🎙 Scoopy Trooples of Alchemix: "Liquidity Mining is Like a Drug; You Have to Wean Yourself Off it Over Time"
In this week’s episode I speak with Scoopy Trooples, co-founder of Alchemix, a protocol that offers self-paying loans without the risk of liquidations. Think about that; here’s a DeFi application that promises to automatically pay users’ collateralized loa...
In this week’s episode I speak with Scoopy Trooples, co-founder of Alchemix, a protocol that offers self-paying loans without the risk of liquidations. Think about that; here’s a DeFi application that promises to automatically pay users’ collateralized loans, and on top of that, guarantee they won’t be liquidated. Scoopy explains how something like that can work and it’s all about plugging into other money legos like Yearn Finance to earn yield off collateral and use that yield to pay off loans. We talk about how DeFi’s composability is key for protocols like Alchemix, which simply wouldn't be possible in Tradfi. But we also talk about the risks of having so many applications relying on each other.
Scoopy also goes into Alchemix v2. The plan is to open up the protocol to collateral options beyond the current Dai and ETH, and also expand to other yield strategies, so users can decide what level of risk they’re willing to take.
Scoopy also goes into what he believes is a new movement in DeFi, which he helped coin as DeFi 2.0. Scoopy says dapps will now have options besides yield farming to attract liquidity to their protocols, which will allow teams to better control assets in their smart contracts, increasing capital efficiency.
To him, what’s most exciting about what’s coming up in the space is how we can leverage tools like money legos and DAOs to make an impact in the real world.
The podcast was led by Camila Russo, and edited by Alp Gasimov. Transcript was edited by Owen Fernau.
🎙Listen to the interview in this week’s podcast episode here:
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👀 Only paid subscribers have access to the full interview transcript below.
Camila Russo: Okay. I just want to get this out of the way. How did you come up with the pseudonym Scoopy Trooples? And of course, you all watching on YouTube will see that Scoopy has an anime face on like many others in the DeFi ecosystem. He is an anonymous founder which is a growing trend in crypto, thanks to DeFi. So if you can give a little bit of background on that?
ST: Well, this is my real face. I am a 2D character. Let's make that clear. So as far as how I got started in crypto and how Alchemix came to be, first, I think it was way back in 2011, I read an article about the Silk Road, and I was like, oh, that sounds interesting. And I went down the rabbit hole a little bit, and then I went to a site to buy some Bitcoin. And right before I hit the buy button, I was like, this isn't for me, and then I tuned out of Bitcoin for years at that point. Big whoops right there! I think it was less than $1 at the time, so it's like, oh well. I probably would have spent it on the Silk Road stuff anyway.
And then next time I heard about it was in 2013-14 when it had its big run up, and then subsequent crash. And some people I knew were like telling me to get into it, but I was like no, it's a bubble, and then when it crashed, I felt vindicated about it. And then I looked at it again in 2016. I had some windfalls come my way and I was like I need to invest these and I started looking into doing different investing things.
And I looked at Bitcoin, I saw that it was trending back up after being in a really extended bear market. And I was like well, it didn't die? It's still around? And at that point, I really started taking it seriously and decided to throw all my chips into Bitcoin at that point. And then once you're in, you have skin in the game, then I think everybody can attest that it becomes an obsession, you go down the rabbit hole, and that becomes all you can think about anymore…
“...once you're in, you have skin in the game, then I think everybody can attest that it becomes an obsession, you go down the rabbit hole, and that becomes all you can think about anymore…”
CR: Were you experienced in trading assets outside of Bitcoin?
ST: No. This was my first foray into any type of investing at all. It really appealed to me a lot too, because what happened in 2008 with the financial crisis, it felt like there was no way out. The system was unfair, but there was also no way out. We were living in their sandbox, and that was that. And once I started learning more and more about Bitcoin, I was like, oh, wow, this is as big of a discovery as the separation of church and state. It’s the separation of money and state. And it really dawned on me that that's a really powerful idea, and is a way for people to opt out of the controls that the financial system imposes on everybody in the world.
“...once I started learning more and more about Bitcoin, I was like, oh, wow, this is as big of a discovery as the separation of church and state. It’s the separation of money and state.”
And so, deeper down the rabbit hole I went. Naturally, I gravitated towards Ethereum because of all the ICOs that were going on and all of the incredible gains that were to be had in those ICOs. Everything was pumping left and right in 2017. It was just a crazy time. And 2021 has been great, but it's still nothing compared to 2017. The whole frothiness of everything at that time was just incredible.
“...2021 has been great, but it's still nothing compared to 2017. The whole frothiness of everything at that time was just incredible.”
And then being more involved in Ethereum and getting my feet wet more and more with token transfers and ICOs, eventually I started using DApps with CryptoKitties being my first time ever using Metamask and being really confused about how to set gas limits, gas prices and everything like that. And then after I got a few of those NFTs, in 2018 I started playing around. There wasn't DeFi in early 2018 at all. But there were a number of these money Ponzi games that were out at the time. There was a Proof of Weak Hands, there was FOMO 3D and games like that. And I dabbled in those a little bit.
But that really started sparking my curiosity about, well, I know that these are really little scammy things to do with money, and I guess if everybody knows the rules going ahead of time it's a little bit different than an actual Ponzi. But I was like wow, you can do a lot of stuff with programmable money!
And it really got me thinking about that. At that time, I was in a completely different field of work, salary, nine-to-five position, and I wasn't a coder at all at that time. But I was like this is what I want to do. This is what I lay awake at night thinking about, different protocols, different designs, different things that you can make with it. And so then I, using the gains I made in that bull market, had a FU money to say a FU to my job, and my boss, and walked out, and I joined a coding bootcamp and I haven't looked back yet.
“This is what I lay awake at night thinking about, different protocols, different designs, different things that you can make with it.”
CR: And when was this, 2018?
ST: That was in 2018. Yes.
CheeseFi as a Precursor to Alchemix
CR: Oh, that's an amazing journey. So you came into crypto without having any previous experience coding or even trading but got into Bitcoin first, interested in the alternative financial system aspect of it, and then down the ICO rabbit hole, and then through there into programmable money. And then thanks to ICOs and all the 2017 bubble, you were able to actually quit your job and just go full-time actually building these programmable money-based applications?
ST: Yeah, exactly. I wanted to get my hands on it. Because it's one thing to write about ideas and share them with others, but it's another thing completely to actually be a part of building it. During that time, I was in various crypto Discords and I kind of found my tribe, and I had a number of close friends. And a few of them were also developers as well. And so we kept on pitching around ideas and getting started on projects and then stopping on them.
“...it's one thing to write about ideas and share them with others, but it's another thing completely to actually be a part of building it.”
And then finally, one idea came along that really resonated with all of us in our little tribe together. And that was originally called CheeseFi which is the precursor to Alchemix. And then while we were developing that, we stumbled upon the idea for Alchemix as we were trying to fix some of the problems that were in that earlier model. And then once we had that idea in our head we're like oh, we got to build this. And then basically, it was from September 2020 until the end of February we were just heads down building Alchemix and then we released it at the end of February.
CR: So where did the idea come from? Was it about this protocol with the self-paying loans from the start?
ST: No, no. CheeseFi’s original idea was to get your future yield upfront. So that idea was you would deposit DAI, you would specify a certain amount of days to lock it up, and then you would get this cheese token in return for it. And then all of the interest that was earned, we were thinking about using something like Aave or Idle Finance at the time, because Yearn wasn't really a thing when we were planning CheeseFi. We were going to do that. And then with the interest payments, we would buy back the cheese tokens from the market so that way we make a virtual synthetic of your future yield.
And that was the idea behind that. But we started diving into MEV, and sandwich attacks and other things like that. And we modeled it out and we realized that it wouldn’t work. And so, while we were trying to solve that issue for it, we stumbled upon the model for Alchemix. And we changed the name from CheeseFi because at that time, all the food tokens had a rotten taste in everyone's mouth, because what happened with Yam and the millions of clones of Sushi and everything like that, we decided to stay away from the food branding.
CR: Oh, that's interesting. Was CheeseFi before the whole food token mania?
ST: Yeah. I actually shared it with Dan Elitzer before he launched Yam and so I was like, oh, thanks for ruining food tokens, man.
Alchemix Inner Workings
CR: Amazing. Okay. So can you go more in depth into how Alchemix works, like how can this possibly happen?
ST: So the way Alchemix works, with our v1, is that users come and they deposit DAI or ETH into Alchemix. If they deposit DAI, then that goes into Yearn into their yvDAI vault to earn interest. And then the amount of DAI that you put into the system acts as your collateral base and then you can borrow against that with our synthetic stablecoin alUSD. And then with the ETH side, same thing, but you can borrow the synthetic ETH.
CR: And how much can you borrow?
ST: For alUSD, you can borrow 50% of the value of your collateral and with alETH if that's 25%. And the reason we parameterize that is because we were trying to be conscious of low repayment times. And when we launched alETH, the yields for ETH were really low, like 2% or 3%. So we thought if somebody is going to be in there and lock for 20 years, it wouldn't make a whole lot of sense in that respect. So by having a higher collateralization ratio, we could ensure that the loan repayment time would be a lot more reasonable for people.
“By having a higher collateralization ratio, we could ensure that the loan repayment time would be a lot more reasonable for people.”
CR: I see. Okay. So for example, I deposit 100 DAI in Alchemix, I get 50 alDAI in return…
ST: alUSD. It was originally called alDAI though.
CR: Okay, alUSD. And then the 100 DAI I put in, is then put in a Yearn vault, and that starts earning interest? And where does that interest come from? It's from people using DAI in Yearn to borrow?
ST: So Yearn has a number of strategies that they use in order to generate yield. Some of the more basic ones are just put them in lending platforms like Cream, Aave, Compound, and stuff like that but they also have some more advanced strategies where they use the DAI to do yield farming and with the governance tokens that they farm, they liquidate those to buy more DAI to put back into the strategy to compound.
CR: Okay. So it's like this huge ladder. So you deposit DAI on Alchemix, that goes to Yearn, Yearn then uses that DAI in different strategies, and that's where the interest comes from, and then that interest is used to pay the 50 DAI that the user borrowed from that 100 DAI collateral?
ST: The 50 alUSD pays off your alUSD debt. And it doesn't go directly into the person's hands. It goes into a peg stability module that we call the transmitter which then guarantees a one-to-one conversion for alUSD to DAI. It just takes longer than swapping on an AMM so there's a tradeoff for that. You can ensure that you can trade without slippage that way but it does take longer than a swap like on Curve does.
CR: Okay. So how would that work? Like who would be redeeming that DAI?
ST: So if the peg of alUSD falls, it's been very rock steady, it hasn't gone under $0.99 to date. But even then if it's like $99.2, $99.3, if somebody takes enough liquidity in there and they exchange enough alUSD for DAI through the Transmuter, they can make some money off the arbitrage.
“...if somebody takes enough liquidity in there and they exchange enough alUSD for DAI through the Transmuter, they can make some money off the arbitrage.”
CR: Got it, okay.
ST: And that brings the price back up because they buy the alUSD off the market in order to make this arbitrage happen.
CR: I see. Okay. So that interest that Alchemix gets from the collateral that's deposited on Alchemixis then put in this separate vault-like system called Transmuter and then that's used to maintain alUSD peg? Because you can ensure that you're always able to swap alUSD for DAI, and so that maintains the peg.
ST: Yes. Yes. That's fed by yield from the Alchemixcontracts and also anytime somebody repays their debt in DAI because they have the choice to do it in alUSD or DAI, but anytime somebody repays their debt in DAI, that goes straight to the Transmuter. And then the Transmuter is further enhanced by also depositing into Yearn. So the yield that it generates actually goes towards the depositors in Alchemix and increases their interest payments essentially, and makes their loan repayment happen faster.
CR: Got it. And you said if people wanted to repay their loan, they can just choose to repay their loan themselves rather than have the system repay it for them?
ST: Yeah. They're not locked in. When you take out the alUSD loan, you don't have to wait until the system pays off all your debt for you. You can come back anytime. And that's also another peg stability mechanism. Like let's say there's a discount on alUSD and you want to get out, you would just buy alUSD off the market for cheaper than the price of $1, and then that would bring up the price and you can pay off your debt…
“They're not locked in. When you take out the alUSD loan, you don't have to wait until the system pays off all your debt for you. You can come back anytime.”
CR: And then you get the collateral back, right?
ST: Yes. As debt-free payments happen automatically in the system, you can withdraw more and more of your collateral because it'll become over-collateralized at that point.
CR: I see. So you don't need to wait until all of your loan is repaid to get your collateral back?
ST: You can withdraw partially, yes, whatever is available. There's a maximum 200% collateralization ratio, so if you're maxed out at that ratio, you can't withdraw anything, but if you're not, then you can withdraw whatever you're allowed to withdraw at that point to maintain that ratio.
Alchemix in the Real World
CR:Okay, very cool. So far, how many loans have been repaid automatically in Alchemix?
ST: I don't know about how many loans have been repaid for Alchemix. But I know that since we launched, we have repaid around $30 million in debt.
“Since we launched, we have repaid around $30 million in debt.”
CR: Oh wow. Okay, that's really cool. And in what time frame?
ST: That's since February 27th, so that's coming up on like 9 or 10 months at this point.
CR: Really cool. What are some of the initial issues or problems you've seen with the model?
ST: So one issue is that we're a little bit sensitive with our peg at times because of where other CDP platforms charge interest. So when you go to repay your debt or you get liquidated, always a little bit more is taken off the market in order to repay that debt. But since Alchemix doesn’t charge interest and we get it from the yield-bearing tokens, and then it goes one-to-one in the Transmuter, it is a little bit more sensitive in that way. But that's really the only issue. Even despite that because we have this huge backstop in our Transmuter of over 130 million DAI, we have had a super rock steady peg and I expect the same to happen in the future.
CR: So how have you seen people using Alchemix? What are people using these self-repaying loans for?
ST: So on the DAI side I definitely see people using it to do real-world finance stuff. We've had people come in our Discord and talk about the things that they've actually financed with this. One of the most prominent examples is a user, his dad, his boat sank in a storm a few years back, and he used an Alchemix loan to buy a boat for his dad, so his dad has a self-repaying boat at this point.
“...a user, his dad, his boat sank in a storm a few years back, and he used an Alchemix loan to buy a boat for his dad, so his dad has a self-repaying boat at this point.”
CR: That's so cool.
ST: Yeah. I know somebody else bought a car. I know a more heartwarming story is that somebody paid their hospital bills for their newborn son. And I know somebody paid off their grad school debt using an Alchemix loan as well. So we want people to use the platform to essentially not have to make that tradeoff between saving and spending. Because if you were to take your principal and then use that to pay off different things in life then you would have less principal to earn on in DeFi. And what Alchemix does is it allows you to take the full value of your principal and earn on that and still then take a loan off against that and then spend with it. So you can spend and save at the same time. And I think that's really the power of Alchemix.
“...we want people to use the platform to essentially not have to make that tradeoff between saving and spending.”
CR: Really cool. What have you noticed with recent market dynamics? Like now that people are more bullish on ETH, have you seen any changes on how people are using Alchemix, like are people using more ETH as collateral now or is it not as sensitive?
ST: Well, our ETH has really grown a lot, significantly over the past month. We recently rubbed up against our debt cap and we're in the process of increasing it. And our deposits are just through the roof. So I think what people are doing is that they're borrowing our ETH and then they're trading it for more ETH to put into Alchemix so they can get more leverage on top of it that way. And it's a very safe system, so they don't have to worry about being liquidated, so people feel comfortable putting it in there and letting it work for them long term.
“So I think what people are doing is that they're borrowing our ETH and then they're trading it for more ETH to put into Alchemix so they can get more leverage on top of it that way.”
CR: Very cool. So how much collateral is in Alchemix right now?
ST: On the DAI side, we have about 370 million DAI in there. It's around 240 that's in the Alchemist contract which is back in the CDPs and then another 130 million in the Transmuter which is the backstop. And then on the ETH side, it's a similar story we have like 80,000 ETH total in Alchemix at this point. And I think around 50,000 of that is in the Transmuter and the rest is in the Alchemist contract for it.
CR: What happens when a yield starts to go down? Do you react by having bigger collateralization ratios to prevent what you said before, having loans take so long to be repaid? Or how do you react to that? Because yields were coming down quite a bit for some time earlier this year. I'd imagine now with a renewed bull run maybe they'll start coming up again. But everything is so volatile in DeFi, so how do you balance that?
ST: Well, I think the fact that Alchemix doesn’t lock people in, they can repay their debt at any time, allows them to get in and out according to their comfort level or their satisfaction with the yields. We’re not doing fixed yield because if we did that we would have to lock people in, and we would offer lower yield rates because of that because that’s just the natural dynamics of having a fixed yield product.
So by having it variable but also not locking anybody in, we let people decide themselves whether they are comfortable with a 4% interest rate. It might not be as amazing as a 20% like it was earlier in the year. But it is what it is and we have to live and die by the market. The system is sound and people are always guaranteed a one-to-one redemption with alUSD to DAI. So overall, we're pretty satisfied with it. Even with yields lower, it's still a CDP platform and you're getting a 0% interest loan, right? So, there's something to be said for that.
TradFi Vs. DeFi
CR: Totally. I think just being able to do this is a bit mind blowing. It sounds very magical to have self-paying loans with no liquidation risk. Do you think you'd be able to even build this in traditional finance?
CT: I think the closest analogue that there would be in traditional finance is having an investment property and then a home equity loan on top of it. So then your tenants would pay their rent and then that would basically pay off your home equity line of credit. But that also involves owning a property, managing a property, and finding tenants. And if you're not doing all that stuff then paying a management company to do all those things. And Alchemix basically brings a home equity line of credit to your base assets. So I think that's really cool.
“Alchemix basically brings a home equity line of credit to your base assets. So I think that's really cool.”
CR: So what do you think is the core innovation in DeFi that allows you to do this?
ST: It's composability. It's the fact that we can hook into Yearn and they can't stop us. We got their blessing and we work with a Yearn team, but it's all permissionless. If they didn't like us, they'd have no way of stopping us from using their platform anyway. So I think that permissionlessness and the composability between different protocols and assets, money legos are really what makes DeFi superior to anything in the traditional finance world.
“...permissionlessness and the composability between different protocols and assets, money legos are really what makes DeFi superior to anything in the traditional finance world.”
CR: It's pretty awesome. I love the money legos concept. But at the same time, having all these legos snapping together and like I said before, it is like a ladder of just different protocols, which in the end, are maybe layers of risks of you're adding on to a product. I don't know if you agree or if that's right. But if you can talk about potential systemic risk, which seems like it would be the case when your product inherently relies on so many other protocols. So how do you think about systemic risk both for Alchemix and for DeFi in general when everything is plugged in together?
ST: Yeah, this is something that we do think about a lot at Alchemix. Which is the reason why we went with Yearn over other yield aggregators for our v1 is because they have a pristine track record, and their development team is top notch. And they are conservative. They don't chase some of the higher yield strategies. because they might have a little bit of lossyness to them, so to speak. And we might miss out on some of the higher yields, but we also gain peace of mind knowing that Yearn is properly managing the money. They're going to select the protocols that they integrate strategies with, with a lot of caution as well.
In our v2, we're going to be opening up to multi-collateral and multi-strategies. And basically, at that point, we're going to be pushing the risk assessment onto our users. Because if they want to chase after a higher yield strategy, but then that blows up, it'll be on them to repay their bad debt at that point, right? So if they want to go the conservative route and put it into a Compound or an Aave, they can do that. But if they wanted to go a little bit more degen and put it into a riskier strategy that's higher yield, they can do that, but they have to accept the risks that are involved with it.
“In our v2, we're going to be opening up to multi-collateral and multi-strategies. And basically, at that point, we're going to be pushing the risk assessment onto our users.”
CR: And right now, is it on Alchemix to pay any potential bad debt?
ST: At this point, if Yearn were to blow up and take a loss, we'd have to talk to the Yearn team, to talk about how we could manage that and everything like that, and we would look into using our Treasury assets to reimburse people and stuff like that. But thankfully, nothing bad has happened. We haven't had to worry about that and those problems.
In our v2, we're making a full on-chain DAO and I really like the Aave security module that they have for their DAO. So you would stake Aave in that and you’ll earn a return for staking Aave. But with the catch that you actually have something at stake, if the DAO approves risky strategies or risky assets in there, and then that causes a black swan or a negative event to happen, then in that case, the Aave stakers can get slashed in order to sell the Aave tokens at an auction to pay off the bad debt. And that's something we're making in our Alchemix DAO which we're expecting to launch sometime mid next year after our v2 comes out, hopefully, end of year, this year.
ST: Our v2, it loss spreads to every single strategy individually, that puts the onus more on the user for selecting that. So we'll have a Terms of Service, like, hey, do you accept that, this could happen and this would be on you and not the Alchemix protocol. Unless it's found out that our implementation was the root cause. If that's the case, and that's a completely different calculus. We would have to really work with the community to try to make things right.
CR:So what other collateral do you expect to add in v2?
ST: So in v2, we're basically having open arms to any viable stablecoin that is out there. Right now we only have DAI. We'd also potentially have other assets like USDC, sUSD from Synthetix, lUSD from Liquity, FRAX, MIM, and different decentralized stablecoins as well. As long as they had a strong history of having a strong peg, and we’re confident in their teams to continue developing their projects and supporting them, then there's a high likelihood that they're going to get on Alchemix as a alUSD collateral.
And for our alETH, we're really looking at things like Lido staked ETH, Rocket Pool’s rETH, things like that, especially after the merge happens, those are going to be an amazing source of yield and very reliable as well. We're not going to have to worry about like 10 different Legos interacting and having one of them blow up. It will be a lot simpler.
“...for our alETH, we're really looking at things like Lido staked ETH, Rocket Pool’s rETH, things like that, especially after the merge happens, those are going to be an amazing source of yield and very reliable as well.”
CR: Interesting. And will there be a DAO that approves all these new collateral types, or will it be the Alchemix team at first?
ST: Maybe for the launch of v2 we'll have an active hand in that. But even then, it's going to be really DAO decisions. Even if that means the Alchemix team makes a proposal, we still want to get it authorized by the community because we think that gives a lot of legitimacy to the decisions that we make. And in an open organization of sorts, at least the governance process is open at this point, other people can make proposals. So if you're a different protocol, and your stablecoin isn’t in Alchemix, you can write a proposal and make your case to have it be accepted on Alchemix, and then if it gets accepted, then we'll go to work and work on implementing it.
“...if you're a different protocol, and your stablecoin isn’t in Alchemix, you can write a proposal and make your case to have it be accepted on Alchemix...”
CR: Cool. And then will the same thing happen with yield aggregators or with the places where the collateral goes?
ST: At this point, the yield aggregation space, and interest bearing tokens, it's not standardized. So every single strategy that we would make, we'd have to have a bespoke adapter in order to make it work in our system. It would be really, really, really awesome if there was like an ERC standardized yield-bearing token out there so they would just have the same methods that could be called. And that way, if that happens, then we could go full-on permissionless decentralized let anybody plug in anything to Alchemix.
CR: Cool. But at this point, it needs to be approved?
ST: Yeah, it goes through a DAO process to get on that.
CR: Okay, really cool. And this v2 is expected to be launched mid next year?
ST: So v2 goes into audit on November 1st. And expected audit time is 6-8 weeks. So if things go really well in the audit, and we don't have to go back and refactor anything, then a December launch is a possibility. If it goes slower, we have to send it back for refactor and then a second audit process, then it will probably be January.,
CR: Okay. So pretty soon. Very cool.
ST: And then the DAO would be a separate thing that we're making and the spec is designed for it. And some of the code is already written down for it. But we're focusing on v2 and getting more collaterals and strategies integrated at the moment, and putting that to the side for just now.
DeFi 2.0 & Protocol Controlled Value
CR: Awesome. So I also want to talk about a DeFi 2.0, which is a term that maybe you coined, but I'm not sure. At least like you popularized it. You wrote this big thread on it, we covered it at The Defiant. And so if you can just talk about this movement, if you can call it that, what's it all about, how is it different from DeFi 1.0, I guess?
ST: Some internet sleuths went back and tried to find the origin of DeFi 2.0. And I think Stani from Aave said it way back in 2019. And then, sort of earlier this year, when there was a new wave of DeFi projects that were released early in the year, mewn, the ditto sofa couch, he called it DeFi 2.0 when I was calling it Gen 2 DeFi. And then when I made the thread, I just arbitrarily said DeFi 2.0 and then talked about the new dynamics for DAOs, sort of as firms in a sense and changing the liquidity mining dynamics and stuff like that and then that caught on as what DeFi 2.0 is at this point.
CR: Okay. So, what is it? What are the main characteristics?
ST: So, basically all through 2020 and most of 2021, the way that DeFi protocols would bootstrap is through liquidity mining or yield farming. And that would include having pool 1s where you'd have either just one asset or stable assets like LP shares for positions in Curve or something like that, and you would stake those and get the governance token. And then there was also a pool 2 which is the risky one. That's where you put in the governance token and then either stablecoin or ETH to match it, and then people would farm the governance token with that.
And that's a great, great way to bootstrap a protocol to get its liquidity up, to get people interested in it, everything like that. But the longer these programs run on, the more problematic they become. Let's edit that out. Sorry, I'm just kind of itchy this morning. So can you repeat that question so we can kind of do a fresh take so we can edit that out?
CR: Yeah, of course we'll do. Okay. So what is DeFi 2.0? What are the main characteristics?
ST: So all in like 2020, in 2021, the way that DeFi protocols would bootstrap and grow was through liquidity mining and yield farming, so there would be pool 1s or they would deposit one asset or an LP token for stable assets like a Curve LP and then they would get the governance token for supplying that asset to the protocol. And if it's just a single asset like what Sushi and Yam did, that's more of just a distribution method. And then for the stable LPs and stuff like that's more for sourcing important liquidity for protocol.
And the other side is the pool 2 which is the governance token paired with another token, usually ETH. And these are great ways to grow the protocol, get people interested in it, and really bootstrap it, and grow the liquidity. But the longer these programs run, the more toxic liquidity flows happen. What usually happens is a giant whale will enter the game with the sole purpose of dumping every single gov token that they can get in order to maximize their profit.
“...the longer these programs run, the more toxic liquidity flows happen.”
And then when this dynamic happens, other people who are participating in the liquidity mining see oh man, other people are dumping, and if they continue to do so, the price is going to continue to go down so I'm going to lose out on the stated APR that I'm supposed to be getting. So I better start dumping my tokens too or else I'm going to lose.
And then this happens more and more and more. And then the actual yield that you're getting goes down because the governance token is going down with it. And then there's a steady downwards trend for these tokens that have active liquidity mining programs. And so I was trying to think of how can we solve this problem? Because liquidity is super important, how can we get it in a different way that doesn't lead to these outcomes? And I think the only idea really in the space at the time was vesting it, you could claim your tokens a year later, but that would just delay the inevitable. Or if you claim it now you get half. I think Ellipsis on Binance smart chain, they do that with their rewards.
“...liquidity is super important, how can we get it in a different way that doesn't lead to these outcomes?”
So reward long term holders, but you still have the same dynamic where people are in a race to dump it in order to maximize their yield. So I was thinking about this and over the course of the year I became an “ohmie” from OlympusDAO. I got my OHM and I decided, you know what, I don't know if this is going to work, I don't know if this is going to collapse or anything like that. But I'm going to put in what I can afford to lose and see what happens. And I'm going to hold it for at least a year. And I did that. And it kind of made me curious about their project. It made me want to learn more about it, and I started going down that rabbit hole.
CR:Can you explain what OHM is about?
ST: Yeah. So the token OHM comes from OlympusDAO. It's sort of like an algorithmic currency. I wouldn't call it an algorithmic stablecoins though. They say that every single OHM is backed by at least one DAI and that is a guarantee. But instead of doing a liquidity mining program, they do a bonding program. So you would buy OHM by either buying it with their LP shares, which is OHM-DAI, or you can actually buy it with DAI-FRAX, and I think there's maybe one or two other assets that you can buy it with. I think ETH is involved in that as well.
And then all that money goes into their treasury which then backs the price of OHM even more. And what they do in order to keep this running is when people get the OHM, they can stake it for a really high APY to get more and more and more OHM.And eventually, they keep on bringing down the APY, bringing it down, bringing it down. It started like 150,000% and now it's a much more reasonable, but still ridiculous 8,000%.
“...they keep on bringing down the APY, bringing it down, bringing it down. It started like 150,000% and now it's a much more reasonable, but still ridiculous 8,000%.”
But they have a runway essentially. They know that we have this much in assets, and there's this many OHM out there. And if they're supposed to be backed by one DAI minimum each, then with this APY we know we have this amount of runway. And so they're always thinking about like let's keep the runway at least at this target length. And as more bonds are sold and more assets are added to the treasury, that runway extends. But then also as there’s more and more OHM, they have to bring down the APY in order to compensate for the extra supply and everything like that. So eventually I know that they're going to plan to get the APY down under 100% in order to make it more sustainable in the long run.
ST: It becomes like a firm in a sense. Where it's like a fractionally backed currency much like the dollar or anything else is out there.
CR: And the idea is when you're incentivized to stay in the protocol rather than just earn the governance token and then dump it because you're earning this yield over time?
ST: And since OHM owns, I think it's like 99% of the liquidity for OHM and they’re diamond handing it, there's a lot of confidence that there's good market makers because they're always going to be there to provide liquidity. They had a recent bank run that happened because of cascading liquidations from people using their OHM as collateral to borrow stablecoins to buy more.
And then it cut their market cap in a day by a billion dollars, but because they had this giant liquidity pool with hundreds of millions of dollars in it, they were able to absorb the shock and they're back marching up just like they were before it happened. So it's proving to be a really resilient system and proving the doubters wrong time and time again, much to my delight and surprise.
“...it cut their market cap in a day by a billion dollars, but because they had this giant liquidity pool with hundreds of millions of dollars in it, they were able to absorb the shock and they're back marching up just like they were before it happened.”
Acquiring Liquidity Without Mining It
CR: Okay. So was this what inspired you to think about alternatives to the original version of liquidity mining?
ST: Yeah. So with Alchemix, we have basically a pretty liberal three year yield farming program and then it kind of goes off to tail inflation. And we were thinking like, what if we don't make all of our goals and we don't get as much token value accrual by that three year period, the amount of incentives left aren't going to be enough to ensure that there's adequate liquidity so people can swap alUSD to other assets in order to really take advantage of the Alchemix system.
And we started thinking like how can we make this more sustainable? How can we make this better for our token holders who are getting dumped on by a few large whales? And being an ohmie at this point I was like what if we use their technology to start owning our own liquidity, that way we won't need to incentivize as much in the future. And as our rewards naturally decline over time, there'll be enough to meet the market because we'll hold enough of the liquidity to meet the demands for the users of the product.That's where we started talking to OHM and that was back in August.
“How can we make this better for our token holders who are getting dumped on by a few large whales?”
CR: Got it. And now is Alchemix using OHM for its liquidity incentives?
ST: Yeah, we just started using the Olympus Pro and we started using that to repurchase the LP tokens from people in exchange for ALCX bonds. And we've been doing that for two and a half weeks now. We have $1.5 million worth of LP that's now in the hands of the Alchemix DAO. And so, I think once we get to around $10 million of liquidity that we own, then we can probably really turn down the pool 2 incentives because we won't need other people to come in and match that side because it'll be enough, proportionally to our market cap, for us to have liquidity on the market.
CR: Oh, that's interesting. Do you foresee more protocols using this bond-like system to incentivize liquidity?
ST: I wholly recommend other protocols to pursue Olympus Pro or an alternative solution to liquidity mining or something to complement it. Because I don't think liquidity mining should go away. I think it's a really powerful reward for people who want to support the protocol. It's a great way to grow and bootstrap your project. But it's sort of like a drug, if you over-rely on it, if you use it too much, it's going to start to have really disastrous effects. So you’ve got to wean yourself off of it over time.
So make your markets, get your liquidity, grow, and then flip the dial, start adjusting the dial so you'd become more and more bond heavy over time. So that there's still an option for liquidity mining for people who want to do that, but it's going to become less and less and less a part of the program in the protocol.
“So make your markets, get your liquidity, grow, and then flip the dial, start adjusting the dial so you'd become more and more bond heavy over time.”
The Future Liquidity Acquisition
CR: That’s so interesting. Do you think it's equivalent in TradFi to companies getting financing from both equity and bonds, is it the same thing?
ST: So they're not like selling their token in order to finance. They are taking out debt against their tokens in order to finance. And I think when corporations do that, and they do that conservatively, it's a fine way to finance, but eventually those debts are going to become due and you're going to have to pay those debts. And if a company over relies on this, like the Chinese property developer, I forget their name.
ST: Evergrande, yeah they pushed their debt out so far and they had so much, now they're having they're struggling even to make debt payments at this point and they can't finance their operations anymore. And the whole thing could collapse if they're not bailed out. So I think this is different, you're not borrowing, you are conducting a trade with people saying, hey, we'll give you more tokens below the market price in order to get permanent liquidity for our protocol. And I think that's the biggest difference there. We're not just taking on debt, we are building liquidity in exchange for equity.
“you're not borrowing, you are conducting a trade with people saying, hey, we'll give you more tokens below the market price in order to get permanent liquidity for our protocol.”
CR: Yeah. No, that makes sense. Okay. So you foresee a future for DeFi where there is more of a mix between liquidity mining and protocol-controlled liquidity?
ST: Yeah, totally. I don't know if you ever read Don Tapscott's book back in 2016, Blockchain Revolution. He was really big in talking about DAOs as firms, and how that could be a revolution. And we never really saw that happen until recently with, I think the best examples of this are OlympusDAO, also Frax, and Fei. Because Frax and Fei, they have their semi-algorithmic stablecoins, but they have a lot of assets under management that they use in order to generate revenue to then grow their supply of their stablecoins, and also to add value to their tokens. So by using these different assets that they control, they're able to become a lot more capital efficient.
CR: Right. I think Fei is such an interesting model along these lines of protocol-controlled value because it takes MakerDAO’s model and pushes it a little bit. It works with crypto as collateral, but instead of having borrowers be able to withdraw their collateral at any time, Fei actually owns that and can use that collateral in other ways to maximize the capital they can have in the protocol.
So like you said, it becomes more capital efficient, which I guess, if this feature of DeFi 2.0 means that protocols are owning more of collateral and assets in their protocol, the result should be just greater capital efficiency, because they're able to leverage those assets in the way that they see fit or that contributes to the overall goals or the overall value of their protocol, right?
ST: Yeah, totally, I bet that's a big theme of, I think, DeFi 2.0 is superfluid collateral, superfluid holdings of tokens, where you don't have assets sitting idly doing nothing, you always put them to work. And the cool thing about DeFi is when you put all these like assets to work, they go into other protocols, and then they make DeFi better for other people. Because there's more liquidity, there's more available supply to borrow. So it grows the pie for everybody, while also benefiting the DAO that is engaging in these operations.
“...the cool thing about DeFi is when you put all these like assets to work, they go into other protocols, and then they make DeFi better for other people.”
Venture Capital in DeFi 2.0
CR: Yeah, very cool. How do you think the relationship with venture capital might change in this model? Do you think DeFi can become less reliant on venture capital?
ST: I think what might be happening is that when projects are getting started up, before they've launched, before they have a token, before they have revenue, venture capitalists are still going to be very important for getting these things off the ground.
Alchemix, we were all volunteers, and we did this all in our spare time before we launched. But that's more the exception to the rule, not the rule itself. So, most people can't afford to do that. Or if they want to have a larger team and source really excellent engineers, if they don't already have a circle of friends to volunteer to do it, they're going to need money in order to get these things done. So I don't think that venture capitalists are going to be relegated to the sidelines or anything like that.
“...I don't think that venture capitalists are going to be relegated to the sidelines...”
But I think that sometimes protocols would do subsequent rounds. I think those might become a little bit more rare going forward, especially when they have the protocol live, if they have protocol controlled value, like if Alchemix really needs funding for something and we have $20 million in LP tokens, we could just take a little pinch out of those LP tokens and then use that to finance something if we really need to, if our protocol income isn't enough as it is in order to do something big.
So I think there's going to be some more optionality for protocols, DAOs to finance themselves. Especially with something like a Rari Fuse pool, it becomes really interesting. So Rari Fuse essentially is like a factory contract for Compound. So you can make your own Compound instance, set whatever assets you want as collateral, you can allow any of the assets that you want to allow, you can make them borrowable or not borrowable. It's really, really, really powerful.
And I think if DAOs are using their governance tokens as a collateral, then that's going to give them a lot of power tomorrow. Sort of like corporate debt, as long as it doesn't get out of control and they don't borrow recklessly, then I think that's also another way for projects to fund themselves.
“...if DAOs are using their governance tokens as a collateral, then that's going to give them a lot of power tomorrow.”
CR: Oh, that's so interesting. So before we were talking about equity and bonds versus this OlympusDAO model, with this Compound-like factory from Rari, now this is actually more like a bond, like you're borrowing against your own protocol token?
CR: So interesting.
ST: At that point, yeah, it becomes very powerful. It's just lego bricks, permissionless finance, open finance. People call it DeFi, but I've always thought that open finance was the more apt description because it really is this open playground, and then you can build with people, on top of people and stuff like that. And I think that's what really makes it special.
Is Open Source Sustainable
CR: Yeah. And I have a question related to that actually. So, this concept of open finance, it's like all these protocols and projects building out in the open with open source code, and it really challenges a whole concept of competition that is such a core part of building a startup or building a company. Like recently, I saw that this project Kinetic built something similar to Alchemix, or borrowing code or code inspired by Alchemix, and you guys were actually really supportive of that happening. And this team is planning to airdrop Alchemix holders tokens from their project.
So it's such a different dynamic from what you're used to in traditional finance or in Web 2.0. But I wonder how sustainable can that be? If this Kinetic team actually starts competing with Alchemix somehow, is there a point where this whole ethos of open source and collaboration and building together, comes to a point when the stakes are high, and that doesn't make sense anymore? Or how do you think about that?
ST: Well, that's a really good question. We've been forked a handful of times already. And typically, our go-to strategy is if these teams aren't going to try to offer us a tribute or anything like that, they're just going to rip our code off, then we're just going to ignore them completely. And that seems to have been a really good strategy because none of those projects have taken off.
Kinetic is a little bit different, though, because they're not really a direct fork. They took the idea from us for sure. But they're built on Terra, which is not a Solidity or EVM chain. They have to program that in Cosmos WASM, which is a Rust language. And so since we don't really have Cosmos developers or Terra developers on our team, and we don't plan to expand onto Terra, and that they reached out to us, let us know what they were doing and then offered to airdrop tokens to our community, I don't think that there's really any reason to be hostile towards them.
Alchemix, in our post v2 world, we're going to be expanding to lots of different chains, Polygonm Arbitrum, probably Avalanche, thinking about BSC, and other ones like that. So, they can have their little sandbox over in Terra, and everyone, when they think about self-paying loans, they're not going to think about Kinetic, they're going to think about Alchemix. And if we have a large presence all over the place, ultimately, we're going to have the network effects of that and we have the community built. Those are things that are really hard to build and fork away.
“...if we have a large presence all over the place, ultimately, we're going to have the network effects of that and we have the community built. Those are things that are really hard to build and fork away.”
So on one hand, you can't stop people from doing that even if we close sourced our software, they can decompile it, from looking at the byte code on Ethereum and rebuild it themselves. So once the idea is out, once the code is deployed, it's out there and anybody can fork it, anybody can copy it. But not everybody can gain the trust of the community. Not everybody can market it correctly. Not everybody has the right strategy for how to grow it. And those are things I think that the Alchemix team are really, really good at and also since we’re first.
“...not everybody can gain the trust of the community. Not everybody can market it correctly. Not everybody has the right strategy for how to grow it.”
So, if they become bigger than us, and they execute better than us, that just means that we weren't doing our best and they out-competed us, and that's the free market at the end of the day. So having a little healthy competition is not a bad thing. It's going to keep us on our toes, make us like a gingerbread man. We're going to run faster than you, catch me if you can, right?
CR: And then to wrap up, what are you most excited about? Like other projects other than Alchemix or trends that you're seeing in DeFi or what do you want to get built that you haven't seen yet?
ST: Man! There's a lot of stuff going on that's being built now, lots of different yield derivatives. What I want to see are, there's a number of services that provide on-ramps into DeFi without having to go to a Coinbase or Kraken or something like that. But I'd like to see more interfaces with real world finance and stuff like that. Where if I take out a self-repaying loan, I can have that attached to a credit card and just swipe it and then pay for something that way. I think that would be really, really powerful.
“...if I take out a self-repaying loan, I can have that attached to a credit card and just swipe it and then pay for something that way. I think that would be really, really powerful.”
Or using the yield derivatives as ways to finance things. Like imagine paying for subscription services where you don't actually have to put out any money towards it, you just put down a deposit that you can withdraw at any time and then the yield will then pay off your Netflix subscription and things like that. I think those are really powerful concepts.
Also, I’m really looking forward to seeing DAOs evolve from this voting on governance proposals type of thing like they have now, to being active managers of money and things like that and through controlling their protocol value and everything. And especially when these firms get more and more powerful and richer and richer, then seeing how they can do good for the world, I think that's what's really exciting. Getting these DAOs having a mission and being able to interface with the real world. I’m very, very, very concerned and passionate about the future of the planet and global warming and everything like that.
“...when these firms get more and more powerful and richer and richer, then seeing how they can do good for the world, I think that's what's really exciting.”
And I think it would be amazing to have a DAO that just makes solar panels and then sells the profits back for their token and then people will be like oh wow, if I buy this token, they're going to buy more solar panels and then if they're going to buy back their token... things like that I think are really, really cool. And I'd like to see more of that for sure, getting beyond just degen games to maximize your crypto experience, but actually going beyond that to becoming powerful world entities. I think that’s what I want to see.
CR: And you do have some like a charitable initiative, right, is that related to what you're saying now?
ST: I mean, we do pay people's debts for them, so I guess that's charity in some respect. But I imagine, think about like if you're a charity DAO like in v2 we're going to be very extensible and composable, whereas v1 very much locked down because we had security concerns. Imagine you have a Moloch DAO right now. In Moloch DAOs, people just pool together capital and then distribute it to different grantees, and then once the capital is gone, it's gone, and then the DAO dissolves, unless people will donate more.
But imagine they build their Moloch DAO into Alchemix and then they take out like an alETH or alUSD loan and then they use that as a basis for paying grants and stuff like that. In that case, their capital will regenerate after a number of years and they'll be able to do more and more rounds of grants in the future. And I think that's a really cool concept. And I really want to talk to lots of DAOs and to maybe consider Alchemix as a part of their treasury management.
CR: Awesome. Well, I love to see that sort of thinking in a world where it seems like it's all about maximizing yield and degen games and that kind of stuff, which is fun. But I feel like sometimes in DeFi people forget about real world issues and how we can actually make an impact on real people's lives.
ST: I think this is the natural course of things though, because it's sort of like Bitcoin started just as this degenerate speculative asset and now it's becoming an institutional form of money, and being used in, you know, an ETF got approved in America, right? And I think that that's sort of like what gets people to adopt it, is the speculative leaps of adoption. But once it matures, then it can find a foothold and interface with the actual financial system, like the real world financial system.
And I think DeFi and DAOs are going through this process as well. And it's just going to take time to get there. It's going to take some regulatory clarity, some precedent set, some really daring people who try to challenge the system in order to make a place for us in the real world. Until then, I'm going to be a 2D character.
“It's going to take some regulatory clarity, some precedent set, some really daring people who try to challenge the system in order to make a place for us in the real world. Until then, I'm going to be a 2D character.”
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