What is Alchemix?

In the world of DeFi, new projects are constantly emerging, each with their own unique features and benefits. One such project that has been making waves lately is Alchemix Protocol. With its innovative approach to yield farming and its promise of self-repaying loans, Alchemix is quickly becoming one of the most talked-about projects in the DeFi space.

So, what is Alchemix and why is it generating so much buzz? Let's take a closer look...

To explain Alchemix protocol, it’s important to mention that its general mechanisms apply to every other dapp. Alchemix is made out of a collection of smart contracts governed by the community.

Smart contracts are automated pieces of code that mediate the interaction between a user and the dapp. Whenever you interact with Alchemix, crypto tokens always remain in your possession. In order to access the protocol, users have to manually approve the smart contracts. You can think of it as a bot that performs the action you agree with based on a strict set of rules. This is an important difference compared to traditional finance, where the money is placed with a third party.

With smart contracts, there is no risk of a person running away with users’ money, or ever worse, locking up the money for any reason. Furthermore, anyone can access Alchemix regardless of their geography, political views, or religion — Alchemix doesn’t require KYC.

Transparency and decentralization are powerful tools to enable a thriving DeFi ecosystem. With the traditional limitations out of the way, an important question arises: “How does Alchemix become self-sustaining?”

Alchemix protocol mainly derives its value from issuing self-repaying loans. In exchange for the service provided, Alchemix receives a small fee that goes into maintaining the protocol. Upon consulting with the community, core developers are usually in charge of implementing the protocol upgrades. This ensures Alchemix stays safe from hacks and the protocol adapts to the market conditions.

As the number of transactions increase, the fees quickly add up. A portion of these fees goes into the protocol treasury, which pays for the developers, audits, and future products.

The protocol treasury is secured by a multisig that is being held by the core team and key members of the Alchemix DAO. The development team aims to eventually transition to on-chain governance, giving the community complete control of protocol parameters.

The open nature of DeFi encourages protocols to cooperate and innovate. Alchemix is a unique protocol that has been in the making since early 2020. However, the protocol can be vulnerable to hacks and exploits. As easy as it is for developers to review each others’ code, hackers can just as easily spot a vulnerability and take advantage of it. 

The code is publicly available to verify. Those who are tech savvy can audit the code for themselves and see precisely what the smart contracts do. Less technical users can indirectly assess the safety of Alchemix protocol based on audits and reports issued by technical community members. Alchemix has been audited by Runtime Verification and runs bug bounties to patch potential vulnerabilities.

Despite its careful analysis, Alchemix went through a security incident on June 16, 2021. One of the contracts had an error which led to the protocol incorrectly calculating outstanding debts, which in turn meant protocol funds were used to pay off user debts. As a result, for a short window of time users were able to withdraw their ETH collateral with their alETH loans still outstanding — a rug pull by the community to the tune of $6.5 million.

To cover the gap, Alchemix temporarily increased protocol fees, injected ETH liquidity from Alchemix’s treasury, and sold DAI from the treasury to buy additional ETH. Since the incident, the team has deployed an entirely new vault to address the flaws of the original.

How does Alchemix work?

Alchemix Protocol allows for the creation of synthetic assets that represent the future yield of a deposit. You can think of it as a yield advance that is granted instantly upon depositing the collateral. Unlike a bank loan, funds are not trapped. Deposited crypto tokens are committed to earning yield which will eventually, automatically pay back user debt. As the loan gets repaid, users are able to gradually withdraw their collateral. At the end of the day, users gain access to capital interest-free, without having to do any monthly payments. Does it sound like magic? It definitely does.

Being able to pull off a self repaying loan takes a lot of financial engineering in the back end. Several measures have been implemented to ensure the synthetic assets maintain their peg, and more importantly, the deposit doesn't get liquidated. In order for self-repaying loans to work, Alchemix has devised a mechanism made out of three main components: alAssets the Transmuter, and Elixir DAO.

Alchemix alAssets

Alchemix assets, or alAssets, represent a synthetic derivative that is issued upon making the deposit. Alchemix currently supports stablecoin deposits such as DAI, USDT, USDC, and yield bearing stablecoins such as yvDAI. Recently, Alchemix added support for ETH, as well as staked ETH assets (WSTETH and RETH). Users receive the synthetic version of the deposited collateral i.e. alUSD, while the deposit earns yield to pay off the loan.

To mint a stablecoin such as alUSD, users deposit DAI into the Alchemist smart contract. In exchange, they receive alUSD up to 50% the deposited amount of DAI at a 1:1 ratio. As a safety measure, loans require a 200% collateralization ratio. This means for every 2 DAI a user deposits, the user may borrow up to 1 alUSD.

The deposited DAI is deployed to yearn vaults to earn yield. Alchemix has chosen Yearn Finance as its primary tool to repay its loans. Yearn offers sustainable yields for a plethora of assets, and it's generally known as one of the most reliable DeFi protocols.

At any time, a user can repay any portion or his entire debt and unlock the collateral. In our example, users can repay their debt using DAI, USDC, USDT, or alUSD. This represents a major advantage to users, as they can exit anytime without having to commit to long lockups. There will never be a liquidation of a user's collateral unless they do it themselves because their debt will only ever go down. While using Alchemix doesn't incur any interest, it takes a 10% fee from the generated yield. This fee goes into the Alchemix DAO, which helps maintain the protocol and incentivize DAO participants. 

Alchemix Transmuter

So far, we have described how users can convert their assets into alAssets. The Transmuter is doing the exact opposite. Users can send their alUSD to the Transmuter and receive their stablecoins back on a 1:1 basis. As yield, liquidations, and repayments come through the Transmuter, users will gradually receive their deposit. When a user chooses to withdraw the converted DAI, an equal amount of alUSD will be burned.

The Transmutation process deliberately takes time. This is because the yield from yearn vaults slowly accumulates. The Transmuter will honor redemptions as the yield builds up. 

Alchemix Elixir AMO

While alAssets are in queue for the transmutation process, they don't produce any value. In other words, the alAssets sit in limbo until they are converted into the underlying asset. Alchemix takes advantage of the waiting time to make the pending assets capital efficient.

The Elixir AMO (Algorithmic Market Operator) is a tool that makes use of the idle capital by depositing it into Curve liquidity pools. With a large enough pool of alTokens, Alchemix earns additional rewards in the form of CRV and CVX. This extra capital can be used to cover protocol expenses and speed up the debt repayment of Alchemist depositors.

How to make money on Alchemix?

Alchemix introduces novel ways of using your crypto tokens in the DeFi ecosystem. You may ask yourself: "what is the point of receiving a smaller loan than the deposit?" Once again, it's about the possibilities. Due to the way Alchemix is designed, its service is especially profitable for users who are already hedged with stablecoins.

For example, users can take an advance on their USDC and get up to 50% of the yield upfront to buy altcoins. With new capital unlocked, you can speculate on new tokens without fear of being liquidated. Large investors are specifically advantaged as they unlock capital to make major investments. 

Like many other ERC20 tokens on Ethereum, alAssets are tradable and experience price fluctuations. This opens up an array of arbitrage opportunities. If alUSD is trading below $1, you can help restore the price and buy alUSD at a discounted price. The alUSD can be used to repay your loan, or increase your collateral to borrow more. 

Alchemix Self-Repaying Loans

Now that we described how Alchemix works under the hood, let's take a look at the fun side – making your first self-repaying loan.

To make a self-repaying loan on Alchemix, follow the steps:

1. Go to the Alchemix app

2. Select the token you would like to deposit from the list of vaults

3. Click on the "+" button for the selected vault

4. Input the selected amount

5. Press ‘deposit’ and authorize the transaction in your wallet

6. You can see how much you have available to borrow by clicking the Vaults page, and looking at the 'Available Credit' amount

7. To take your first self-repaying loan, click the ‘borrow’ button at the top of the page

8. Type in the amount you'd like to borrow

9. Click "borrow" to initiate the transaction

Now that you have taken the loan, you can see its stats by going to the "borrow" page. Unlike the traditional banking system, there are no fees or penalties for repaying the loan before it's due. What's more, Alchemix offers flexible solutions to repay the loan or liquidate it. Maybe there are better opportunities to use your capital elsewhere, or maybe there's an emergency and you need to cash out your deposit. The beauty of Alchemix is that users can use the deposited collateral to repay their debt instantly. Because the deposit is always over-collateralized, there is always enough funds in your account to exit the protocol. 

Another cool feature is that you can migrate between vaults. On their page, you will see each vault has a different APY. It can be advantageous to move to a vault that pays higher APY, meaning your debt can be repaid faster. Select the "+" button on the vault you have your funds deposited, select the "migrate" tab, click the "Target Vault." Next, input the amount of funds you'd like to migrate and click on the "migrate" button. You can also choose to manually exit your position and migrate to the vault of your choice. 

ALCX Staking

Another way to make money on Alchemix is by participating in the DAO governance. Alchemix protocol is powered by its native token ALCX. Users who stake ALCX get rewarded with alALCX, which grants them voting rights in the Alchemix DAO. As a shareholder, you are entitled to a share of the profits made by the protocol. This is different from the "memetic governance tokens" used by other protocols, as it requires shareholders to have skin in the game.

Inspired by the AAVE governance mechanism, ALCX stakers will have to do their part to make the protocol whole again. ALCX stakers will have up to a percentage of their ALCX slashed in the event of a protocol loss. In exchange for taking this risk, shareholders split the 10% fees paid to the protocol. As previously mentioned, the 10% fees represent the harvested yield from users' deposit. 

Price Prediction for Alchemix — Can it hit $1000?

Buying and hodling ALCX — the native token of the Alchemix protocol— is one way of potentially making money on Alchemix.

The main utility of ALCX is to serve as the governance token for the Alchemix DAO. As the value locked in the protocol increases, voting decisions will have more impact over the protocol, making it rise in value.

By looking at its current price, it’s natural to think about the chance of ALCX hitting $1000 per token. This can happen sooner, or way in the future, and is determined by a couple of ever changing factors.

Let’s examine the potential growth of the ALCX token by analyzing its tokenomics. ALCX’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} ALCX tokens being in circulation today, that means a price of {PRICE} per ALCX.

How did we come to that calculation? It’s quite easy, the price of an ALCX token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each ALCX coin. 

By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of ALCX at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for ALCX to hit that price.

At a price of $1000 per token, that means the current market cap of ALCX would equal ${{CIRCULATING_SUPPLY} * 1000}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $1000.

Now let’s shift our attention to the fully diluted market cap.

Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.

The fully diluted market cap represents the total value of a coin if all tokens were in circulation. ALCX’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} ALCX which means that no more coins above that number will ever be created.

These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.

How does this impact the price of ALCX? Taking into account the current price of an ALCX token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. ALCX coins that have been burned are not taken into consideration because they have been permanently removed from circulation.

Whether it seems gigantic or not, the number we came to above only takes into account the current price of an ALCX token. Doing the same calculation but with a price of $1000 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 1000} for the ALCX protocol fully diluted market cap.

These are all crucial details to know when calculating if ALCX can reach the price of $1000 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.

The future of ALCX depends solely on its growth as a network used by tens and hundreds of millions of users. The price of ALCX already traded above $1000 after the protocol launched, so it wouldn't be surprising to see it reach $1000, and perhaps even more by 2030.

If you’re looking to add some ALCX to your portfolio, the most trusted places to get some are Binance and Coinbase.