 worth of DAI into Alchemix and takes out a $5,000 loan. We’ll assume a conservative 5% APR yield on the deposits. That’s probably on the low end, but yields could fall in DeFi in the coming years as more institutional investors enter the space. Under these conditions it would take 3,578 days, or just under 10 years, for the Alchemix loan to be automatically repaid.
If we make a more generous assumption of a 10.2% APR on the deposit, it would take 1,789 days for the Alchemix loan to be repaid. To make your own calculations you can visit the Alchemix Vault and connect your MetaMask wallet.
The alUSD token
alUSD is an ERC20 token and can be used throughout Ethereum’s ecosystem of decentralized applications. Although alUSD is a dollar stablecoin, its price can fluctuate just like DAI. alUSD depends on arbitrage opportunities to keep it pegged to the dollar.
If alUSD trades below the dollar, investors can buy discounted tokens and use them to repay their loans. This buying pressure should return the price of alUSD to $1. If alUSD trades above $1, the higher price incentivizes investors to take out loans and generate extra alUSD. This alUSD can then be sold into the market for a gain.
alUSD is currently trading on Curve and SushiSwap. Unlike Terra Luna’s algorithmic UST token, alUSD is unlikely to experience a bank run since it’s secured by the value of the collateral.
The Alchemix DAO
Like many other DeFi applications, Alchemix is managed by a DAO. Investors who hold the ALCX token can vote on how the protocol is run, including feature development and how the DAO’s funds are spent. The Alchemix DAO is self-funded as it collects 10% of the yield profits from the collateral deposited in Yearn.
ALCX trades on multiple centralized and decentralized exchanges, or can be earned by staking tokens in the Alchemix liquidity pools. ALCX has two unique features:
- It was distributed to investors via a fair launch. Just 20% of the initial tokens went to the DAO, while the remaining 80% are distributed to liquidity providers
- There is no hard cap on the number of ALCX tokens that can exist. The Alchemix protocol will continue to mint ALCX tokens to pay liquidity providers indefinitely, however, in the future the protocol will reach a lower bound of a maximum 2,200 tokens minted per week
A future for Alchemix
Alchemix is a unique financial product that represents the pinnacle of blockchain innovation. There’s almost no chance that a self-repaying loan protocol could ever exist in the traditional financial markets, and yet DeFi is just several years old and we already have Alchemix.
Although there is always some risk in using novel dApps, Alchemix appears to be relatively safe since alUSD is supported by over-collateralized deposits. More information about the protocol is available on the Alchemix Medium page, where the team posts regular updates about what’s going on in the ecosystem.
How to buy Alchemix
You can buy Alchemix (ALCX) in Exodus using a credit / debit card, bank account, or Apple Pay. For a simple, step-by-step guide on how to buy cryptocurrency in Exodus using Ramp network, head to our knowledge base.
Exodus hosts over 180 different crypto assets, and you can buy Alchemix (ALCX) with Bitcoin and other cryptocurrencies within Exodus by either using the built-in exchange app, or by linking your Exodus wallet with the FTX exchange.
This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.