Flipping Your Perspective on Alchemix Loans, Part One
A Story of Alchemix Loan Repayment Times
A very common question we get in the Alchemix discord is “how long does it take to pay off my loan?”. On Twitter, I often see people objecting to Alchemix with the reasoning of “why would I take a loan that takes several years to pay off?!”. Given the primary advertisement for Alchemix is “self-repaying loans”, it makes sense that the first thing people want to know is how long it takes your self-repaying loan to… well… repay!
I’d like to challenge that line of thinking in a two-part series. Part One will feature a story (and some meticulously prepared clipart) that is geared toward someone relatively new to DeFi and Alchemix. Part Two will dive into more complex examples with a focus on ETH strategies, challenge how you think about Alchemix use cases, and compare with other DeFi options. For today’s story, you only need to understand the basics of Alchemix:
- Alchemix lets you deposit a chunk of money to earn interest.
- You can take a loan from this chunk of money and do whatever you want with it.
- In the meantime, your entire chunk of money continues to earn interest, which is used to automatically pay off your loan.
If you would like a more detailed explanation, I highly recommend checking out the Community-Written FAQ page.
The Story of Scoopy and Gorbietta, Bank Version
Remember that the point of this story is to demonstrate that the loan repayment time of an Alchemix loan doesn’t matter. So keep that in mind, and don’t let the riveting plot distract you too much. Let’s jump in!
Say a man, named Scoopy, has $10,000 in the bank that is earning him 1% interest (It’s so high! What a great bank Scoopy has). He wants to buy an engagement ring for his girlfriend, Gorbietta. The engagement ring costs $3,000. In the boring traditional world without self-repaying magic internet loans, Scoopy would just buy the ring and be left with $7,000:
Now, say after 5 years, Scoopy forgets to put his emergency brake on his car and it rolls into a ravine — he needs a new car. He decides to drain his savings account to fund the downpayment. He checks his bank account — his $7,000 has become $7,358, thanks to the miracle of compounding interest! Scoopy spends all $7,358 on a new car.
Scoopy and Gorbietta are (as) happy (as you can be after losing a car in a ravine)! But Scoopy has also never heard of Alchemix. What if, 5 years ago, a friend had told Scoopy about Alchemix instead? Rewind!
The Story of Scoopy and Gorbietta, Alchemix Version
A man named Scoopy is ring shopping with the intent of proposing to his long-time girlfriend, Gorbietta. Scoopy excitedly mentions his plans to his close friend Jawz, and Jawz tells Scoopy to use Alchemix.
Let’s pause the story for a second. One of the big benefits of Alchemix is that it has better interest than your bank (currently around 5–10%). But, I’m gonna be honest with you — so does pretty much all of crypto. So, let’s knock Alchemix down a peg for this example and say that it also only has 1% interest. The point here is to show you the benefits of Alchemix are not at all dependent on high-interest rates — Alchemix is still better than your bank when interest rates are equal. Ok, back to the story!
Scoopy is rather skeptical but knows Jawz is a pretty smart guy, so he decides to try Alchemix out. He deposits $10,000 into Alchemix, takes a loan for $3,000, and buys a ring. He now has $10,000 of collateral in Alchemix and $3,000 of debt for a total of $7,000 — the same starting point as the bank example. However, Scoopy sees the loan is expected to take 30 YEARS to repay! He complains about this to Jawz — but Jawz “loses” Scoopy’s private keys so that he can’t give up on Alchemix. Scoopy is now stuck with his Alchemix loan.
Now, fast forward 5 years. Scoopy is still complaining to Jawz daily that his loan is taking FOREVER to repay. Jawz tries to show Scoopy the math, but he’s just not having it. However, Jawz does know that Scoopy is someone who learns by doing — so he takes extreme measures. Jawz pushes Scoopy’s car into a ravine. Lo and behold, Scoopy’s private keys are at the bottom of the ravine! Scoopy is furious but has no choice but to use his Alchemix account to buy a new car.
He checks Alchemix and sees that not only does he still have his original 10k balance, but his debt is only $2,500 now! Scoopy self-liquidates (a feature in Alchemix that enables you to repay your debt with your collateral) and withdraws the remaining $7,500. Remember that Scoopy only had $7,358 from his bank — with Alchemix, he has more money available. With the extra $142, Scoopy gets flames painted on his new car.
Scoopy, Gorbietta, and Jawz are (as) happy (as you can be after your friend pushes your car into a ravine)! And you, dear reader, can see that even though Scoopy did not wait the full 30 years for his Alchemix loan to repay, he is still in a better financial position after 5 years than he would have been without Alchemix. Therefore, the loan repayment time didn’t matter.
Diving Deeper
Here are answers to questions you may have had while reading this story:
- Scoopy can only take a loan for $5,000 — what if the ring costs more than $5,000?
Let’s say the ring costs double, so $6,000. Scoopy could leave $2,000 in the bank and put $8,000 in Alchemix. He would then take a loan for $4,000 — this would leave him with $2,000 in the bank plus a $4,000 Alchemix loan, which in total gives $6,000 for the ring. The net result is still better with Alchemix — he earns 1% APR on $8,000 with Alchemix, versus earning 1% APR on $4,000 if he uses just the bank. The final value after 5 years comes out to $4,204 from the Bank, or $4,400 with Alchemix. Once again, Alchemix wins! - What about gas fees?
Using Alchemix requires paying transaction fees, which currently are not cheap! Therefore, the modest account size in the example presented here may not end up better if you use Alchemix. However, that is changing this year as Alchemix is expanding to many other networks, with much cheaper fees! This means however often you’ve been losing your cars in ravines up to this point in your life, you can use Alchemix to lose your cars slightly more often now. How great is that? - What about Alchemix Fees?
Alchemix takes 10% of all generated yield. So in theory, you would earn about 0.9% APR instead of 1%. But in reality, Alchemix also has the transmuter boost — a mechanic that gives users extra yield. Since the inception of Alchemix, the transmuter boost has always exceeded the fee. Therefore, there is effectively no fee (if not a negative fee) for you to use Alchemix. If there is ever a major alETH or alUSD de-pegging event and the transmuter is used to restore the peg, the transmuter boost would be reduced. - What if interest rates go down?
The point of the example here was to show that as long as you can get the same interest rate in Alchemix that you can get anywhere else, Alchemix is better. Obviously, if there is an option to get 100% APR on your money, and Alchemix’s best option is 10%, then Alchemix may not be the best option (depending on your risk tolerance, etc). But if Alchemix has an option to earn 10% APR and Big Bob’s Yield Farm also has an option to earn 10% APR (or even slightly higher) — Alchemix is better due to the loan functionality. - But I can get a loan from another DeFi protocol and they let me take up to 85% of the value!
In almost all scenarios these loans are liquidatable and some also charge fees that eat into your yield. Some strategies, specifically looping strategies with stablecoins, admittedly are very unlikely to be liquidated as they would require a black swan de-pegging event — but to certain users (perhaps whales or DAO treasuries) this could still be an unacceptable risk. The beauty of Alchemix, as we saw in the example, is that Scoopy didn’t have to touch his loan for 5 years regardless of how the markets moved. No active management was required (though, it is an option to increase performance). The average person doesn’t want to worry about liquidations and doesn’t want to manage a portfolio daily/weekly/etc — Alchemix gives people that option. That being said there are still plenty of scenarios where other protocols may make more sense for your strategy! We will dive into these deeper in part 2. You may be surprised how often Alchemix still comes out on top, when you apply what we learn! - How is compound interest accounted for?
The example assumes bank interest compounds automatically and assumes no compounding for the Alchemix vault (as it would need to be done manually). If Scoopy wanted to compound his Alchemix gains, he could wait for a portion of his loan to be paid off, take on additional debt to match the amount paid off, swap that to DAI, and re-deposit that into Alchemix to increase his collateral balance.
Flipping your Perspective on Alchemix Loans, Part Two
The purpose of Part One was to show someone who is relatively new to Alchemix and DeFi that the loan repayment time doesn’t matter. The point of Part Two is to continue to demonstrate this fact with more examples, as well as challenge how you think about some of the more common Alchemix loan strategies. Part Two will also have much more of a focus on ETH strategies. You can find Part Two here.
