Abhishek Ranjan · Follow
Published in · 5 min read · Feb 4, 2022
With these self-repaying loans, you can be debt-free in 2 years.
Imagine yourself working day-in and day-out for years to finally be able to save $50,000 in your bank account. Just when everything starts to look rosy life throws an absolute bummer at you — disastrous car accident! Luckily, you survive but your car is torn apart. Since you need a vehicle to commute to your work back and forth, you are forced to buy a new one. That would mean spending a major chunk of your life savings as loans won’t come by because of your ongoing educational loan. But, you are pretty determined that you are not going to liquidate your prized savings.
Hence, you start to look for possible ways to borrow capital so you can buy yourself an automobile. On your quest, you learn about a bank that lends magical credit that repays itself in a little over 2 years of time. The only condition is that it wants you to keep your $50,000 savings as collateral. Upon meeting this condition you will be eligible for a magical loan of $25000 (50% of your collateral value) that will repay itself in the next 24 months. Once the loan repays itself fully, you get back your original $50,000 savings. Would you choose to borrow this magical self-repaying loan and get your life back in shape without having to give up on your original savings?
This magical lender is Alchemix - a Defi protocol that auto-repays all its loans in approximately two years by putting your capital to work for you while you enjoy spending your credit. The most remarkable feat of this lending protocol is your savings remain intact which is paid back to you in full upon the repayment of the loan. You might be wondering but where do these massive returns come from to repay a loan in two years? Before answering that, let’s make sure that it even makes some financial sense to borrow from this lending protocol!
Continuing with our initial example two cases arise. Case 1 where you are forced to spend $25,000 from your savings to buy your new car and decide to invest the other half exactly in the same manner as Alchemix would have invested your capital to gain those high returns. Two years down the line, the equation would look something like this:
In this case, you end up owning your car and $39,062.5 at the end of the second year. But, what would happen if you choose to borrow from Alchemix instead? Let’s find out!
In the second scenario, your $50,000 after being put to work for two years would grow to a whopping $78,125. The Alchemix protocol will get back the $25,000 principal along with a small percentage of the profit gained and the remaining $50,000 will be paid back to you. You end up having your car and original $50,000 at the end of the second year. This means you will have $10,937.5 more money with you than in the first case. I guess it makes total sense to borrow from Alchemix rather than just throwing away one’s hard-earned savings.
The basic mechanics of Alchemix are simple: a borrower deposits an amount of DAI stablecoin (1 DAI is 1 USD) and is able to make a loan of up to 50% LTV of the deposited amount, disbursed as the synthetic protocol token — alUSD, which is equal to 1 USD and is backed by future yields. (This alUSD is also a stablecoin and can be easily swapped with other popular stablecoins like DAI, TUSD, USDC, and USDT or even traded for Ethereum and Bitcoin.)
To harvest the highest yields, Alchemix deploys these deposits into the vaults of Yearn Finance — a yield optimizer that uses a mix of staking and lending strategies, to maximize the yields. As the yield is harvested from Yearn’s — yvDAI Vault, users will see their alUSD debt decrease, and if they wait long enough, it will be completely paid off by the Alchemix protocol. In other words, the loan pays itself off.
On a schematic diagram, the entire process looks like this:
Well, in that case, you can choose the liquidation option which will allow you to withdraw your deposits early after deducting the dues and the 10% protocol fees from the collateral.
As seen from our earlier example, using Alchemix resulted in having an extra $10,937.5 which is 27% more than the scenario where savings was used to fund the car. In every possible scenario, borrowing from this protocol leaves you with more money.
The loan repayment tenure varies based on the available yield rates in the market. When first launched in 2021, Alchemix loans were accruing 18–22% in annual yield. With this rate, it’s quite possible for Alchemix to repay your loans in 25–30 months regardless of the loan size. However, these massive yields once available have dried up a little in the present market conditions. The good news is that these variable yields are still in double digits and hence fully capable of repaying all your borrowed loans in under 5 years which is going to likely be the case in the near future.
With Alchemix, your only debt is the time!
Disclaimer: This information is only meant for educational purposes and is not financial advice.
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