A self-repaying loan sounds like the stuff of science fiction – but with crypto, all things are possible.
Alchemix allows users to get under-collateralised loans on their Ethereum or Dai tokens, which are then put to work generating the astonishing yields available in decentralised finance (DeFi).
There’s no risk of liquidation and the loans pay themselves back over a period of several years.
The protocol is governed by the ALCX token, currently the No. 246 crypto with a market cap of US$413 million.
To learn more, in late September Stockhead spoke via Zoom to “Scoopy Trouples,” the protocol’s pseudonymous creator.
Stockhead: So can you explain what is Alchemix, starting from square one?
Trouples: To begin with, how to understand Alchemix, you have to understand a few other things in DeFi first, because it’s like a progression or evolution of some different systems that are already existing in DeFi. The cornerstone of it is — are you familiar with the application MakerDAO?
[One of the first DeFi protocols, MakerDAO is an application that allows users to mint the decentralised stablecoin Dai with their Ethereum tokens, essentially getting a loan from their Ether]
Trouples: So they innovated on the decentralised stablecoin space, they’re the trailblazers in it. Essentially the system they have is something called a collateralised debt position. And the idea is that you deposit tokens, it started with Eth, now it’s a bunch of different tokens as well.
And you over-collateralise a position. So let’s say you put in like something like $10,000 worth of tokens into Maker DAO, and each one has its own collateralisation ratio.
So, a stablecoin, the collateral would need a much lower collateralisation ratio, because it’s stable and the chance of it going off-peg are much lower.
Whereas if something like Eth, it’s 150% per cent collateralisation ratio. So if you have $15,000 worth of Eth, you can borrow $10,000 worth of Dai.
And part of this, the way that they can ensure that Dai is always collateralised properly, is that if you fall underneath that collateralisation ratio you will get liquidated.
Trouples: So that way they can always ensure that Dai has that collateralisation ratio that they need to feel comfortable with, for it to actually have the full faith and backing that people would expect from a decentralised stablecoin.
And this model has been copied and kind of innovated on a little bit, there’s USDP which allows for lots of different tokens to be deposited in order to make this other decentralised stablecoin.
There’s another one, Magic Internet Money, and LUSD, those are kind of like the leading ones that use the CDP [collateralised debt position] model.
And Alchemix is kind of similar to that, we also rely on over-collateralisation for our deposits and for minting alUSD and alETH, but we differ from the other platforms in that we only do mirrored assets in Alchemix.
And then we got that by the end of day one.’
Right now that’s only limited to alUSD and alETH, but that will also extend to alBTC and other altcoins in the future.
And one of the cool things that happens with this, is if we have alUSD and we only take stablecoins as collateral, and we assume that a stablecoin equals $1, then we don’t have liquidations, we don’t need to have liquidations built into our system.
So people can take out the max value from their position and not ever have to lose a night’s sleep, or feel any sinking anxiety, especially when the market tanks, (wondering) ‘oh is my position OK?’
Stockhead: Sure, sure.
Trouples: And that’s one thing that we really like about Alchemix. So, in order to only do this, we don’t actually even charge our users any interest — that’s one of the major components to the other CDP models is that they charge you interest. So Dai might be two per cent, eight per cent, 10 per cent, you know 0 per cent depending on the health of the peg and what the tokenholders want.
They get kickbacks essentially for protocol revenue, so having the interest rate as high as it can be is beneficial to the tokenholders of the projects. For MakerDAO’s case, they take that surplus that they make, and buy back Maker [tokens] from the market and burn it. So that’s like their dividend system there, and other protocols have other like similar mechanisms as well for how they reward users and platform tokenholders and stuff.
Whereas in Alchemix, what we do is we kind of put this on the head, and we’ve charged zero interest and instead, what we do is we take your collateral and deposit into Alchemix and we put that into Yearn, which is a yield aggregation protocol on DeFi. And then what happened is that the yield from your collateral actually pays off your debt for you.
Stockhead: That’s the really wild component that I think will make people’s heads explode.
Trouples: Yeah, so right now we’re getting around like five per cent on ETH and around seven on Dai, which are collaterals that we have accepted right now in our early version one product.
And right now we’re only built to work with Yearn, and we possibly could make other strategies for other protocols but we have our version two, close to completion, and it will be entering audit in about a month from now. [This interview was conducted in late September]
So we want to just focus our developments on that instead of kind of going off and building other things on our legacy code.
And one of the cool things that we’re going to be able to do in our version two is, we’re not going to be limited to Yearn.
And, you know at first when we first started like Yearn was, you know, the leader Nields and stuff like that but other protocols have jumped up and pop up that you know have kind of supplanted them.
And I’m sure there will be more in the future that come in and supplant the ones that are out there today.
So one of the big things for v2 is that you can have multiple collateral types for AlUSD so instead of just Dai, it can be any of those other decentralised stable coins I mentioned, it could also be like USDC, Tether, and other centralised stable coins as well can be added as collateral.
And then the neat thing is that you can choose what strategies you want for each collateral.
So, if you want to, you know go into a higher risk, if one week you know one protocol is like has the best yield and then another week another strategy has the best yield, you can bounce it back and forth.
And you can compartmentalise it, so if you say, I think Aave is the safest option. I’m gonna put half of my collateral in the Aave. I think Yearn is the next, I’m going to put a third into Yearn, I’m going to put the remainder into this other one. You can customise it however and balance it however you want to so it’s going to become like a meta-yield aggregator, in and of itself.
And users can easily customise how you know it works for them, according to whatever preferences they have for risk tolerance and stuff like that. And also it gives us a lot of flexibility to add whatever yield strategies come up.
Stockhead: And … so you’re only loaning out about 50 per cent of the collateral, is that right?
Trouples: It’s a two to one, so you need $2 to borrow $1.
And then the reason that we do this is because if it’s any lower then people can go and do a recursive loop of minting our alUSD then selling alUSD for another collateral then putting it back into our mix, minting and doing this over and over again.
A 200 per cent collateralisation ratio like we have right now, the maximum leverage somebody can get doing this is 2x.
We don’t want people going up to three, four, five or six times leverage on these positions, because if enough people do this, it’s actually going to be damaging to the peg [that alUSD trades at]…
Newcomers might come and say, ‘Why would I borrow alUSD if it’s only worth 90 cents?’ So that’s why we have a 200 per cent collateralisation ratio, so we limit the amount that these loops can happen.
Trouples: So it’s more of a peg consideration than it is any risk towards the system.
Also another thing is if people are expecting their loan to repay itself, probably it’s something in a reasonable timeframe like five to eight years, I think people could stomach that … but if somebody’s loan was so big it might take 15, 20 years to repay, you know, who knows where DeFi is going to be in 15 to 20 years?
Who knows like what version of the protocol we’re on, whether we’re even still supporting the old version by that time?
So I don’t want somebody to go in there and do a max borrow, thinking I’m gonna come back in 10 years and have all this debt repaid. Woohoo.
And then, you know some things happen, somebody who’s not paying attention, they’re not caring for it and migrating like they should when the new version comes out, then they could be up for a rude awakening much later on. So we want to avoid those kinds of situations.
A self-repaying boat
Stockhead: So what do people use the protocol for? Is it mostly just to cash out?
Trouples: We always like to hear stories of people using it for actual personal finance, I think that’s the most exciting stuff.
Probably the funniest story that we had with one of our users, is that a year ago, this guy’s dad’s boat sank because a hurricane came in, really roughed up the marina. And this user had done pretty well for himself in the crypto market.
And what he did is he took his stablecoins, put them in Alchemix, took out an alUSD loan, and then used that to buy a boat for his dad.
Stockhead: Oh wow.
Trouples: So it’s like a self-repaying boat.
And the advantage of doing this, as opposed to just taking out the stablecoins and buying it directly is, let’s say the boat costs $50,000, and can you have $100,000 in stablecoins.
If you were to just liquidate that $50,000 and use that to buy the boat, you’re left with $50,000, and then you decide to put the rest of that $50,000 into earning some yield in DeFi, you would only have a principle base of $50,000 to do that.
Whereas if you go to Alchemix you can kind of spend and save at the same time, because your full principle of $100,000 is earning yield.
So it’s effectively doubling your yield that you would get, as opposed to only having the $50,000 earning yield.
But then with that extra $50,000 you have, you can go and spend it on whatever you want to, while your entire principle is making that money.
And we’ve done some economic analysis of this, and it ends up being between a 15 to 20 per cent boost in capital efficiency.
Stockhead: Oh wow.
Trouples: So it’s quite a major thing if you’re using it for personal finance.
There’s a lot of cool things you can do with it as far as it goes. It is a bit capital intensive, of course, it only works for people who have a lot of extra money and resources at their disposal but it does allow for that.
One other really cool thing that people have also done with it, and this is more of a degen crypto thing, is to take out a loan and then use it to go leverage up or speculate on altcoins and things like that… just using it as a tool to get more exposure to DeFI but or just like the crypto space in general, so they can know, they can know that you know I have this amount of collateral in Alchemix, it’s making this yield and then I can borrow on top of it….
How are these yields possible?
Stockhead: So, if I were to try to explain this to someone outside of the crypto space, I think one of their big questions would be how can you get such big yields in DeFi that you could actually have these self-repaying loans?
Trouples: Okay, so as far as Yearn goes, they have these things called Yearn vaults. They’re basically this kind of container, you can put tokens inside of it, and those tokens can then be delegated different strategies to earn yield.
Some of them, like the most tested and true one that they have is that they would deposit into Compound [a DeFi borrowing and lending protocol]. And Compound, they reward depositors and borrowers with Compound tokens.
So what then the strategy would do, is they would, let’s say, deposit Dai, and then you can do this really weird loop, where Dai is your collateral, then you can borrow Dai, and then you can deposit that Dai then borrow more Dai then deposit Dai and borrow more Dai, and so on and so on and so on.
And this, it’s this really weird rehypothecation loop. Don’t get me started on it. But it is a safe strategy. It’s been proven for a long time now.
And basically they can farm these Compound tokens by using this strategy, and then they would sell these Compound governance tokens, and then buy more Dai with them. And then that thing gets returned to the strategies and stuff like that to be deployed even further.
And so these compound on each other, one after another, another.
So maybe when you put in your one Dai you got one share. And the moment you put it in that share was only worth one Dai, but then maybe a week later or a month later, it’s worth like $1.01 or something like that, if it goes up in value.
So that’s one of the Yearn strategies, they also put in into other markets, like Aave, Iron Bank, Cream…
[very complicated explanation that your humble scribe, in all honesty, had trouble following]
Stockhead: Wow, so that’s very granular…. Can you take it …
Trouples: Yeah, sorry that’s the deep dive into how things work and operate with each other, to break it down for layman’s term, Alchemix is a way for you to basically get an advance on your yield.
Trouples: That’s the protocol in a nutshell. It’s a CDP [collaterialised debt position] platform of self-repaying loans where you take out your future yield today. And it’s a safe platform. You don’t have to worry about getting liquidated.
It just works, it’s all automated, debt repayments happen nearly every day. It will be more regular, we have some bonds that are going up that are going to automate the process entirely.
You know, it’s been the team hitting a button every day and sometimes we forget, you know, cuz we get busy with life and stuff like that to get distracted. Usually it’s like, ‘who did it today? Oh, I didn’t do it, I thought you did it.’
So it’s almost every day.
And the idea is that you can spend, and save at the same time, increasing your capital efficiency while you do so.
Stockhead: So, you gave me a very kind of granular discussion of how Alchemix works. But why — for people that are outside of crypto — why can you get such great yields in DeFi when, if I’m at my bank, I’m getting less than one per cent?
Trouples: Well, I mean the way the banking sector works is that they just take the cues from whatever the central banking, you know, institution has.
So if the country, their interest rate is from their Federal Reserve or their central bank, then banks can’t really go much beyond that.
They’ll borrow from the Fed at one per cent then, maybe to commercial partners at 1.5 per cent and to retail at two or three per cent.
And when you have deposits in there and you have this pitiful yield curve, they can’t really pass it on to the customers too much.
The USA, in a vicious debt cycle
Trouples: I just think the current monetary regime is, we’re in debt, and the only way we’re going to service the debt is to create more debt so it makes the existing debt cheaper to pay off.
I think they’re in that vicious cycle, and they can’t get out of it and they have to keep rates low, and as a result of that rates will continue to be low. In Europe, you’re seeing rates go negative, and there’s talks in America about them going negative.
I just think that it’s getting to be very dangerous territory and very unappealing territory, where people are not encouraged to save at all.
They’re always encouraged to spend as much as they can, or to go into more debt. Then if you are making enough money to be able to pay for bills and have a lot of extra money left over, then it becomes just invest in stocks.
I mean that works because there’s more and more and more and more money in the system, so the stocks can go up and up and up and up and up.
Whereas in DeFi, there is no mandate for what the yield rates are, it’s just natural, whatever the market sets them at.
And there’s two major factors that go into this. The first is borrowing demand for stablecoin. So whenever the market starts heating up, people want to borrow stablecoins, because it’s a very simple unit of account.
You know they’re not affected by volatility and then they can use that to leverage positions. If I think Ethereum is going to go up in the next few months, I’m going to borrow some stablecoins and lever up on Eth for a little bit [by using the stablecoins to buy Ethereum].
And then once I’ve made my profit, I’ll cash out. I’ll pay off my debt, and things will be good.
And so that’s where a lot of the yield comes from, that’s Compound, Aave, Cream, Rari Capital, and other lending protocols of that nature. That’s half of your yield sources.
And the other half is DeFi protocols who do liquidity mining.
And a lot of times that’s the pool 2, where it’s a governance token paired with Ether or a stablecoin as their primary market for liquidity.
A lot of times these DeFi protocols have other markets that they want to make at the same time. And stablecoins being one of the biggest and most attractive ones out there.
So all the decentralised stablecoins out there, they all offer incentives, using their native token to liquidity providers.
I mean, alUSD, we do that with alUSD at Alchemix. LUSD does that, Frax does that, Magic Internet Money, they do that, and it’s allowed them to grow and get hundreds of millions of dollars of supply and liquidity.
So what happens is you get a lot of people who are stable yield farmers. And they might only have USDC but they say ‘oh wow, if I put my USDC into this pool, there’s a little additional risk for putting it in there, you know depegging and smart contract risk, but instead of making five Yearn, I can make 20 per cent.
And then people, what they’ll do in order to realise that yield, is that they will harvest the governance tokens and then sell them.
And so, people, for there to be good yields in DeFi there needs to be demand for DeFi tokens, and a bear market or like you know, little like the mini bear market or something like that where the markets cooling down the yields tend to drop because there’s less demand for altcoins. People usually go to safety, whether that’s Bitcoin, Ethereum or stables.
And then when the market starts heating up, and people are more risk-on, a lot of times these DeFi tokens start to pump in and the yield pumps with them.
‘Half of all DeFi yield comes from Curve’
Trouples: There are some more advanced strategies coming out using something like Uniswap v3, where people can supply liquidity there and then try to make money off of transaction fees.
There’s a platform called Popsicle…
Stockhead: Yeah, I know of the platform.
Trouples: They had a pretty bad exploit four months ago. But I know before the exploit people were bragging about how much they were making, using their special unique three vaults. So, I’m sure you’re gonna see some more innovation in that space and how people can get yields in different ways, more sustainable ways,
Half of all DeFi yield is being propped up by Curve. [a protocol for swapping between stablecoins]
Stockhead: Oh really?
Trouples: Yeah, I mean, Curve has something like 14 billion liquidity in it… that’s as a major source of the yield, that’s going around in DeFi is from that.
I mean because if you put your Ethereum in Compound [where it can be lent out], you’re gonna get like 0.3, 0.4 per cent, or something like that. But if you put it in… If you put like your Eth into like an Eth liquidity pool on Curve … then you can earn five, six, seven, eight, nine depending on in the market conditions and so forth.
Just that little bit of extra risk, people are very much willing to take it on to turn that extra yield.
What are the risks in DeFi?
Stockhead: I’ve been trying to get my father involved in crypto, to introduce him to it.
I sent him some Solana and USDC and I think got him to put it in the vault on Solend, where he’s getting like nine per cent [by lending out] that USDC.
And he’s getting just seven per cent on his shares in his in his retirement account.
But it’s hard to know just what the risks are for things like that.
Trouples: So there’s basically, there’s a few different kinds of risks that are involved with these things.
On the lowest level is a coin like USDC, same thing with Tether, and some of the other centralised stablecoins is they have a function called blacklist.
So that’s if the token goes into the hands of somebody (who shouldn’t have them), or is stolen by somebody else, then they can say this address can no longer transfer these tokens so they’ll be locked in that person’s account forever, effectively frozen.
They can print more and then balance the books and things like that.
So, if one of these centralised stablecoins decides to censor a platform, your platform, that’s one risk right there.
Essentially brick the platform, and all the people’s deposits on it.
And that would be probably that would be disastrous.
But it’s hard to say whether that’ll actually happen or not. I’ve put as a black swan — very low probability, in my mind.
The next level of risk is the rugpull. So that is when the administrators have a protocol, if they still have access to the admin keys, what they can do is if they structure the code in a certain way they’re able to basically take the funds that are in it.
Some protocols, even if they have different administrative functions, they purposefully leave out the ability for there to be migrations of tokens. They make the users do it instead of having it be something the protocol can do.
Rugpulls happen the most often, when there’s new tokens listed on Uniswap.
Essentially what will happen is, somebody will create a pool, seed it with liquidity, maybe spoof a couple trades.
Then other trading bots will pick up on this, and do a lot of market buys, and then a person who originally supplied liquidity will just remove all of it.
They printed some worthless token and paired it with something else … So when they rug it, they get everything that’s in the pool and the people who bought it, there’s no more liquidity to trade it so the the price goes down 99 per cent.
And then rugpulls can also happen with projects that people think are legitimate.
They might be around for a couple of weeks or something like that and people are saying things are looking really good.
And then the dev just goes rogue and takes it all out, people are in shambles.
So that’s the rug pull and the other one is the exploit. And a lot of times, like, especially Ethereum, transactions are atomic, meaning that they happen, the finality happens, within the block. So you could actually string together like 50 transactions, inside of one and they’re all atomic.
Stockhead: These are the flash loans.
Trouples: Yeah, the flash loan exploiter is one of them.
So what they can do is, something like Yearn, I was telling you earlier, when you deposit it in there, it has a built-in oracle and like, for the shares.
Let’s say it’s price per share. So like if you get in there on day one, you know price per share would be one, but as they started harvesting more yield, the price per share, goes up, typically.
But what might happen is if they’re using strategies that have some level, like impermanent loss like a current pool or something like that, somebody could execute some trades using flash loans to manipulate the price oracles so that they can essentially get more than they should.
Okay, so if the price per share is like 1.1 and then they did some weird manipulations to it, then all of a sudden that price per share is 1.5 or 1.2, then essentially they just increase the amount of the deposit, like, their deposit amount by 10%, so they can withdraw that all on the same block and end up with a free million dollars, a free $5 million.
And sometimes these these exploits can be done multiple times and all within the same blocks and before you even know it, somebody has exploited you for $30 million.
Some of it is logic errors; if they’re connecting to another application they make an assumption, or they don’t implement it correctly, and most users would never really know that there’s this exploit out there and everything’s working fine, all their tests are working fine.
But some super hacker is like, ‘Oh, haha. I found this little thing I can exploit and I can get a lot of money out of it.’
A reverse rugpull
Stockhead: So I know Alchemix has been audited and it’s been around for a number of months at least, awhile in DeFi. I know some crypto people say never invest what you can’t afford to lose, but what would you say Alchemix would be safe for someone that can’t afford to lose?
Trouples: With Alchemix, we had one incident and didn’t lose any of our users’ money, it was actually a result of the protocol losing money.
People call it a reverse rugpull, or a rugput.
And what happened was, when we deployed alEth, there was an issue with the deployment, and we didn’t catch it.
And we had done some initial tests and everything was looking fine, but one of our yield adapters wasn’t set up properly… it was set to the wrong index.
So, when we called it from the zero index, indexes start at 0012345, it called, it messed up some of the logic and it ended up repaying all of our users’ debt.
So then their collateral, which is supposed to be a locked, became freely withdrawable.
But we were able to recoup more than half the funds, by having our users donate the funds that they got to us, which was nice. It was great, we would have been a lot tougher spot if we didn’t have that happen for us.
But luckily we have good protocol revenue. And we had a small strategic investment round.
And we had like something like $5 million in our treasury and we had to spend around $2 million of it to get alETH solvent again. Would have been $4 million if our community hadn’t come up big for us, so overall we’re doing okay, even after that.
Stockhead: Nice. And so how many people are in the team?
Trouples: Let me see, we have a couple of part-time contributors as well. Let me double check. The core team is four Solidity developers work on the core contracts and stuff like that. Three front end developers, including myself.
We have a graphic designer, and the marketing guy, and then we have an operations and community guy as well.
So that is 10 people on our team.
And we have contributors, too, that are not on our payroll but we pay them on occasion for the work that they do.
Stockhead: I think it’s just so wild that you know you have these, these pretty small teams of people that are able to build like this, a essentially sort of a bank in some respects, with millions, or sometimes even billions of dollars locked.
Trouples: We have a little over a billion in Alchemix. It’s terrifying. When we launched, I was like, success to me is that we’ll have $100 million TVL [total value locked] by the end of the year.
And then we got that by the end of day one. And then we were up to like $300 million TVL after like week two, and I started freaking out because at that point we weren’t audited.
You know, we had several code reviews done by other people in the space, looking for vulnerabilities, and including some really, really, really top tier names who reviewed our code but we still didn’t get an audit on it. It was still in progress at that point.
And so I even had like a panic attack where I felt like my heart was gonna jump out of my chest, because it’s just, it’s a big deal handling $50 million. If people lose that then you know that sucks. It’s not the end of the world though.
But $300 million, goes poof? Oh my god I would be hunted.
Stockhead: Oh goodness.
Trouples : I had to learn a lot of meditation and breathing exercises, to be able to center myself and de-stress. Eventually I just kind of became numb to it but yep, we have a billion TVL.
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.