Understanding the DeFi Alchemy of Alchemix that Allows Time to Pay Off Your Debts | DeFi Hunter

This article is an original piece by Chain Catcher, authored by Loners Liu.

Last week, YFI founder Andre Cronje retweeted an introduction to the Alchemix project on his Twitter, causing a stir among AC fans, as if this was the next wealth code they had been desperately seeking. As of the publication of this article, the total locked value in the Alchemix protocol has exceeded $40 million. This issue of DeFi Catcher will analyze the Alchemix project from its operational mechanism and token economic model.

1. Alchemix Operational Mechanism

Alchemix is a DeFi protocol that uses a synthetic asset token model to help users access future earnings from their deposits. The protocol allows users to withdraw a portion of their temporarily staked stablecoin deposits.

Similar to MakerDAO and Synthetix, users can deposit DAI (with other stablecoins to be added later) into the Alchemist smart contract (i.e., in the Vaults) to mint alUSD. AlUSD is the synthetic token of this platform, which can be minted at a 1:1 ratio, up to a maximum of 50% of the DAI deposit. For example, if 1000 DAI is deposited, a maximum of 500 alUSD can be withdrawn, and the deposited DAI will be used in Yearn vaults to earn yield.

The following diagram is the product framework of the Alchemix platform (image translation: Quasar Labs), which mainly includes four parts: Vaults, Transmuter, Treasury, and Farming.

The protocol will periodically deposit Yearn vault earnings into the Transmuter, and each time earnings are sent to the Transmuter, they are proportionally distributed to all alUSD held. This means that once DAI is deposited into the contract, the contract will regularly use the earned money to pay off your debts until all user debts are cleared. Additionally, since stablecoins are used as collateral, there is no liquidation risk.

At the same time, when users claim their DAI from the Transmuter, an equivalent amount of alUSD will be burned.

According to the white paper, 10% of the earnings generated by Yearn will be allocated to the AlchemiDAO Treasury, primarily to support the ongoing development of the project protocol, pay for development expenses and core team supporters, cover server costs, and other ongoing expenses.

In terms of settlement, unlike other DeFi protocols where you must repay the exact token borrowed, Alchemix debt can be repaid at any time using DAI or alUSD, or any combination of the two (as long as the total amount exceeds the owed debt).

For example: Bob has a debt of 1000 DAI in the system, and he finds that alUSD is cheap, priced at 0.9 DAI. Bob can buy 1000 alUSD at a discount from the market and use it to repay his debt; the system will always consider the price of alUSD equivalent to DAI. This move can help Bob save money, while his purchase of alUSD can help bring its price back to the peg. The reverse is also effective; if the price of alUSD is above the peg, Bob would sell alUSD to buy DAI, thereby reducing his debt.

2. Token Economic Model

ALCX, as the governance token of the Alchemix ecosystem, can participate in the governance of the ecosystem, such as voting on which assets can be used as collateral. According to the Alchemix community governance decision, 22,344 ALCX tokens were issued in the first week, and the issuance will decrease by 130 ALCX tokens each week over three years. After three years, 2,200 ALCX tokens will be produced weekly until the maximum supply of ALCX reaches 958,014, to incentivize the ongoing demand for the ecosystem.

In terms of token distribution, 60% of the tokens are allocated to the community, which can be obtained mainly through four staking methods (explained below). The DAO organization holds 20% of the tokens, with 5% allocated for bug bounties. Additionally, 20% of the tokens will be distributed to a pool exclusive to the development team. The project team explains that this action is primarily to attract more developers to join the Alchemix ecosystem. Developers can submit proposals for potential DApps or ecosystem/infrastructure applications, and if approved, they will receive funding assistance. All tokens will have a nonlinear output over three years.

3. Token Acquisition Methods

According to the project white paper, there are currently four ways to acquire ALCX tokens.

The first method is to provide liquidity for the ALCX/ETH trading pair on Sushiswap and then stake the obtained SLP Token in the ALCX/ETH SLP POOL in the Farm, which can provide better trading depth for users wanting to acquire ALCX tokens.

The second method is to use DAI (currently only DAI is supported, with other stablecoins to be gradually supported later) to mint alUSD, and stake the minted alUSD in the alUSD pool. This is to encourage more users to generate alUSD.

The third method is to stake ALCX to also earn system rewards in ALCX tokens, or acquire ALCX through Sushiswap.

The fourth method is to provide liquidity for alUSD/DAI/USDC/USDT in Curve and then stake in the Alchemix protocol to earn ALCX DAO staking rewards. This adds depth to alUSD, achieving a non-dilutive transfer of value, thus anchoring the price of alUSD at $1, and allowing alUSD to circulate into a broader DeFi ecosystem through Curve's liquidity pools, enhancing its utility.

Among these, the official Farm page currently only offers the first three staking methods. The author speculates that the fourth reward has not yet been activated, and it is currently unclear how the tokens will be distributed among the four pools, but it is expected to be similar to Uniswap's average distribution among four pools. The white paper also mentions that as more al-token series are launched, corresponding liquidity reward pools will also be added to the Farm yield farming system.

4. Conclusion

As another AC concept project, Alchemix indeed has introduced some innovations within the existing DeFi system, such as immediate access to alUSD while deposits generate interest in the background, improving capital efficiency; over time, debts will be fully repaid automatically, and this process carries no liquidation risk (due to stablecoin + over-collateralization).

However, the specific prospects of the project will depend on the use of alUSD in more scenarios. The Alchemix team also plans to release other DApps that will utilize alUSD and other future al-tokens. As more DApps using these tokens come into play, there will be greater demand and upward price pressure, which will reduce selling pressure on the tokens.

From a product design perspective, the staked stablecoins are best to be decentralized stablecoins, which is why Alchemix currently only supports DAI. If in the future multiple assets are allowed to generate alUSD, and one of those stablecoins faces regulatory risks, it could impact the value fluctuations of alUSD (e.g., MakerDAO allows USDC as collateral).

Additionally, the Alchemix contracts have not yet been audited by an auditing agency, and participating in this project carries certain financial risks.

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