Defiant ventured into the dark forest where nothing at all was what it seemed and unimaginable horrors lurked round every corner. Well this week we’re labouring the fantasy metaphor yet further with a languid lunge through illusion magic and scarcely credible financial finagling in what critics are already calling the David Blaine of crypto films.
In TradFi, investors use interest and dividends as a source of income. However, these payments are usually quarterly at best. Alchemix is a newer DeFi protocol that flips this concept on its head by providing the ability to get your future yield now.
Alchemix vaults act as the hub to generate yield advances in the form of a synthetic derivative called alUSD pegged to $1.
Having launched in February, Alchemix already boasts $1.17B in TVL.
With Alchemix, you can deposit DAI and borrow up to 50% of the deposited amount of DAI at a 1:1 ratio, by minting alUSD. The deposited DAI is then deployed to Yearn vaults to earn yield and continuously pay back the vault owner’s debt while the vault owner can choose to use the alUSD for personal expenses, farming, or whatever they want!
Alchemix enables borrowing from future yield in the form of dollar-pegged alUSD. Alchemix automates paying back loans with the yield earned from deposited DAI. So as the protocol pays down your debt, you can withdraw more DAI collateral unless you choose to pay back the alUSD sooner. Vaults are not liquidatable by “keepers” based on a collateralization ratio like with Maker, Aave, Compound, or Reflexer.
The owner of an Alchemix vault can choose to liquidate part of their collateral to repay the loan, allowing them to withdraw whatever is remaining, but there’s no liquidation to enforce maintaining a specific loan-to-collateral ratio. Alchemix is governed by the ALCX token.
To illustrate this concept, imagine I give you $1,000. If you choose to purchase a laptop for $500 and invest the other half, the real cost of that laptop is $500 plus the potential return you could make by adding this $500 to your investment portfolio. Should you choose to invest all $1,000, your opportunity cost is the inconvenience of not having a laptop today. The important concept here is that money spent today decreases the amount of principal that can be used to earn a future return and vice versa. But what if these options were no longer mutually exclusive and we did not have to choose? This is the beauty of Alchemix Finance; we can have the best of both worlds by spending our future investment returns today.
By combining the processes of yield generation and borrowing, Alchemix is able to create zero-risk loans (outside of smart contract risk) that repay themselves over time. The loans are risk-free because the principal’s rate of return always serves as the repayment rate for a user’s loan. Think of the loan as a personal credit line against your savings that is paid down with the yield that your savings earn. At any given time, the user can choose to repay their outstanding debt and access their underlying collateral. In return for its service, the Alchemix treasury takes a portion of the yield generated from its users’ assets. Currently, this rate is set at 10%. This means that 90% of the returns are passed through to the user or used to pay down the user’s debts. In time, the fee rate will ultimately be determined by the Alchemix DAO.
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