Witchy Woo’s Alchemix Awakening

A couple of weeks ago, I shimmied my way to a long-overdue party. Chatting enthusiastically to friends, the topic of Decentralized Finance (DeFi) arose and my eyes slowly glazed over… I don’t understand it, I thought distractedly, there’s no point. Snippets I’ve read in the media maintain it’s full of scary anonymous entities who steal all your money and disappear down black holes.

You got it, I’m a natural skeptic. My husband has mentioned investing some of our funds before, and I’ve made excuses: too busy, not interested, don’t trust it. I’m keeping our (not unsubstantial) savings safely in our 30-year-old bank account, thank you very much!

But one of my BFFs persisted, aided by a couple of others. How they scheme! Her colleagues introduced her to the “DeFi ecosystem” and its “potential power to transform global markets” some time ago. She has recently purchased ‘Alchemix tokens’ becoming a DeFi form of a shareholder, apparently, and is sounding extremely pleased with herself.

Well, good for her, I muse.

My friend is at an advantage, though. She understands how banks operate – I, well, don’t. I don’t admit it to her, but my interest is piqued. Might do a little digging, just for the fun of it, I suppose…

So, always up for for a new challenge, I’ve taken it upon myself to try and figure out how it all works. I’m going to document my adventure for you, my dear uninitiated newbies. Welcome to my journey of discovery down the rabbit hole…

Cautiously, I decide to click on the Alchemix Discord link, stepping into the unknown. The first question I ask is pretty basic: What is Alchemix and how does it work?

Well, the Alchemix community is a friendly, helpful bunch — I’m inundated with answers and am surprised to find it simpler than I’d imagined.

Alchemix is an alternative way of financing your life or business, and it doesn’t rely on a bank — you’re given full control of your finances. In a nutshell, a user (or borrower) deposits an amount of DAI (1 DAI = 1 USD) into Alchemix and can take a loan of up to 50% of the deposited amount which is paid out in the form of alUSD, Alchemix’s USD stablecoin.

So what on earth, I hear you cry, is a ‘stablecoin’? Worry not, I looked into this too!

A stablecoin is a digital currency that’s pegged to a “stable” asset, such as US dollars. This is necessary because the US dollar is not a cryptocurrency, so you can’t spend it on DeFi platforms such as Alchemix. I’ll cover how to get hold of stablecoins in Part 2 (it’s quite straightforward), but for now, you can effectively consider DAI to be the same as a US dollar that you can use on cryptocurrency platforms.

Stay with me, I promise you it’ll be worth it!

Your deposited DAI is then used to generate yield (profit), and that yield is used to pay off the loan. Quite clever, I must admit!

I’ll go into more detail as I learn more about the process, but I can confidently say that the longer you leave your deposit in Alchemix, the more interest it will earn, which automatically pays off your loan over time. With Alchemix, your funds are never idle, they’re always earning a yield and you can borrow against your assets if you choose to do so. And while there is still some intermediary involvement, the overall system is much more transparent than in the world of traditional finance. That’s the part that appeals to me most — you remain in control and you don’t need to worry about making payments on your loan.

The next question I ask is: What’s the difference between Alchemix loans and other loans? I have to understand this for myself, so I compare the platform with others in the space.

Well, most leading platforms will accept collateral (any asset that has value) in one form (ie: Ether) and will lend out in another form (ie: a USD-pegged stablecoin like DAI or USDC). These asset types have a variable unit price, which means that if the value of the collateral falls below a certain level relative to the value of the loan, the loan risks being liquidated so that the collateral can be handed to the lender or sold into the market to make the lender whole again — essentially to protect the lender’s position.

In Alchemix, the unit price of the loan is always 1:1 with the unit price of the collateral, meaning that there is no risk of the value of the collateral falling below the value of the loan. This is why the developers behind Alchemix enthuse you can’t get liquidated — you can’t!

It’s not because of the fancy self — repaying feature they’ve incorporated, nor is it because of the impressive TVL (I can’t even pronounce the number, it’s so huge), it is because their loans cannot become under-collateralized thanks to that magic 1:1 ratio — your collateral always fully covers the principal, so it cannot default. This, I believe, is unique, and protects the interests of both the borrower (you) and the lender (you). For now, with no on-chain record of credit history, all Alchemix loans have to be over-collateralized, helping foster trust in what is a ‘trustless’ system.

So, I ponder, how much loan can I take out? And why would anyone sound of mind take, for example, a 25,000 alUSD loan from Alchemix if they have to provide 50,000 DAI in the first instance?! Why wouldn’t they just spend the 25,000 DAI from their 50K and pocket the change? Yet again, I decided to probe a few in the Alchemix community for answers to these crucial questions. And, dear readers, I was once again enlightened. It’s a good thing they are so patient with me because it takes a while for it to sink in…

Here’s a clear explanation: If you are borrowing 25,000 DAI as your loan against your 50,000, when it is magically paid back over a few years (the genius team is working on speeding this up, by the way) you will still have your original collateral plus the 25,000! This is something of a revolutionary concept, and it’s proving popular! For protocol safety and stability, you are currently limited to a 50% value loan against DAI, and a 25% value loan against Ethereum. Oh, I think gleefully, that sounds like a potential vacation payment!

My family is long-overdue a getaway and come to think of it, my kitchen ceiling is about to collapse. (Actually, it is, leaky en-suite!) With a bank, I’d have to choose: Do I leave my money in the bank to slowly collect interest, or do I pull it out for a vacation and essential repairs? The beauty of Alchemix is you can do both — spend on the vacation (and anything else you might need) while your collateral continues to earn yield. I’ll let you guess what I’m going to do!

Alternatively, you can simply deposit funds into Alchemix, wait for the interest to accrue, and never take a loan — just cash out the alUSD or alETH as it is generated. I’d rather access my yield years early; book and pay for a much-needed vacation (remembering that over time the yield will pay off my loan); repair my ceiling and save more. However, as I’ve said, the choice is completely yours. Because it suits my circumstances, I’ve decided to use Alchemix like a regular savings account, taking a loan when I need to pay for my vacation and kitchen instead of withdrawing money. It’s a simple use case, but as I see it, really practical and new user-friendly. I’m one for keeping things modest, you see!

I hope this helps some of you. Next time I’ll cover how to buy some ALCX (the Alchemix cryptocurrency token), as well as how to get your hands on some DAI to enable you to use Alchemix. But right now, my lovely newbies, duty calls… I’m off to book two weeks in the sun!




Teacher, learner, DeFi, and Alchemix enthusiast.

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Witchy Woo

Witchy Woo

Teacher, learner, DeFi, and Alchemix enthusiast.

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