A look into Alchemix protocol.

With the emergence of Decentralized Finance we have seen a plethora of new ideas and protocols emerge from the space. Some are original ideas, some are infrastructure solutions (Balancer), some are platforms aggregators that use other DeFi products and services in a specific way/order to be able to create a new type of product/service. Alchemix falls into a unique category of being a lending/borrowing protocol integrated with Yearn vaults.

read more about Yearn vaults 👉 here

https://alchemix.fi/

Here is a flowchart of the Alchemix protocol.

https://alchemix.fi/img/diagram.3aaff45c.png

❓ How does this work

This flowchart explains some other protocol functionalities greater than the scope of this article, such as Farm, Governance, and the Treasury.

Vaults are the center of the Alchemix protocol. The Alchemist.sol contract powers the Vaults. This is how it works for our initial version using DAI and our synthetic stablecoin, alUSD:

1. Deposit DAI into the vault.
2. Borrow alUSD up to 50% in amount of deposited collateral. Loans will have a absolute minimum 200% collateralization ratio.
3. Deposited DAI is deposited into the yearn.finance yDAI Vault.
4. Yield is harvested from the yDAI Vault tokens.
5. Harvested yield pays down the global debt in the system, reducing all depositor’s debt. If you have deposited DAI but not borrowed alUSD, the yield will credit your account with alUSD.
6. Once the harvested yield has reduced the global debt, it is transferred to the Transmuter Contract.
7. Users can withdraw deposits in amount up to reaching the 200% collateralization ratio. So as the protocol pays down your debt, you can withdraw more DAI.
8. At any time you can repay a portion or all of your debt in order to unlock your collateral. DAI and alUSD are treated 1:1 for repayment and liquidation. As such, you can repay your alUSD debt with alUSD and/or DAI. Repaying debt with alUSD is also a pegging mechanism because if alUSD were to be under the peg, users could buy it from AMMs and pay off their debt at a discount.
9. At any time, you can liquidate a portion or all of your collateral. The contract will repay your alUSD debt using the DAI from your collateral.

Essentially, the vaults give users a flexible line of credit for their future yield. Users can enter and exit anytime without committing to long lockups. There will never be a liquidation of a user’s collateral unless they do it themselves because your debt will only ever go down. Shortly after launch, more stablecoins will be added as collateral in order to borrow alUSD.

🔒 What about safety and Liquidations?

This is because of the integration with Yearn and the safety measure their vaults have in place.

While Alchemix will undergo security reviews and audits, there is no guarantee that something bad won’t happen. Vaults have an emergency shutdown procedure in such a case. If this procedure is initialized, then all funds will be withdrawn from yearn.finance, deposits will be paused, and users can pay down their debt and exit the system safely, hopefully preventing or mitigating any losses.

Two additional security measures exist to protect the Alchemical synthetic tokens. First, there is a limit for how much alUSD can be minted from each asset. This limit depends on the level of technical, market, and legal risk for a given asset. Second, Alchemix will use Chainlink oracle price feeds. If a stablecoin’s value is under a certain threshold, minting, repaying with the base asset, and liquidations will be paused until it’s value is back to acceptable levels. These security measures will not completely prevent the damage from a stablecoin losing its peg or becoming devalued, but it will protect much of the Alchemical synthetic token’s value .

⌛ So how long will paying down your debt actually take using Yearn vaults?

As of 2021/02/27 Alchemix protocol is not live. So the following numbers are speculations based off current stats. Things may change in the future of course.

yearn v2 vault

From my understanding, this will be the Vault that Alchemix is depositing your initial input into.

Example

1. $10000 into Alchemix generating ~ 20% per year from Yearn
2. mint $5000 alUSD for other investing activities. (borrowing up to 50% initial input is allowed)

So the questions become,

What is the cost to borrow alUSD?

How much % of the yield generated from the initial input is taken by Alchemix for fees?

Both of these will most likely be chosen by the DAO once implemented.

Regardless, let’s assume a 15% APY for your initial input, which will include the fees Alchemix takes for providing the protocol and for borrowing. (21.7 APY from yearn DAI vault - Alchemix fees = ~15% APY)

$10000 * 0.15 = $1500 / yr

$5000 required to pay back loan

5000 / 1500 = 3.3 years

this above formula assumes the yield from the DAI vault doesn’t compound. Where in fact, it does.

So it would take ~ 3 years until your loan collateral generates the amount that you have taken out for a loan.

Drawbacks with this vs conventional loans?

Using Alchemix requires you to deposit 2x your desired loan amount. Where traditional loans don't require this and can use your physical collateral.

The difference here is that Alchemix is able to use your collateral to generate yield > fees for loan payments…

Now imagine if conventional loan entities could take your physical assets (like your house / car) and then generate a yield with that! Maybe one day…

DeFi only just begun!

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