BCGAME - Free 5BTC Daily Bonus!Launched in 2021, Alchemix (ALCX) is a system for creating synthetic assets that allow users to take out loans that are repaid by the yield on the underlying collateral. ALCX trades at $383,73 per token, with a circulating supply of around 273.000, for a total market capitalization of $108 million.
What is Alchemix?
As most DeFi DApps are built on the Ethereum (ETH) and ERC-20 standard, the resulting composition allows developers to go even further by building their DeFi applications on top of others. This concept is known as “money legos,” where DeFi protocols are stacked on top of one another, with each lower layer acting as a foundation for the ones before it.
Driven by market excitement and a massive influx of liquidity, developers have been piling legos of cash into increasingly complex arrangements, creating financial solutions that could only exist in DeFi. With the mind-blowing nature of its premise and implementation, the Alchemix project is perhaps the best example of what has been called the “Weird DeFi” era.
On a very basic level, Alchemix allows users to borrow in the form of synthetic assets backed by collateralized tokens in a similar way to the DAI project. What Alchemix differs from other projects is that lending is fully automated. Instead of requiring manual payment from the borrower, the loan is automatically repaid by investing collateral in yield aggregators.
How does Alchemix work?
Users take out loans by minting alUSD (the project's native stablecoin) equal to a percentage of the tokens deposited in the Alchemix protocol vault (50% in the case of DAI). This alUSD can then be staked to the project's ALCX governance token or exchanged for other tokens on decentralized exchanges (DEXs) such as SushiSwap (SUSHI).
While users must watch the market or over-collateralize to protect themselves against settlement with conventional DeFi loan solutions, there are no forced settlements at Alchemix. The project basically allows users to withdraw an advance on the gains they would have made had they used the guarantee for cash farming on platforms like Yearn Finance (YFI) and Curve Finance (CRV). Here are the two most unique concepts of the Alchemix protocol: loans operate as a unit of time and users borrow from themselves.
Loans operate as a unit of time.
First, Alchemix does not force settlements, as the protocol relies on collecting income from secured assets to repay the loan, which means there is no threat that the loan cannot be repaid. The guarantee remains blocked until the loan is fully paid for the generated income, which means that the blocking period is relatively long (2 years assuming a stable return of 20% at an LTV of 50%).
As income returns are not stable, the actual period required to repay any loan will vary over time. It should also be noted that Alchemix assumes that an income can be generated by the secured assets, meaning that the loans would no longer repay themselves without any income. If users want to access the underlying collateral, they can withdraw their assets at any time by liquidating the coffers in advance.
Users borrow from themselves
Second, loans taken from traditional financing operators (TradFi) or other DeFi projects always involve another party providing you with the funds and who will seize the guarantee in case of default. In the case of DeFi, loans are usually provided by other users and managed by a specific platform. With Alchemix, users are making a deal to give back their future. In other words, the debtor and the creditor are the same person.
Alchemix marketed itself as a “bear-resistant” DeFi loan protocol. During the crypto market crash on May 19, more than $662 million in DeFi loans were settled across multiple platforms within 24 hours. However, Alchemix did not pay off any loans and even presented arbitrage opportunities as users began converting alUSD to DAI when the stable currency rose above its dollar peg.
The project has received a lot of attention and enthusiasm from the community. During the week of its launch, increased interest in Alchemix forced yEarn to increase its DAI limit from 100 million to 300 million. In addition to DAI, users can also take out loans in alETH secured by Ethereum yields. Currently, users can only mint an amount equal to 25% of the pledged ETH, although the team hopes to increase this number to 50% after an initial testing period.
What was the reverse pull of the Alchemix rug?
On June 17, 2021, users discovered a “free money” bug that prematurely forgave ETH-guaranteed loans. For about 15 minutes before the Alchemix team discovered the bug and stopped minting alETH, users would have no outstanding debts, even though they had previously borrowed alETH at a 4:1 ratio. initial amount of alETH issuance, and resulted in the loss of approximately 2.700 ETH ($6,53 million) from the project.
A post-mortem published by the Alchemix team noted that no user money was lost and that the issue was caused by an error in the alETH vault deployment script. To make up for lost funds, the team made a call to users who benefited from the bug to return their earnings and temporarily increase protocol fees. The incident was jokingly referred to by community members as a “reverse rug pull.”
ALCX price history
Since its launch, ALCX has risen significantly during the first half of 2021 bull run. The token went from $342 on February 27th to $1.496 on March 27th, representing a strong increase of around 337% in 3 months . The token, however, has almost dropped to its launch value with the recent drop, about 74,39% from its price on February 27th to its price of $383,73 on August 15th, 2021.
ALCX is currently ranked 225 by market value. There are about 273.000 ALCX in circulation. The token has a maximum supply of 478.612 and is to be used as a governance token for a planned Alchemix DAO. The token is also used as an incentive to bet alUSD and will eventually serve as a means of protecting the protocol in the scenario where one of its yield strategies is exploited.
As the Alchemix protocol does not require ALCX to borrow yield-guaranteed loans, the only purpose of the ALCX token is for governance and escrow. As such, LACX price movements will more closely reflect general market and agricultural production trends rather than sentiment about the design or feasibility of its use case.
What is the future of Alchemix?
While the Alchemix project is still in its early stages and has experienced some bumps along the way, it offers a potentially revolutionary new paradigm in interest-free and non-repayment loans. By empowering users with the ability to borrow against their expected future returns, Alchemix has the potential to make loans much cheaper and less predatory. Currently, about $250 million is deposited in Alchemix's coffers, which represents a slight reduction from the peak of $300 million in early June.
The downside of Alchemix is that users must assume a very high rate of return to pay off their loans soon. While the huge amount of money going into DeFi has yielded impressive returns, many experts don't expect such high APYs to be sustainable in the long run.
Alchemix's considerably long blocking periods can prove unattractive if yields decline. For example, an Alchemix loan would take about 2,5 years to repay at a consistent 20% APY and more than 5 years to repay at a 10% APY. As such, Alchemix loans are better used to manage wealth over time than to aggressively leverage.
In addition to its high level of complexity, gas fees represent another major barrier to entry for Alchemix. An article written by Flipside Crypto noted that the large number of transactions required meant that the gas fees required to stake alUSD on the protocol totaled 0,082 ETH ($155). Barring the launch of Ethereum 2.0, Alchemix will have to find a way to reduce gas fees through layer 2 solutions or other methods to make its protocol viable for those who don't have five figures to spare.
Conclusion
Despite its current accessibility issues, Alchemix still represents a big step forward in making cryptographic borrowing more viable. As the protocol protects users from unexpected liquidations caused by general volatility and market downturns, borrowers can gain access to greater liquidity as they do not need to collateralise in excess to protect their positions.
