Alchemix: Automated Crypto Loans with ALCX & ALUSD | Gemini (2024)

DeFi Lending and Alchemix Crypto Loans

Alchemix is a decentralized finance (DeFi) lending platform that differentiates itself in a highly competitive field with flexible loans that automatically repay themselves over time. Built into its design, Alchemix automates the process of paying back crypto-backed loans so that, with ample time, all loans on the Alchemix crypto platform should be sufficiently paid back and liquidations should never occur. While many stablecoin-backed DeFi lending platforms exist, most leave it up to the user to manage keeping the loan collateralized and paying it off. Alchemix seeks to automate this process for users interested in receiving stablecoin-backed loans.

The Alchemix loan repayment process functions as follows: Users deposit DAI — a stablecoin built on Ethereum — to Alchemix as collateral in order to mint alUSD, which is a synthetic protocol token that tokenizes a user’s future yield. The deposited DAI is then used to generate yield in Yearn.Finance vaults, and the yield is used to pay off the loan. Depending on the depositor’s intentions, synthetic assets like alUSD can be converted back into DAI and subsequently exchanged for fiat, or they can be put to work generating even more yield in Alchemix staking pools or liquidity pools.

This process of repayment — which a user must typically complete manually elsewhere — is automated on the Alchemix crypto platform. Since alUSD continuously flows in as yield that is generated from Yearn.Finance, the supply of alUSD is automatically converted back to DAI at a 1:1 ratio in order to pay off the loan as yield is accrued. Alchemix’s interconnectivity with DeFi products like Yearn.Finance and DAI is a characteristic known as composability, or the ability for a crypto product to interact with other products in the space to increase functionality.

The Alchemix Crypto Protocol’s Transmuter

When obtaining an Alchemix loan, users deposit DAI to Alchemix vaults. Upon doing so, they can borrow funds up to a 200% collateralization ratio — or one alUSD for every two DAI deposited. This is standard practice for many DeFi lending platforms, but Alchemix’s model leverages yield farming through Yearn.Finance vaults to pay down a user’s debts automatically. Users are able to choose from an increasingly wide selection of yield farming strategies in order to repay their debt.

Once users have deposited DAI with Alchemix to mint alUSD they have an array of options. The Alchemix crypto protocol employs a pegging mechanism for the platform’s synthetic tokens called the Transmuter. It ensures that users can exchange alUSD for DAI at a 1:1 ratio. Yield generated from Yearn.Finance vaults is sent to the Transmuter and converted into DAI continually as it flows in. Users can deposit their alUSD to the Transmuter smart contract, which rewards them with DAI in proportion to the amount they have staked. When they withdraw these DAI rewards, an equal amount of alUSD is burned. Users can also use the Transmuter to swap their alUSD back to DAI, which is easier to convert to fiat currency if the crypto-backed loan was taken in order to make a purchase in fiat.

At all times, a user’s loan collateralization ratio must be at least 200%. If the collateralization ratio drops below this level, then a user may choose to liquidate part of their collateral to retain the appropriate level of collateralization. If the collateralization ratio exceeds 200% due to yield generation, then a user can withdraw DAI or mint more alUSD until it reaches a 200% collateralization ratio again. For the sake of flexibility, users are also able to settle their crypto loans early —should they need access to their underlying collateral — by repaying their debt with either alUSD or DAI, which are treated the same in the Alchemix system. Once a user has zero alUSD debt remaining, they can withdraw all of their deposited collateral.

Alchemix Staking and ALCX Liquidity Pools

Alchemix relies on platform participants to contribute to its liquidity pools and staking pools in order to facilitate its lending mechanism. These pools also present an opportunity for users to generate further yield on their synthetic assets like alUSD. As a reward for staking in Alchemix staking pools or providing liquidity to Alchemix liquidity pools, users can earn a proportional amount of ALCX tokens — the platform’s native governance token.

Upon the platform’s launch, there are two staking pools:

• alUSD: Users can stake alUSD to earn ALCX. This pool exists to help establish a peg for alUSD as close as possible to $1 USD.

• ALCX: Users can stake ALCX to earn ALCX. This pool exists to provide a less risky opportunity for risk-averse ALCX holders to earn rewards.

There are also two Alchemix liquidity pools that utilize Sushi Liquidity Provider (SLP) tokens:

• ALCX/ETH SLP tokens: Users can stake SLP tokens to earn ALCX. This pool exists to provide liquidity for the ALCX token.

• alUSD/DAI SLP tokens: Users can stake SLP tokens to incentivize holding alUSD until the alUSD/DAI pair finds sufficient liquidity.

Alchemix Governance and the ALCX Token

Alchemix uses its native token — ALCX — for platform governance through a decentralized autonomous organization (DAO). ALCX token holders have the ability to vote on protocol parameters, the development of new features, funding, and the structure of the DAO itself. The Alchemix DAO receives 10% of the entire platform’s Yearn.Finance profits, and uses the funds to pay its developers, cover infrastructure costs, award development grants, and fund other projects as determined at the community’s discretion.

The ALCX token was initially released via a fair launch, without any early investors or the development team setting aside their own supply. The protocol is designed to function optimally when the majority of ALCX token holders are platform participants themselves.

ALCX does not have a hard cap on its token supply, though it does adhere to a set release schedule that reduces issuance weekly over time — rewarding early platform participants most heavily for their early contributions. ALCX rewards will finally reach a flat weekly release of 2,200 ALCX per week three years after launch. It is projected according to this schedule that the total token supply will be somewhere near 2.4 million ALCX at the close of this timeframe.

The Alchemix DAO initially received 15% of the projected token supply three years after launch, with another 5% reserved for bug bounties to reward security auditors for reporting potential bugs in the protocol’s code. The remaining 80% of ALCX tokens can be earned by staking certain tokens in the platform’s staking and liquidity pools. Through this mechanism, those who actually contribute to the platform will receive ALCX tokens and have the ability to participate in community governance.

Alchemix Crypto-Backed Loans and the Future

Launched in March 2021, Alchemix is still a very young DeFi protocol. While the Alchemix crypto platform is relatively new, it is quickly adding compatibility with more cryptocurrencies and types of collateral, as well as offering users more ways to customize the structure of their crypto loans. Alchemix also intends to implement additional decentralized applications (dApps) to expand its ecosystem.

Alchemix is already a platform for users interested in capital-efficient loans that allow their collateral deposits to generate yield in the background. It offers several unique features and benefits to users, such as the ability to customize their loan structure and yield strategy, borrow against stablecoins without risk of traditional liquidations, and enjoy low-maintenance lending with crypto-backed loans that amorize themselves automatically. Alchemix also presents a lucrative opportunity for participants to deposit collateral in order to mint synthetic assets that they can then stake and provide liquidity for — even if they never intend on withdrawing funds from their crypto loan.