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Alchemix Making Imaginary Self-Paying, Crypto-Backed Loans a Reality

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October 19, 2022
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    Imagine a world where your assets pay off your loans. Yes, you read it  right!

    Let’s say you invested in real estate and the value of the investment appreciated at 12 percent APY. After a few months, you took out a loan to buy a new car, and you have to make car payments every month. Now, picture the appreciation of your assets paying off your liability– here, your car loan payments - without you having to sell your assets.

    While this sounds fictional, with Alchemix’s crypto-backed loans, this has become a reality.

    What is Alchemix?

    Alchemix is a synthetic asset lending platform that allows you to deposit crypto assets, take a loan against them, and the future yield of your assets pays off your debt automatically. However, with Alchemix, it is a timed game. The longer you leave your deposits on the platform, the greater the yields. Consequently, a significant chunk of your loan will be paid back. 

    Since it is a synthetic asset lending platform, let’s understand what synthetic assets are. 

    What are Synthetic Assets? 

    Often referred to as “Synths,” the term might look like it derived straight from a sci-fi movie. But to understand what synthetic assets are, first we must decode derivatives as synthetic assets are derivatives. 

    A derivative is an asset that derives its value from an underlying index or asset. Similarly, a synthetic asset is a tokenized derivative that mimics the value of another asset. 

    Components of Alchemix Protocol 

    1. Vaults: Vaults are at the heart of the Alchemix protocol and what powers them is Alchemist.sol contract. Basically, vaults give you a flexible line of credit for your future yield. Also, your collateral can never be liquidated unless you do it yourself. 

    2. Transmuter: It is the key pegging mechanism for alchemical synthetic tokens. With the Transmuter, you can stake your synthetic assets and convert them into your base assets over time. 

    3. Alchemix DAO: The Alchemix DAO will govern Alchemix Finance. It will earn revenue from the Alchemix protocol and a portion of it will go to the treasury, which then pays out permanent staff and developers that maintain the protocol. The governance is done with a liquid token, ALCX. 

    4. Token Distribution: The ALCX token grants governance in the Alchemix DAO and ensures everyone who contributes to the Alchemix protocol gets paid. Also, the development team never gets enough tokens to control the protocol, but it incentivizes them to continue working on the protocol. 

    How does Alchemix work?

    To get an Alchemix crypto-backed loan, you have to deposit DAI and an Ethereum-based stablecoin as collateral. The deposited DAI is then used to generate alUSD, a synthetic protocol token in Yearn.Finance vaults to repay the loan. For every 2 DAI you deposit as collateral, you can get 1alUSD as a loan. You can also convert the synthetic asset, alUSD back into DAI and then further convert it into fiat currency. This allows you to generate even more yield via Alchemix liquidity pools or staking pools. 

    One exciting thing to notice about Alchemix is that you earn higher interest on its platform for DAI as compared to Yearn. What generates the additional interest? Alchemix gets better interest rates because they have a bonus treasury of DAI in the Transmuter. This is earning extra interest on Yearn and that same interest goes to users as a bonus. 

    The process of repaying this crypto-backed loan is super easy as well. Where in other typical loans you have to make payments manually, it is an automated process on the Alchemix lending platform. Since alUSD is continuously generated from Yearn.Finance, alUSD’s supply is automatically converted back to DAI at a 1:1 ratio to pay off your loan as yield is accumulated. Achemix’s ability to interact with DeFi products such as DAI and Yearn.Finance is called compatibility and it improves its functionality significantly. 

    Is This Just Hokum?

    A self-repaying, crypto-backed loan sounds too good to be true and sometimes it makes you wonder: where is the point of failure in this?

    Well, with 50 percent LTV (loan-to-value), the protocol wouldn’t be affected even with the most aggressive fractional reserve banking calculations. Another factor that makes Alchemix almost foolproof is the coin DAI. Kudos to the Alchemix team for choosing DAI as it is one of the most collateralized stablecoins issued by the Maker protocol. This protocol makes the platform even safer because it is one of the oldest and most established decentralized lending protocols. Coming back to DAI, its value is pegged to the USD, but its collateralized value is 150 percent. So, its quality is not a problem. 

    In June 2022, when the entire crypto market was bearish and even the most prominent cryptocurrencies were seeing a downward trajectory, Alchemix also faced a major decline. But, after its initial decline, Alchemix (ALCX) regained its bullish phase which was again followed by a bearish trend.

    Despite its ups and downs, ALCX is still the most sought-after DeFi protocol in the space by investors as it introduced its alETH product in partnership with Curve Finance, a decentralized exchange for trading cryptocurrency. 

    Risks Related to Alchemix

    What makes Alchemix strong can also be its biggest weakness. It is built on top of other DeFi protocols, making it a unique lending protocol that automatically repays your crypto-backed loans. However, this same strength might become its weakness as a failure of a single DeFi protocol could create a cascade of failures and affect Alchemix’s capabilities. 

    To counter this problem, the Alchemix development team has created a security system that actually works well. When the market crashed in 2021, the protocol wasn’t affected at all. It is though uncertain what could happen to the protocol due to its dependence on other DeFi protocols. 

    How to Get a Crypto-Backed Loan with Alchemix?

    To get a crypto-backed loan from Alchemix, you have to connect your wallet first, here’s how:

    Step 1

    Go to the Alchemix official website and on the top left-hand corner of the page, you’ll see the “Connect Wallet” button. 

    Step 2

    There will be three wallet options, Brave Wallet, Coinbase Wallet, and Wallet Connect. 

    Step 3

    Purchase DAI and store it in any of the wallets mentioned above to get started with the wallet connection. It is important to note that you’ll need ETH in your wallet to cover the transaction fees. 

    Step 4

    Transfer DAI to the wallet of your choice and then authenticate the wallet on the Alchemix platform. 

    Step 5

    In the Vault section, click on the Deposit button and deposit your DAI into Alchemix from your wallet. 

    Step 6

    Select Borrow on the Vault page to receive a 50% alUSD on your deposit. You can stake the alUSD and earn ALCX in return. S

    Conclusion 

    Alchemix is one of the fastest-growing lending protocols. The first version of the protocol offered crypto-backed loans and a raft of features that maximized security and minimized risk. However, for the second version of the protocol, the Alchemix team has set a new standard for smart-contract security for DeFi and instilled maximum confidence in the Alchemix protocol. 

    Crypto-Backed Loans FAQs

    1. How long do Alchemix loans take to pay off?

    Last year, Alchemix shipped a vault that accepts ETH. Borrowers are now able to borrow alETH, which is soft-pegged to ETH and uses ETH as collateral. The loans have a 400 percent collateralization ratio and yields of 3 to 4%. With this, it would take a few years to pay off your loan.

    2. Can you get liquidated on Alchemix?

    The chances of your collateral getting liquidated are negligible unless you do it yourself. With Alchemix, you borrow a synthetic version of the asset. So, you avoid the risk of liquidation.

    3. Who owns Alchemix?

    Founded in 2021, Alchemix is led by a pseudonymous developer Scoopy Trooples. The older version only accepted DAI as collateral, but since then, it accepts ETH as well.
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