AutoALEX: The Power of Compound Interest

“Compound interest is the eighth wonder of the world. Those who understand it, earn it … those who don’t … pay it.” - Albert Einstein

Transcending $ALEX Staking

When $ALEX staking opened on January 26 this year, the response was overwhelming; over $1M was staked within 24 hours and over 70% of our community chose to stake for the maximum number of cycles (32 cycles, or about 117 days).

In the following weeks we were frequently asked three questions in particular:

• Manually harvesting and restaking my rewards every cycle is inconvenient. Can this be automated?
• Why don’t you allow even longer staking, say for 64 or 128 cycles?
• Can I use my staked $ALEX as collateral for other purposes, such as borrowing $ALEX to participate in future IDOs?

We are pleased to share that we have designed AutoALEX (atALEX) to address all of these needs. atALEX is a novel token that allows:

• Effortless auto-compounding in perpetuity
• Withdrawal of your funds at any time, i.e. no staking lockup
• Use as collateral for maximizing capital efficiency

In this article we will discuss the utilities and advantages atALEX provides.

The Power of Compound Interest

Staking involves locking up crypto tokens through a smart contract for a fixed period of time. Staking benefits a project by increasing the total value locked (TVL). As locking up your tokens comes at the risk of price changes, staking is incentivized.

On ALEX at the end of every reward cycle (525 stacks blocks or about 3.5 days), stakers are incentivized through protocol rewards in $ALEX as well as APower, our IDO access token. Those rewards however, are not automatically reinvested.

That is why the “Stake” page shows an Annual Percentage Rate (APR) because the return does not take compound interest into account. When compound interest is taken into account, Annual Percentage Yield (APY) is used instead.

Compound interest means that the interest you receive is continuously reinvested. The chart below illustrates a textbook example on the difference between a 10% APR and 10% APY over a thirty-year period.

The difference is initially small but grows exponentially over time.

Introducing atALEX

Imagine an asset that auto-compounds and grows but all you have to do is hold it. That is the essence of atALEX: a synthetic asset backed by ALEX and its future cycle rewards.

During the gathering phase you can mint 1 atALEX with 1 ALEX. After 32 reward cycles, you’ll still have 1 atALEX in your wallet however, you can swap it on the ALEX/atALEX pool for an amount close to what you would have gained had you harvested and restaked every cycle.

This is because the intrinsic value of atALEX will only increase, with respect to ALEX, over time. We’ll use an example to illustrate:

Marie and Pierre are both ALEX stakers. During the gathering phase of atALEX, Marie takes 100 ALEX and mints 100 atALEX. Pierre prefers the manual harvesting and restaking, so he stakes 100 ALEX for 32 cycles.

The below charts makes two assumptions:

1. A fixed APR of 231% is assumed. In reality ALEX staking yield is variable: the more stakers the lower the APR as the fixed emissions are distributed to a greater number of participants.
2. Pierre harvests and restakes his rewards every single cycle without any miss.

As Pierre has been consistent with harvesting and staking, the above serves as a conversion table. Marie and Pierre would have the same amount of ALEX at any time during these 32 cycles: if Marie swapped her atALEX for ALEX she would receive the same amount* as Pierre. (see footnotes 1)

At cycle 33 however, something interesting occurs. Pierre must experience a “cool down cycle” where he harvests his principle and has to wait to restake, while Marie’s AutoALEX continues passively compounding.

Marie’s return, without having to do anything at all, will be greater than Pierre’s in the long term.

The advantages of AutoALEX are:

1. True passive income. Marie just needs to hold AutoALEX and take no further action.
2. Greater APY over time as Marie will never miss a rewards cycle or pay regular transaction fees to harvest and restake.
3. Liquidity. If for any reason Marie needs her principle, she can withdraw it in any amount at any time using the ALEX/AutoALEX pool. Pierre can only withdraw his liquidity every 33rd cycle.
4. Capital efficiency. Marie can borrow against her AutoALEX to participate in IDOs or to swap into other tokens and still receive auto compounding gains. Pierre can not, his capital is locked until his staking cycles end.

atALEX and the Beginning of Borrow/Lend without Risk of Liquidation

The core innovation ALEX has always sought to introduce to bring to DeFi has been borrow/lending without liquidation risk. (covered in our second Whitepaper as well as video)

Although full implementation of borrow/lend for all tokens will require the network scalability of the Hyperchain, the first token where this key functionality goes live will be with atALEX.

Although with atALEX you can withdraw your principal at any time ALEX/atALEX pool, the moment you do you no longer benefit from the power of compound interest.

The ability to use atALEX as collateral against which you can borrow ALEX, means that you can continue earning compound interest while you borrow.

atALEX is the ideal token to pilot our borrow/lending functionality, because the value of atALEX, measured in ALEX is deterministic, providing it several unique properties:

1) The value of atALEX, measured in ALEX, increases over time.

2) The amount of atALEX increases over time: atALEX is minted using ALEX. Exiting atALEX however, can only be done through the swap pool.

3) atALEX can be thought of as ALEX that has been staked in perpetuity*. (see footnote 2)

How Do I Aquire AutoALEX?

Around April 26th, we will announce the gathering cycle, an exclusive opportunity to mint AutoALEX at a 1:1 ratio because as soon as the reward cycle begins, AutoALEX will increase in value relative to ALEX. Those who join early will benefit significantly more over time than those who join later, so we encourage our community not to miss this singular opportunity.

To raise awareness and accelerate atALEX adoption, we will be launching a Lockdrop campaign in parallel to the launch of atALEX.

Footnotes:

1. This is a theoretical example. In reality, we should have taken into account the transaction fees Pierre must pay every cycle, for harvesting and staking. In addition, there would be small variations in the ALEX/atALEX pool that shift the conversion rate slightly, but as the two assets are linked deterministically, any such variation is an arbitrage opportunity that will act to push the conversion rate towards its deterministic value.
2. “In perpetuity” in this case meaning until the conclusion of ALEX emissions, unless extended by governance vote.