They enable hodlers to earn interest income and borrow against digital assets with a few clicks and relatively simple interfaces.

MakerDAO, Aave, and Compound have long been at the top of the market. Their respective TVLs are $15.15 billion, $13.59 billion, and $6.64 billion (as of 04/10/2022). The Terra ecosystem’s Anchor protocol is also gaining traction. Its TVL has already surpassed the $15 billion mark.

DeFi 2.0 lending projects such as Alchemix, where debts are self-liquidated and not subject to liquidation, are also gaining traction.

The key features of classic landing protocols

There are pools of digital asset offerings and pools of leveraged funds in any lending protocol. Each has a unique set of coins.

Users deposit assets into the offer pool, allowing them to earn interest on their investments and borrow coins. The amount of loan funds available is a certain proportion of the value of the assets in the supply pool.

For example, the Loan-to-Value (LTV) parameter for “wrapped bitcoin” WBTC on the Aave platform on the Ethereum network is 70%. This means that if the collateral is $10,000, the user can lend no more than $7,500 in WBTC

The main difference between permissionless protocols and traditional financial market products based on partial reservation and KYC is in the oversupply.

Liquidations are another important aspect of lending protocols. If the collateral’s value falls below a certain threshold, the user’s collateral assets will be sold forcibly.

Alchemix value proposition

Alchemix is a new lending protocol with some distinct features.

Loans backed by synthetic versions of pledged assets avoid the risk of liquidation. For example, a user may deposit collateral in ETH or DAI and then issue assets tied to them, such as alETH and alUSD.

When the value of collateral and leveraged assets falls, so does the value of coins. However, this has no negative impact on users’ debt positions or the LTV parameter.

This is the key distinction between Alchemix and traditional lending protocols, in which you typically deposit volatile assets like ETH and receive loans in stabelcoins (if the value of the collateral falls in ether, the loan amount in stabelcoins stays the same, making the debt position risky).

Andre Cronje’s yEarn Finance protocol is used by the platform. Users will receive income on their deposited collateral assets as a result of this integration.

The user’s loan is gradually repaid through the interest income generated by the yEarn repository. This method is more efficient because it allows for more borrowed funds while lowering the risk of liquidations.

The Alchemix protocol has a Loan Ratio parameter of 50%. This means that the loan amount for the user cannot be more than half the value of the collateral. In other words, the collateral must be worth at least twice as much as the loan amount.

Users can liquidate collateral or a portion of it at any time to repay a debt in alUSD immediately. If the user urgently requires collateral assets but is unable to repay the borrowed funds in full, partial liquidation of a position can be beneficial.

The loan can be repaid using both synthetic Stablecoin and with the more familiar DAI, USDC, or USDT.

At the time of writing, the Vault yield on yEarn for DAI Stablecoin is only 2.53%. For farming COMP and CRV tokens, the strategy involves interacting with the Compound and Curve platforms. The generated coins are sold for DAI and deposited back into the Vault.

10% of all revenue generated goes to the Alchemix decentralized autonomous organization’s treasury. These funds are used to pay developers, fund various community initiatives, conduct audits on a regular basis, and so on. The remaining 90% is used to pay off debts owed by users.

To maintain the stability of alUSD, an arbitrage system similar to Terra is used.

Assume that 1 alUSD is less expensive than 1 DAI. The arbitrageur can buy “discounted” synthetic Stablecoins from Alchemix on one of the exchanges and then sell them for a profit to pay off debt in his vault.

If 1 alUSD is worth more than 1 DAI, the asset can be issued and then sold at a discount to the market price.

The platform includes a Transmuter tool that converts WETH and stabelcoins to synthetic assets and back at a 1:1 ratio. For example, to maximize return on capital, you can exchange borrowed alUSD for DAI and then use the latter in third-party DeFi-protocols.

Alchemix has its own token, ALCX. It is used in protocol management votes. The token can also be used in steakhouses or in SushiSwap’s WETH/ALCX liquidity pool.

According to the chart below, the ALCX exchange rate briefly crossed the $2,000 mark in March 2021, shortly after the project’s launch. As a result, the asset’s price plummeted.

ALCX, ETH and synthetic versions of these assets can also be farmed.

The annual yields (APYs) of the pools differ significantly. For example, the APY of Saddle alETH on February 6, 2022 is 3.12%, while the APY of ALCX/ETH v2 is 44.91%.

Alchemix 2.0 and the future prospects of the project

Alchemix’s first version was released in February 2021. Initially, the platform had only two Vaults: DAI/alUSD and ETH/alETH.

With the launch of version 2 in March 2022, the interface of Alchemix was transformed and the capabilities of the platform were significantly expanded.

Vaults based on the popular centralized stabelcoins USDC and USDT, as well as “wrapped” ether from Lido (wstETH) and rETH protocol Rocket Pool, have appeared.

Transmuter’s capabilities have expanded in tandem with the new assets, and the Farms section has been updated.

Scoopy Trooples, co-founder of Alchemix, announced integration with Aave, Compound, and other DeFi-protocols, in addition to yEarn.

Conclusion

Alchemix has an intriguing value proposition: the developers have completely redesigned their approaches to non-custodial lending.

Users’ collateral is used efficiently by integrating with the yield aggregator yEarn and using synthetic assets. Debt positions are virtually immune to liquidation and are automatically serviced by future interest income.

The platform’s disadvantages include the low (at the time of writing) profitability of yEarn strategies. There is also no support for next-generation networks such as Fantom and Avalanche, which offer fast and low-cost transactions. However, given the developers’ upbeat statements and the growing popularity of cross-chain solutions, these issues are likely to be resolved soon.

In the future, we can expect equally innovative approaches within the DeFi 2.0 concept, as well as new solutions that encourage users to actively participate in decentralized ecosystems.