🤔 What is Alchemix Finance ?
Alchemix is a decentralized lending platform built on Etherium. It allows users to take out loan that pays themselves out.
The borrower does not have to repay the borrowed amount but rather:
- His collateral is locked for a certain time period.
- The collateral is used to generate yield. The yield is used to pay back the loan over a period of time.
- The borrower can withdraw the collateral once it has generated sufficient yield to pay back the loan.
Alchemix finance gives the borrower advance on future yield of the collateral upfront. However, borrower has to lock his collateral till the time it generates sufficient yield to pay back the loan(opportunity cost).
💡 What role does ALCX token play ?
ALCX token is used for:
- Governance: ALCX token grants voting rights to its holder. ALCX holders propose and vote on updates to the Alchemix protocol.
- Staking: ALCX holders can stake their tokens to earn additional tokens as reward.
- Recapitalization: The protocol may become insolvent in case the market crashes and the value of collateral deposited by the users falls below the loan amount. In that case, the protocol will sell staked ALCX tokens to raise money for recapitalizing the shortfall of funds.
📝 Origin of Alchemix Finance
- Alchemix Finance was launched on Etherium mainnet in February 2021 by a team of anonymous developers.
- During launch, the platform only supported DAI as collateral. However, support for other crypto assets as collateral was also added later.
- The team decentralized the governance of protocol in December 2021.
😌 What problems does it solve ?
- Take out loan:
- None of the traditional banks issue loans against crypto.
- Alchemix finance allows users to take out loan against their crypto holdings.
- Users do not have to sell their crypto holdings and incur capital gain tax. Instead, they can use it as collateral to borrow.
- Most banks in the world offer no interest on savings. People can choose to store their savings on Alchemix finance and earn a much higher interest.
- Traditional banks have to build relationships over many years to partner with other institutions whereas other Defi apps can build permissionless on top of Alchemix finance.
- There is no transparency in how banks operate. Most banks take excessive risks because governments insure deposits. Whereas Alchemix finance code is open-source.
- No complicated paperwork like KYC and long waiting period is involved to take loan.
- Governments cannot regulate and control Alchemix finance because:
- It is built on Etherium
- Founders are anonymous
- Efficiency gains: Alchemix represents an ideal that is the epitome of banking (just not for bankers) – a bank that has no bank: no branches, no rent, no staff, no advertising, no funding costs, no operating costs. Just code.
🤖How does it work ?
- Users add their collateral(for example DAI) in the vault.
- They can borrow alUSD(stable coin pegged to US dollar) up to 50% value of the deposited collateral.
- Alchemix finance generates yield on the deposited DAI on Yearn finance.
- The generated yield pays down the loan borrowed by the user.
- Users can withdraw their collateral once sufficient yield has been generated to pay back the loan.
- Users can also pay back the loan early to access their collateral.
Transmuter is the pegging mechanism that ensures alUSD(Alchemix stablecoin) is 1:1 pegged to DAI.
⚙️ How to take loan from Alchemix finance
🏛️ Governance model
- Alchemix finance uses snapshot, a decentralized voting system. ALCX token holders create and vote on proposals to update the protocol.
- Alchemix finance uses Multisig signers to make changes passed by voting. There are 8 multisig signers: 4 developers and 4 community members.
- 5/8 multisig signers have to sign for an update to be implemented.
- Multisig signers do not make decisions, but rather simply implement the updates voted by the community.
🤑 How much money does the project have for future development ?
- The project has raised $4.90M + $3.10M in two funding rounds.
- 10% of the yield generated on the collateral goes to treasury. 90% of the yield goes towards the actual repayment of loan.
- Alchemix treasury has 478,612 ALCX tokens.
Hacks and Controversies
- First incident: The original script to mint the pre-mine ALCX tokens was accidentally run twice, creating 957,224 tokens instead of 478,612 tokens. The team burned 478,612 tokens.
- Second incident: Borrowers who had deposited ETH as collateral were able to withdraw their collateral without repaying back the loan. This resulted in loss of 2,200+ ETH to the protocol. The Alchemix team organized a campaign encouraging users to return the lost ETH in exchange for an exclusive NFT and ALCX rewards, eventually recovering more than half of the funds.
😨 Risks and challenges
- Market crash: It is possible that:
- There is a severe market crash.
- Collateral value is not sufficient to cover the borrowed amount.
- Value of ALCX token falls because the protocol is under collateralized.
- The project cannot recollateralize the protocol even after selling staked ALCX token, whose price has already fallen.
- Banking sector is heavily regulated by their respective governments and central banks. Many governments will try to ban/regulate Defi for operating without a banking license and threatening their banking sector.
- Liquidity pools hold tokens worth millions of dollars presenting a lucrative target for hackers.
- Alchemix had an initial pre-mine of 478,612 ALCX tokens, which were allotted to the Alchemix treasury.
- Approximately 22,344 ALCX tokens will be distributed from Staking Pools in week one of staking, and the amount will decrease by approximately 130 ALCX per week for three years. After three years, there will be a flat 2200 ALCX weekly emission, increasing the total supply by 114,400 ALCX annually. At the three-year point, there will be approximately 4.5% annual inflation of supply, and it will gradually decrease over time.
Token’s price increases due to demand pressure.
Demand pressure on ALCX will come from:
- Governance: Users will acquire ALCX tokens to participate in the governance process.
- Staking: Users will acquire and stake ALCX tokens to earn yield.
- Speculators: They will acquire ALCX tokens for future price appreciation.
Supply pressure on a token decreases its price.
Supply pressure on ALCX will come from:
- Inflation: The protocol will has 4.5% inflation every year, paid out to staking pool.
Alchemix finance aims to disrupt a multi-trillion-dollar banking industry. ALCX token, used to govern such a system would be worth a lot.
🧐 Indicators to watch out for
- Twitter following is growing:
- Total value locked is increasing:
Long-term hodlers can use Alchemix finance to take loan against their assets to buy real-world stuff or additional assets.
Users have to save first and take loans against their savings later, this is unlike traditional finance where borrowers get loans first and save later.
I will be investing in ALCX tokens and staking to avoid being diluted by inflation.