This is a weekly tutorial on the most compelling opportunities in yield farming, written by our friend DeFi Dad, an advisor to The Defiant. The goal is to expose more Defiant readers to new DeFi applications and their associated liquidity mining programs.
Before reading this tutorial, a bug was discovered two weeks ago in the Alchemix alETH vaults allowing vault owners to withdraw underlying ETH collateral without paying back alETH debt. Since then, the bug has been resolved and the code has been audited but do not assume Alchemix is “safe to use” because a tutorial has been written here. Read through the risks section carefully and as always, consider you can lose everything in a single DeFi application.
Background on Protocol: Imagine if you could deposit your money in a savings account but then instantly capture the yield from the future and then turn around and spend it however you choose! Alchemix has captured all of the DeFi community’s attention the last three months for its creative use of money legos to enable borrowers to lock up collateral in an automated yield-earning strategy, while simultaneously borrowing an advance on their yield in the form of synthetic assets.
To dumb it down a bit, here’s a simple example:
- Cami the DeFi farmer deposits 100 DAI into an Alchemix vault.
- She then borrows up to 50 alUSD (a synthetic equivalent to DAI).
- With the 50 alUSD she can spend it or maybe use it to farm elsewhere.
- Meanwhile, her deposited DAI is deployed to a Yearn vault to earn yield.
- The yield is then used to continually pay down Cami’s debt of 50 alUSD.
- In the end, Cami can allow her accuring yield from the deposited 100 DAI to pay off her debt or she can manually pay back the 50 alUSD anytime or even liquidate part of her deposited 100 DAI collateral to pay back the debt.
Thanks to this clever protocol design, Alchemix achieves 3 compelling use cases in DeFi:
- Non-liquidatable loans, avoiding a common risk DeFi users lose sleep over.
- The first self-paying loan. Borrow and if you’re willing to wait long enough, your underlying collateral that’s earning yield will pay back your loan for you.
- A novel mechanism for borrowing an advance on future yield. The power of this utility is that you can now farm with a larger position with a blue chip synthetic asset like alUSD.
Since launching in February, Alchemix has had an exciting run growing TVL as high as $600M on June 15th and as of today, ~$400M. However, the protocol has had limitations catering to vaults that only accept DAI deposits to mint/borrow alUSD.
In just the last few weeks, Alchemix released its newest product alETH–a synthetic asset equivalent in value to ETH. Users can mint/borrow alETH based on a 400% collateralization ratio in their Alchemix alETH vault. For example, if I deposit 4 ETH, I can mint/borrow up to 1 alETH to go spend or use elsewhere, giving me a net 25% more ETH to farm with, while my deposited ETH collateral earns yield denominated in ETH in a Yearn Finance vault.
Opportunity: Today, we’ll focus on how to earn up to 30% APR in ALCX rewards as an LP in the Saddle Finance alETH pool. Additionally, I’ll show how to open an alETH Vault on Alchemix for whenever they raise the alETH debt ceiling, expected to happen any day now. Simply opening an alETH vault in the future will be ideal for those who wish to farm with 25% more ETH while the underlying ETH in the vault earns an estimated 0.33% APY in a Yearn v2 ETH vault.
I will not cover the following but these are viable alternative options to use after acquiring alETH from Alchemix, with expectations of more alETH farming opportunities coming soon.
- Trade alETH for stETH by Lido to earn 5.8%* in ETH
- Zap into the ycrvstETH vault by Yearn Finance earning about 5.4%* APR
- Zap into the Curve stETH/ETH LP and then stake the LP on Convex Finance for a net 8.49%* APY
*All estimated APRs/APYs are likely to change by the time you read this.
Time to Complete: 5-10 mins if paying the recommended FAST gas price on gasnow.org
Gas + Protocol Fees: Based on the FAST gas price on gasnow.org currently between 5-20 Gwei with ETH at $2200, I would estimate paying the following gas fees.
- Deposit into alETH vault with ETH = $5-$10
- Borrow alETH = $20-$40
- Trading ETH for alETH, sETH = $10-$15
- Approving + Depositing 1-3 tokens into Saddle alETH Pool = $10-$25
- Staking LP in Alchemix app = $5-$10
Fees: Other than the usual Ethereum network fees you pay as gas to miners to confirm your transactions, there is an underlying 20% performance fee deducted from yield paid to Yearn Finance with your ETH deposited into the alETH vault, which deploys ETH to a Yearn vault. However, the quoted 0.33% APY accounts for this performance fee already subtracted.
Risks: As always, this is not financial advice and you should do your own research. The following are risks when participating in this opportunity, many of which can be mitigated with cover by Nexus Mutual. Be aware that Nexus recently launched cover for Alchemix and the premium should continue going down to 2.6% APR with more staker support on Nexus.
- Smart contract risk in Alchemix and Yearn
- Oracle failure
- Liquidity crisis
- Systemic risk in DeFi
- If one were to become an LP in Saddle Finance, they’re likely to experience some minimal impermanent loss.
- If one deposits into Saddle Finance’s new alETH pool, it’s advisable to deposit with equal balances of WETH, sETH, and alETH or else one might experience slippage.
Before getting started, the maximum amount of mintable alETH was recently reached so no more alETH can be borrowed until the debt ceiling is raised. However, one can easily acquire alETH by trading for alETH here on Saddle Finance and then depositing liquidity into the alETH pool on Saddle Finance.
If you’re reading this and the Alchemix community hasn’t voted to raise the debt ceiling yet, I would consider waiting to use Part I of this tutorial at a later date. However, if one wishes to earn close to 30% APR in the alETH pool by Saddle Finance, skip to Part II.
Part I: How to Open an alETH Vault by Alchemix
- First, go to the Alchemix Vault application and connect your wallet.
- Then flip the switch from left to right so you’re on the new alETH vault page.
- Next up, specify how much ETH to deposit, keeping in mind you can only borrow up to 25% in alETH against your collateral. Eg. 1 ETH deposited allows for 0.25 alETH to be borrowed. It will require 1 MetaMask transaction.
- Now click the Borrow tab to specify how much alETH to borrow. Again, you can borrow a maximum of 25% of the deposited amount. Clicking 100% in my example will borrow 0.25 alETH against my 1 ETH in collateral. It will require 1 transaction on MetaMask.
- You’re done! Track your alETH vault balances for deposited ETH + borrowed alETH on Zapper!
Note: My vault here shows 0% C-Ratio because I had yet to borrow alETH.
Part II: How to Farm Up to 30% APR with alETH by Alchemix
- Let’s assume that the debt ceiling hasn’t been raised to open more alETH vaults and borrow more alETH. In order to start earning 30% APR as an LP in the Saddle Finance alETH pool, I need to first acquire one, two, or equivalent amounts of the three underlying tokens: WETH, alETH, and sETH.
- It’s advisable to check which tokens will earn you a bonus slippage. WETH has been in abundance lately while alETH and sETH is needed in the pool so currently the pool may give you a larger LP share for depositing sETH or alETH. I would expect once alETH vault borrowing reopens, we’ll see a surge of alETH deposits and LPs will see the best incentive to deposit sETH.
Note: I’m gained a larger LP share depositing more sETH
- Once I’ve decided however much of the 3 tokens I want to add to the pool, I can get started trading/acquiring these pool tokens. Let’s assume below that I will acquire 0.1 WETH + 0.1 alETH + 0.1 sETH so I can go to Saddle Finance’s exchange or possibly get a better rate using a DEX aggregator like Zapper Exchange to swap for alETH.
- To get WETH, anyone can wrap ETH to WETH 1:1 on Zapper Exchange here.
- Then lastly, I can trade for sETH here on Curve.
- Now I’m ready to go deposit all 3 tokens to the Saddle Finance alETH pool. I can choose to deposit any/all of the 3 tokens in any ratio but again be careful about whether you’ll experience negative or positive slippage.
- I click Deposit and I’m prompted to Approve spending all 3 tokens across 3 MetaMask transactions and then prompted to deposit the 3 tokens.
- Once I’ve completed depositing into the Saddle Finance alETH LP, I can head back to the Farm app for Alchemix to stake the LP token under alETH Saddle LP Pool, which will require 2 transactions: Approve + Stake.
- That’s it! I can return to this Farm tab on the Alchemix app whenever to Claim Rewards in the future as I accrue ALCX rewards while trading fees accrue automatically to my staked Saddle Finance LP tokens.
About Author: DeFi Dad is a DeFi super-user, educator, and investor. You can subscribe to his YouTube channel at defidad.com and get started learning DeFi for Beginners with a compilation of explainers and tutorials.