Alchemix Is The Future of Money Legos

I think people are missing the major point of this brand new primitive in DeFi, and therefore glossing over how game-changing and new of a primitive this protocol really is.

If I plan on holding a spot asset, like $dai or $eth, the economic incentive is to obviously earn interest on it, regardless of the rate. That’s what we’ve always done even in tradfi, and it’s extremely accessible in DeFi.

The issue here, as shown collaterally with Uniswap’s V3 pools, is that capital efficiency is a big deal. These lending pools have a *lot* of DAI sitting in them, but there’s no way for me to be using that DAI before the instantaneous time when the lending protocol needs to lend it.

People expect to get the most use out of their assets. Alchemix unlocks this shortcoming. Why can’t I just use my Compound c-tokens, for example? It’s ERC20 too and has the full value of my underlying asset? The answer is you don’t want to bet your low-risk capital on high-risk positions since you might not get it back.

Alternatively, since you know the price of those c-tokens will rise predictably over time, a self-paying loan through streamed interest payments is obviously a superior method.

Surely there must be a way to lose? Okay if interest rates across DeFi drop to 0.1% and I borrowed and lost way more in $alUSD than my other assets could pay off, my DAI is essentially “locked”. How is this different than losing your base asset in the first place? I’d argue it’s marginally better because it’s not completely gone. It might take 10 years to pay back the loan, but you can potentially get it back immediately, perhaps through a flash loan.

The point here is we now have a *new* synthetic asset supported by an interest payment stream that all parties can trust as much as they trust the underlying money markets — it’s our way in DeFi of printing money in a permissionless way. Since you’re contributing to the underlying money market, you can get the maximum use out of your base assets without risk to your positions by printing money (up to a limit) whenever you want to.

An example of this power:

  • Deposit 100k DAI in Alchemix
  • Borrow 20k alUSD, convert to 20k DAI.
  • Invest in 10 long positions in projects I love.
  • If I lose most of the 20k DAI over a few years, the 20k alUSD will likely be fully paid off, and I’m left with my initial 100k DAI (quite the opposite of the same situation in a traditional loan where I would now be even deeper in the hole).
  • If my longs pay off, I can deposit more into Alchemix and do it all again with more capital, and with no risk of taking a step back.

It’s easy to see why this is better than putting 80k DAI directly in Yearn and investing the 20k DAI directly — 100k DAI earns more interest than 80k DAI (I’m getting more use out of my capital!). If you’re following along, you’ll see Alchemix will become an immense magnet for base assets like DAI, as people and teams realize it’s effective to earn a yield on the total value of their assets and borrow conservatively against that yield for any risk-taking positions.



Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store