What is Alchemix?
For those of you unfamiliar with Alchemix, it’s a new DeFi protocol built on top of the yield aggregator Yearn. Alchemix allows users to get an advance on their future yield from Yearn — or, to explain it another way, Alchemix allows users to take a 200% overcollateralized loan that automatically gets paid off using the yield earned on the collateral. With V1, a user can deposit DAI into the Alchemix vault, which then deposits that DAI in Yearn’s V2 DAI vault to earn yield, around 30% APY now. Users can then take an overcollateralized loan out against their DAI at a 50% ratio with Alchemix’s synthetic stablecoin alUSD. This stablecoin is pegged to the dollar using a 3CRV pool and a transmuter, which allows users to transmute their alUSD to DAI at any time. As the DAI deposited in the Alchemix vault earns yield, that yield is used to pay back user’s loans automatically. When the yield has paid off the loan in full, the user can withdraw their collateral in full. Since this is DeFi, Alchemix makes their vaults and loans even more flexible. At any time, a user could self-liquidate out of the vault by paying back their remaining loan with a portion of their DAI collateral. This would allow them to get the rest of their DAI collateral back instantly as well as allowing them to keep their loan. Users can also pay back their loan at any time with alUSD or DAI. The key feature of Alchemix is, there are never any liquidations. Ever. The risk you’re taking as a user, besides the always-present smart contract risk, is that you could lose your loan yunting around in DeFi, and you either have to wait a couple years until the yield pays off the loan, or you have to self-liquidate to get your collateral back, which will be half of the initial deposit minus yield earned.
Let’s run through a quick analogy. Lana deposits $100,000 into a Savings Account at Bank WeFundDrugCartels. Bank WFDC offers a 30% APY due to it funding drug cartels (which is about the current APY in Alchemix thanks to the transmuter farming boost). Instead of Lana using this money to live off of, spending her hard earned money and reducing the amount she has to earn that high APY with, the bank gives Lana a credit card with $50,000 on it, and they tell Lana, if you only spend the money on the credit card without touching the money from your savings account, we’ll use that APY to pay off the credit card along the way. At the end of that two years, the $100,000 in your account will be waiting for you, and you will have lived off of a basically free $50,000.
If you throw DeFi into the mix, where instead of spending that money you use it to farm or yunt into your favorite shitcoins, you’re now earning yield on your future yield, all with minimal risk. Truly incredible stuff. But with Alchemix, V1 was just the thesis test. The devs are just getting started.
Alchemix V2 takes this revolutionary idea and pushes it in ways that will change DeFi forever. V2 implements additional vaults with more collateral pairs such as ETH-alETH, WBTC-alWBTC, and additional stablecoins such as USDC, USDT, and sUSD. Along with these additional pairs, word on the street is that there will be additional yield aggregators implemented, so users can choose their favorite yield aggregator platform based on their risk tolerance and desired yield. Let’s run through some examples of how and why these additional pairs will be so revolutionary, keeping in mind the benefits and risks (or lack thereof) of the platform. I’m going to focus on ETH-alETH, but my examples will work for WBTC as well.
Like most of you degens, I’m an ETH maxi, and I need my ETH long exposure. I want to hodl through the peaks and valleys, but I also want to put that capital to use during both the bull and bear market to maximize my earnings. Currently, one of my options is to put that ETH in something like Maker or AAVE to take a loan out against it to do degen things with. While this is far from a bad strategy, I would have to keep my eye on that liquidation price and a part of my earnings get eat up by the interest of my loan. If I lose my loan in a rug pull, I have to try to make back the loan sum, or my collateral is locked away forever. Another risk would be, if crypto gets another flash crash, my hallowed ETH could get liquidated. There goes my kid’s college fund. If I didn’t want to take those risks, my other main option would be to earn yield on that ETH using a yield aggregator like Yearn or Rari. This is also a solid strategy, but it leaves a lot of capital on the sidelines, unable to be used to yunt into ButtCoin’s Pool 2 because I’m afraid to lose it in a rug.
Alchemix combines the best of both of these strategies. With V2, you deposit your ETH into the vault, which then earns a yield using a protocol like Yearn, Compound, or Rari — then you can take a 50% loan out in alETH with no risk of liquidation. Now you’re both earning yield on your long position and able to use 50% of that position to do all your favorite degen things, all without having to worry about losing your long position. Worst case scenario, you just wait until the yield pays off the loan. Alchemix gives you the best of both DeFi strategies without any tradeoffs. Below I’m going to offer some specific examples of how you can leverage Alchemix to conquer both the bull and the bear in ways no other protocol can achieve.
Let’s say I have 20 ETH that I want to diamond hands until 2040. I deposit that ETH into Alchemix and take out a loan for 10 alETH, alETH which can be swapped 1:1 for ETH using Curve. Despite loving ETH long term, maybe I heard that Vitamin Buttermilk is going to delay ETH 2.0 by a month, and I expect the price to go down in the short term. Instead of having to hodl through the chop or sell half my stack and pray I’m right so I can buy back in lower, with Alchemix, I can sell my alETH loan to stables, throw it into a farm to earn yield, then use those funds to buy more ETH when the price drops, paying off my loan and increasing my long stack.
1) Deposit 20ETH= $50,000 (1 ETH = $2,500)
2) Take out self-paying loan for 10 alETH = $25,000
3) Earn 13% on ETH collateral = $6,500 a year
4) Sell 10 alETH to stables when the price is at a top, $25,000 in this example.
5) ETH price drops to $1,500 after a month
6) Yield has paid back the loan by .2 ETH
7) Buy 16.5 ETH with your stables
8) Repay loan of 9.8 alETH
9) Deposit 6.7 additional ETH in the vault, now giving you 26.7 ETH
10) Take out a loan for 13.3 alETH
11) Rinse and repeat to grow your long position during the chop without risk of liquidation.
Let’s repeat the above example but with a twist. Let’s say you want to stay long 20 ETH, but you are sure a bear market is coming. You’ve been too degen to take profits along the way, so now you’re scrambling to hold onto your gains without wanting to sell any of these positions that you believe in long term. You can do the above strategy, but instead of buying more ETH with the $25,000 you sold to stables, you can swap that to fiat and use those profits to live off of for the next 1–3 years of the bear market. When you come back in three years, the bull will be back, and your loan will either have paid itself back or come pretty close. By using Alchemix, you’ve not only lived off your crypto gains for 3 years for free, but you’ve survived the bear market without having to sell anything in your stack. This is a game-changer.
Or, maybe you’re like me and you’ve been Zhu Su pilled into believing in the supercycle. You want a core holding of ETH as it climbs its way to $10k and beyond, but you also want to yunt into some risky pool 2s to get that juicy 1400% APY on Guac&ChipsCoin. Normally you’d have to risk some of your ETH stack to farm that pool 2. If it ends up being a rug, bye-bye to all that ETH. With V2, you can swap your alETH to ETH and use that to farm the risky pool. If it’s a rug, you still have all your ETH in the vaults safe and sound. Now you have to implement Zhu Su’s coma strategy (as described on UpOnly) as you wait for the loan to pay itself back. This strategy also applies to if you want to use your loan to yunt into your favorite speculative shitcoin.
If you’re reading this and your name is Sassal, you’re thinking that all of these strategies are silly because the only thing you should be doing is buying ETH, then buying more ETH, then as the price continues to go up forever, buying additional ETH. Well, guess what friend, Alchemix has a strategy for you as well. You can swap your 10 alETH for 10 ETH, then farm with it in another yield aggregator or ETH 2.0 staker. This would allow you to earn ETH yield on your future ETH yield all paid out in more ETH. In this example, even if you self-liquidated out of the vault, since you kept your loan in ETH, you will always have more ETH than you started with by using Alchemix. After the loan pays itself back, you can deposit that ETH loan along with all your ETH farming rewards back into the vault and take out another loan, rinsing and repeating the strategy to multiply your ETH stack over the years without spending a dime. Oh no Sass, it looks like you need to change your shorts.
The honest truth is, these examples are just the tip of the iceberg when it comes to ETH and WBTC Alchemix strategies. With the implementation of alUSD, alETH, and alWBTC in other protocols, users will have more options than a smooth-brain like me could even imagine. Some have speculated (or cried about if you’re TradFi) that APYs might not always be this high which will hurt Alchemix. The Alchemix team takes this concern seriously. The crafty devs over at Alchemix have built a new transmuter which allows Alchemix to farm with any excess funds held in the transmuter due to self-liquidation. Farming with these funds effectively boots the APY and basically makes the yield auto compounding. Currently, Alchemix is using the roughly $218 million DAI in the transmuter to additionally farm in Yearn, boosting the user’s APY from Yearn’s 13% to a whopping 30%, one of the best stable APYs in DeFi. I imagine when V2 drops, the devs will continue to find crafty ways to add funds to the transmuter and to boost the user’s APY once again. Overall, DeFi will always have much higher rates than TradFi, and even in different market conditions at least one of the stables, ETH, or WBTC will earn an attractive yield. Overall, Alchemix is a dynamic platform that offers strong and unique strategies unable to be found anywhere else in DeFi. Their brilliant dev team, strong community, and prescient vision are sure to make Alchemix a future DeFi staple.