Alchemix Finance is a one-of-a-kind DeFi protocol that enables the creation of DAI stablecoin pegged synthetic tokens representing future yield.
In other words, the protocol assigns deposited DAI stablecoins to the Yearn Finance liquidity aggregator to start earning yield. However, instead of seeing your returns grow over time, you can receive an advance on these yields at any time in the form of alUSD.
And best of all, the yield earned from deposited funds gradually repays the alUSD debt whilst the underlying DAI gets unlocked.
How does Alchemix future yield work?
Vaults are a central component of the protocol and where deposited funds generate future yield. The current DAI vaults work as follows:
First of all, deposited DAI funds are sent to the Yearn Finance yDAI vault to start generating yield.
Next, depositors can borrow up to 50% of the deposited funds. And over time, as harvester yield generates it reduces the depositor’s debt. Thus, creating a loan scenario whereby the future yield repays the loan over time.
Furthermore, as the loan repays, users can withdraw more of the deposited DAI until reaching the 200% collateralization ratio. This protects the integrity of the loan while giving users access to their funds.
Therefore, depositors can repay a portion or all of your loan at any time or choose to liquidate their assets. And should they choose to do so, all transactions are settled in alUSD to DAI on a 1:1 basis.
This gives the platform’s users a flexible line of future yield-based credit without having to commit to long lockup times. More importantly, since the protocol ensures the debt will only ever go down, users never have to worry about liquidations unless they choose to do so themselves.
Are Alchemix vaults safe?
To begin with, Alchemix chose leading DeFi protocol Yearn Finance Vaults as their aggregator to generate future yield. And while Yearn Finance has some of the industries leading security measures, there’s no guarantee that something won’t go wrong.
This is why Alchemix has implemented additional security measures to protect users’ funds. As a result, the protocol has an emergency shutdown procedure that will immediately withdraw all funds from Yearn Finance and prevent deposits. This procedure is designed so that users can exit the vaults safely and without incurring any losses.
Furthermore, alUSD token comes with two additional security measures. The first being a limit on the amount of alUSD that can be minted on each asset. This limit ensures the integrity of the Alchemix synthetic tokens and takes into account a number of factors such as technical, market, and legal risks.
Secondly, the protocol employs Chainlink oracle price feeds. So in the unlikely event that DAI ever drops under a certain threshold, all transactions involving DAI will be paused until it regains its value. This prevents alUSD from losing its peg or becoming undervalued.
Firstly, alUSD is tradeable on decentralized exchanges such as SushiSwap. However, at the time of writing, demand for synthetic tokens such as alUSD is low on exchanges. Hence, there are some serious liquidity concerns.
Luckily, Alchemix has found a solution to the liquidity problem. The transmuter is the protocols pegging mechanism that ensures users can exchange alUSD for DAI on a 1:1 basis.
It works by directing all DAI yield generated from the yDAI vaults into the transmuter. This happens on a continuous basis and users can then exchange their alUSD for DAI.
Furthermore, when DAI is removed from the transmuter, an equal amount of alUSD is burnt to ensure the pairings remain pegged at all times.
Overall, the transmuter is a key component in the protocol and creates a compounding yield loop that ensures liquidity, while at the same time helping to repay future yield loans even faster.
ALCX is the governance token of the Alchemix future yield generating DAO.
The supply of ALCX token is not capped. Instead, the team opted for an emissions schedule designed to gradually reduce token issuance over a period of 3 years.
The schedule commences with an initial pre-mine of 478,612 ALCX tokens and estimates a circulating token supply of 2,393,060 after 3 years.
The token distribution will be as follows:
- 15% allocated to the Alchemix DAO.
- 5% reserved for bug bounties.
- 80% for staking and liquidity rewards.
As with all protocols, deep liquidity is needed to ensure maximum efficiency. Therefore, Alchemix staking pools’ primary purpose is to provide liquidity within the ecosystem and distribute ALCX tokens amongst the community.
There are currently four pools in opertion.
- alUSD – This is the initial staking pool, designed to incentivize holding alUSD until the alUSD/DAI pairing gains enough liquidity.
- ALCX – This pool rewards ALCX token holders. Also, the length of this pool will be decided by the community through the governance DAO.
- alUSD/DAI – Adding liquidity to the alUSD/DAI pool allows users to earn rewards and ensures alUSD can be converted to DAI with low slippage.
- ALCX/ETH – This pairing provides liquidity for the ALCX governance token.
The Alchemix DAO gives ALCX token holders a say in the future of the project.
Currently, the DAO is operating as a developer multisig. However, it is in the process of transitioning towards fully autonomous governance.
Importantly, the DAO serves a number of purposes.
For example, the Alchemix DAO receives income from the protocol and then allocates a percentage to the treasure to maintain the upkeep and development of the project.
In addition, the DAO will fund projects willing to build on the Alchemix protocol should the community first approve them.
And should community members wish to suggest changes on how to modify the DAO, they can first discuss it in the community Discord governance channel. If proposals receive support, they will be written up and voted upon by the community. Thus, community input will heavily influence the future of the protocol.
Alchemix Finance is truly a unique DeFi product. There are simply no other projects out there that offer users an advance on future yield earnings.
In addition, the protocols transmuter feature is an innovative solution to the early liquidity problems that are all too common in new projects.
And while it’s too early to tell what the future holds for Achemix, should the project follow through on its promises it will be in a great position to capitalize on the upcoming DeFi revolution.