Breaking Down Alchemix
Alchemix’s innovative application enables users to repay loans automatically via the yield they generate from their deposits
Overview
What is Alchemix?
Alchemix is a futuristic synthetic protocol that enables users to borrow capital through their powerful self-repaying design. If that doesn’t sound enticing enough, you can also receive a crypto loan based on the future yield potential of your collateral assets. Traditionally with stablecoin-backed DeFi lending platforms, the user is left to manage the loan collateral. However, Alchemix aims to automate this process and create a more simplified and user-friendly experience. Sounds good right? But what does it actually mean?
Think of a bank where you deposit money and earn interest on that deposit. Now imagine if you could also access credit using your deposited assets without worrying about interest rates or monthly payments. This is where Alchemix comes in, offering a product that enables you to spend up to 50% (or 200% collateral ratio) of your deposited asset. To access this credit, you only need to sacrifice a small percentage of the asset’s value upfront.
The best part? There are no interest rates on the debt, and you don’t have to make any monthly payments. The debt you owe is denominated in the asset you deposit, so you don’t have to worry about being liquidated. Instead, the interest you earn on your total initial deposit automatically pays off any debt you have. In other words, Alchemix is a self-paying, interest-free, and non-liquidating loan protocol.
Features of Alchemix
Alchemist
Alchemists serve as the smart contract hub for generating yield and yield advances through their contract “AlchemistV2.sol.” One notable feature of Alchemix is its acceptance of yield-bearing tokens as collateral, in addition to traditional deposits that are converted into yield-bearing tokens.
Each Alchemist can contain multiple yield strategies but is only able to issue one “alAsset”, which is typically named after the underlying asset it represents (e.g. alUSD for a yield-bearing token that tracks the value of US dollars). For example, while an Alchemist that issues alUSD may have yield strategies that accept yield-bearing tokens for USDC, USDT, and DAI, it can only issue alUSD. To begin, users can deposit ETH, or a stablecoin such as USDC, into Alchemix’s smart contracts as collateral. This collateral is then used to mint a synthetic token called alUSD (or alETH if ETH was deposited) worth up to 50% of the amount deposited, representing a user’s future yield.
The deposited ETH or stablecoin is then utilized by the selected vault (Vesper, Yearn, AAVE, etc) to generate yield, which is used to repay the loan. Users have the flexibility to choose whether to convert their alUSD back into their original asset through a liquidity pool and exchange it for fiat, or to reinvest it in Alchemix’s staking/liquidity pools to generate even more yield.
Transmuter
alAssets are a representation of future yield. In that manner, any 1 alAsset is worth 1 underlying asset (1 alETH is worth 1 ETH, eventually). Additionally, 1 alAsset is worth 1 underlying asset for anyone with debt. For example, anyone with debt can repay 1 alETH of debt with 1 ETH (the underlying) or 1 alETH. Because of these limitations, there is an expectation that alAssets will intrinsically be worth less than their underlying collateral. The closer the protocol can keep the value of an alAsset at 1:1 with the underlying, the better the product is for users and the less volatility liquidity providers will experience.
To maintain the price of Alchemix’s synthetic assets and push them towards 1:1, a mechanism called the Transmuter is employed. This useful tool enables users to easily exchange alAssets (such as alUSD) for USDC, DAI, or USDT at a 1:1 ratio over a variable rate time. The rate of time is determined by the rate at which the transmuter receives collected yield and liquidations through the TransmuterBuffer. To ensure the success of the Transmuter, the process is powered by the TransmuterV2.sol contract.
Taking USDC as an example, when users deposit alUSD into the Transmuter, they can earn USDC according to the amount of alUSD they’ve deposited and the total amount of alUSD staked. This is possible thanks to the Transmuter’s ability to credit users with yield, liquidations, and repayments. When a user chooses to withdraw their converted USDC, the equivalent amount of alUSD will be burned to ensure that the peg is maintained. In other words, for every unit of alUSD that is converted into USDC, an equal amount of alUSD will be removed from circulation.
Furthermore, to prevent small arbitrageurs from draining the Transmuter, the TransmuterBuffer was introduced. This buffer creates a pool of funds that can be quickly deployed as a “front-stop” measure. Instead of leaving these funds idle, the Transmuter was upgraded to send excess funds to the Elixir AMO.
Elixir AMO
The Elixir AMO, also known as the Alchemix Algorithmic Market Operator, is an intelligent tool that leverages the funds accumulated in the Transmuter to benefit the Alchemix ecosystem. These funds are utilized actively in the market to earn more income for the protocol and better manage peg stability. When the funds reach a sufficient level, the front-stop is activated and deployed to the Elixir for every alAsset. Ultimately, this enables collateral to be deployed in Curve Liquidity Pools.
Several things happen when that collateral is deposited to the corresponding Curve LP. Firstly, the pool is rebalanced, which increases the price of the alAsset. Secondly, the deposit generates yield in the form of CRV and CVX, which can be used for a variety of uses, such as to cover protocol expenses. Additionally, the AMO has the option to withdraw the alAsset instead of the underlying collateral, effectively removing it from circulation and increasing the price of the alAsset. If the curve pool is imbalanced, the AMO will receive positive slippage from this withdrawal, which nets additional profit in the form of excess backing for the alAsset. This is all positive as it provides the DAO with more revenue streams, while simultaneously decreasing the supply of alAssets when needed.
Governance
The Alchemix DAO serves the purpose of financing developers, staff, and projects that aid in the creation and upkeep of the protocol. The funding originates from the Alchemix protocol, and subsequently, the DAO Treasury covers necessary expenses, such as payment to the above purposes and security audits.
Their native token, ALCX, also facilitates voting through proposals on Snapshot, which currently runs a developer multi-sig. Holders of ALCX can have a direct say in the direction of Alchemix and also the management of treasury funds by voting. To learn more about the Community Governance process, you can check out their guide.
In the future, Alchemix plans to deliver full on-chain governance, giving complete control to the community for various parameters. There is no set timeline for this yet, but it’s worth noting that they have stated it will happen once “The Alchemix DAO has matured.”
