Alchemix Allows Users to Stay Long ETH With Auto-Loan Repayment

Last weekend, Alchemix, which offers automatic repaying loans, shipped a vault that accepts ETH.

Alchemix users will now be able to borrow alETH, Alchemix’s token that’s soft-pegged to ETH, using ETH as collateral. The collateralization ratio: 400%. The launch came with a debt cap of 2,000 alETH and it was reached within a day of launch, according to the project’s founder, Scoopy Trooples.

Until now, Alchemix only accepted the DAI stablecoin as a deposit. But with the protocol accepting ETH, users can maintain a long position while retaining the self-paying loan feature that Alchemix pioneered.

Collateral Seized

The new function enables users to borrow against ETH without risking liquidation. As alETH and ETH move in tandem, users can’t drop below the collateralization ratio and risk having their collateral seized.

The downside is that the loans will take a long time to repay. That’s because they are dependent on the yields that Alchemix can access by depositing the ETH in other DeFi protocols. Alchemix is currently using Yearn Finance’s yvWETH to generate yield on ETH. A loan with a 400% collateralization ratio and 3-4% yields from Yearn Finance’s yvETH vaults would take five to seven years to pay off, according to Scoopy Trooples’ estimates in the Alchemix forum.

So happy to finally reveal what we've been making. Please do read the article as it covers Alchemix in great detail. I will try my best at a TLDR though /1 https://t.co/y5lVFzuXRB

— scoopy trooples (@scupytrooples) February 22, 2021

Users don’t have to wait for the loan to pay itself off though — they can also repay their ETH debt in alETH or ETH to release their initial collateral.

Alchemix will incentivize an alETH/ETH pool, meaning users can immediately trade their alETH to ETH, and by extension any other asset Ether trades with. In this way, borrowing alETH is not so different from borrowing ETH or any other asset against deposited Ether — the innovation lies in the auto-repaying feature of Alchemix. As a result, users can get their yield up front.

Providing Liquidity

Still, the new function has investors already plotting new financial wizardry based on Alchemix’s release. One simple strategy for ETH bulls would be to deposit alETH into the automated market maker Saddle Finance’s pool, which comprises ETH and WETH in addition to alETH. Alchemix says it will commit 5.5% of the protocol’s ALCX rewards to users providing liquidity in the pool.

Using this strategy would mean using the extra alETH to get incentivized rewards, though users would have to weigh it against simply using 100% of their ETH in such a pool, as opposed to locking it away in Alchemix and having only one fourth of the capital to play with.

DeFi Apes

Some users, like jonnyjams on Twitter, are skeptical that locking ETH in Alchemix is a good idea. If a user thinks they can out-earn the boosted yield they get from 25% extra capital on their ETH with a 100% of liquid ETH, they may be better off using their Ether elsewhere.

Alchemix’s alETH release paper says that “post-launch, we will reassess the collateralization ratio and debt ceiling together with our amazing community.”

DeFi apes who missed out on the initial vault offering can only hope that reassessment will come soon.