[REVIEW] [GF: PHASE 1 CYCLE 7 PROPOSAL] Alchemix

đź“ś Grant Proposals Governance Fund: Phase 1
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Optimistic Alchemix OP Incentive Proposal

Summary of changes from discussion:

  • Reduce total ask from 750k to 500k to be more in-line with other proposals
  • Removed a use case of tokens that would have seen Alchemix self-delegate for a year then utilize the tokens to boostrap alOP or extent the grant (based on feedback that delegation/self-delegation is not typically desired and future use cases can be funded with future grants). A majority of comments were around this topic.
  • Added clarification around potential future incentives from Alchemix (via migrating CRV / CVX bribes from mainnet to veVELO on Optimism).
  • Reduce total ask to 250k and reduce total time to 6 months to meet defi committee recomendation.

Project Name: Alchemix

Author Name: Butler and The Third Stringers, @Ov3rkoalafied, 0xFelix, Barree (Alchemix BizGov SubDAO)

Contact Info:
Discord: Butler And The Third Stringers#0440, Ov3rkoalafied#8405
Telegram: @OxTurtleHermit, @Ov3rkoalafied

I understand that I will be required to provide additional KYC information to the Optimism Foundation to receive this grant: Yes

L2 Recipient Address: 0xC224bf25Dcc99236F00843c7D8C4194abE8AA94a

Which Voting Cycle are you applying for?: Voting Cycle 7

Grant Category DeFi

Is this proposal applicable to a specific committee?: DeFi Committee

Project Description
Alchemix allows users to leverage the time value of money by borrowing up to 50% of future yield on deposited collateral with no risk of liquidation, in the form of synthetic assets alUSD and alETH. User collateral is deposited into underlying yield strategies, and yield earned is used to pay down user debt. Because liquidation is not possible and the primary interaction is front-loaded (deposit and take initial loan), Alchemix depositors are far stickier TVL than other forms of DeFi yield farming, which means that users that come to Alchemix on Optimism are likely to remain.

Project links:

Additional team member info (please link):

Relevant Metrics:
Mainnet/Fantom Metrics: https://alchemix-stats.com/
Current Optimistic Alchemix TVL: Launched Sept 28th, live here: Alchemix
Optimistic Alchemix alAsset liquidity: $1.5M alETH/ETH, $1M alUSD/USDC (both on Velodrome) incentivized / farmed via AIP-59

Competitors, peers, or similar projects
No major direct competitors - similar projects include https://abracadabra.money/ , https://www.euler.finance/ , and https://twitter.com/0xC_Lever, but all offer distinct differences that may appeal to different types of users with different goals (ie, Abra denominates all loans in MIM, euler is more akin to a pure interest rate swap, 0xC_Lever is a fork but only for vlCVX).

Is/will this project be open sourced?: Yes, the Alchemix front end and smart contracts are open source.

Optimism native?: Alchemix has deployed on Ethereum mainnet and Fantom.

Deployment date: Deployed Sept 28th, via AIP-62. Vaults can be viewed here: Alchemix
Deposit caps are limited to 100k / 100 ETH for the first week.

Ecosystem Value Proposition: (200 words)

Many DeFi protocols are built around DeFi power users. Alchemix is a tool that benefits power users, as well as users that wish to remain minimally active, or route real-world finances and spending through DeFi as an alternative to traditional means. We are passionate about providing DeFi users a safe way to gain capital efficiency on their assets, and believe users should be able to do so in a cheap environment without having to sacrifice Ethereum’s security. Alchemix is built on external yield solutions, so assets deposited will contribute to increasing TVL of other protocols throughout the Optimism ecosystem. This TVL is not just vanity or temporary - the proven use case of Alchemix will drive additional actual usage and fee revenue to integrated protocols (at first, AAVE and Velodrome). At the time of writing Alchemix is responsible for 46% of the liquidity in the yvDAI vault and 26% of the yvWETH vault on Yearn. Furthermore, the liquidity demands of providing synthetic asset redeemability will greatly increase TVL of AMMs we partner with. Alchemix is responsible for ~122m of combined alUSD3CRV and alUSDFBP liquidity, and ~56m of alETHCRV liquidity in mainnet Curve, which is ~3% of Curve’s total (all chains) TVL. Alchemix also owns a locked veVELO position that has built up $2.9m of incentivized liquidity on Velodrome, between alETH and alUSD pairs. Alchemix has also (as of Sept 14th) accumulated additional VELO as well as migrated a portion of protocol owned alETH liquidity to Velodrome per AIP-59. Alchemix has also recently acquired a veSDL position and is pursuing ways to incentivize liquidity on Optimism thru Saddle. Even before the impact of veSDl and AIP-59, Optimism is already Alchemix’s largest home for alAsset liquidity, aside from mainnet Ethereum.

Finally, Alchemix believes public goods are good, and contributed $100,000 total to Gitcoin Grants in rounds #13 and #15.

Has your project previously applied for an OP grant? No

Number of OP tokens requested: 250,000 OP

Did the project apply for or receive OP tokens through the Foundation Partner Fund?: No

If OP tokens were requested from the Foundation Partner Fund, what was the amount?: N/A

How much will your project match in co-incentives?

  • We are primarily matching incentives on the liquidity side of the Alchemix system, as that is where incentives are typically needed most. Since the passing and execution of AIP-59 Alchemix has over 6.5 million veVELO power and $1m of protocol-owned alETH liquidity farming on Velodrome.
  • Should the deposit caps on Optimistic Alchemix quickly fill, that will be indicative to Alchemix that we should look to re-allocate some bribes from CRV/CVX on mainnet to veVELO on Optimism to further scale the deployment.
    • Per the token distribution below, the incentives are expected to create more demand on the TVL side than the demand side (partially because this TVL is stickier and therefore more desireable).
    • As deposits grow, more liquidity will be necessary than what our current incentives + VELO grant can provide.
    • Alchemix can redirect emissions, including from CRV/CVX bribes on mainnet, to meet this liquidity demand
    • Based on a target alAsset liquidity of at least 1/2 of TVL on Optimism, bribes worth approximately 500k OP (paid in ALCX) would be necessary to direct to Velodrome
    • The end result is that Alchemix is providing incentives to make Optimistic Alchemix feasible for launch, Optimism provides incentives start the growth, and then we can step in with more incentives to sustain the growth.

Proposal For Token Distribution

How will the OP tokens be distributed?

  • 50% (125,000) will incentivize vault depositors in the form of boosted yield, for 6 months, split between alETH and alUSD. Estimated to incentivize $25m of deposits (at an approximated market-determined boost of 1% APR on AAVE strategies)
  • 50% (125,000) will incentivize LP providers on Velodrome through bribes, for 6 months, split between alETH and alUSD. Estimated $3m additional liquidity at 10% APR (Alchemix currently incentivizes $2.5m of liquidity on Velodrome)
  • No tokens at any point would be delegated or self-delegated

Over what period of time will the tokens be distributed?

  • Tokens used for velodrome bribes will be distributed over the course of 6 months.
  • Tokens used for depositor boosted yield will be distributed over the course of 6 months.

Trackable Milestones / KPIs

Alchemix is inherently good and positive-sum for Optimism, for the following reasons:

  • Alchemix is an attractive DeFi offering due to the reduced risk that comes with not having to worry about liquidations. Because it is built on other yield providers it will simultaneously increase TVL in integrated partners such as AAVE (our initial planned Optimism vault offering) as well. Based on V1 and V2 yearn vault statistics, we would expect at least 25% of AAVE Optimism TVL in aWETH and stablecoins to migrate to Optimistic Alchemix. (note that some DeFi trackers may double-count this TVL between AAVE and Alchemix while some may subtract the TVL from Alchemix or AAVE).
  • Alchemix TVL is inherently sticky, even if alAsset liquidity incentives reduce. This effect is demonstrated by the fact that currently, with no direct incentive to migrate from v1 to v2, AND with globally reducing DeFi yields and liquidity, half of deposits still remain with v1 compared to v2 (note: v1 is being retired October 1st). There is currently $26m of TVL in V1 and $26m of TVL in V2. Systematically, users can only exit vaults through repaying their debt themselves, waiting for automatic yield repayments to repay their debt, or via self-liquidation (which allows exiting with [collateral] - [debt] of user’s deposit). Because of the fact that there is no liquidation risk, there is no penalty for continuous max borrowing, and so the incentive for users is to continue to leverage the time value of money by maximizing their debt at all times. Self-liquidations reduce total underlying collateral earning yield and are therefore undesirable for the user in many cases. In a scenario where the user has max-borrowed, self-liquidating would reduce their capital that is earning yield by 50%, which means the users would have to find a yield source greater than twice that of the underlying Alchemix vault for them to consider leaving. Together these factors create long-lasting and sticky TVL in Alchemix vaults and underlying integrated vault partners. The liquidity requirements for ensuring redeemability of synthetic assets for the underlying assets they represent creates a need to incentivize liquidity in alAsset pools. The yield created by these incentives will drive more LPers to increase TVL of partnering AMMs on Optimism. We expect deposit TVL to increase with liquidity, and in periods of decrease liquidity we expect deposit TVL to decrease at a slower rate.
  • By integrating with yield providers such as AAVE, we will be farming OP rewards on underlying vaults as well, which will be passed on to depositors in the form of boosted yield.
  • The presence of liquidity on both Optimism and Mainnet, with a large influx of new users on Optimism will create arbitrage opportunities that will drive volume to Optimism bridges and Velodrome. For example - $10m of migrated TVL to Optimism would create $10m of initial bridge volume, $5m of alAsset selling volume, and additional arbitrage volume (on both exchanges and bridges) between mainnet and optimism during the period of higher demand to sell alAssets.

Why will the incentivized users and liquidity remain after incentives dry up?

  • The OP incentives are going to immediately grow the Optimism Ecosystem, as is typically expected from liquidity mining incentives. The real test is if this creates new long term users and TVL. Due to both our veVELO growth plan (see two points below) as well as the aforementioned stickiness of Alchemix deposits, this TVL has a much greater retention rate than many other forms of DeFi protocols.
  • Alchemix will be able to launch stETH strategies on Optimism once staked ETH unlocks are possible. Additionally, Alchemix will be able to integrate any mainnet strategy that also launches on Optimism (for example, Yearn strategies are planned for deployment as soon as they are scaled up on Optimism). Lastly, Optimism has numerous unique DeFi protocols that could offer yield strategies not available on mainnet (and offers grants to protocols willing to write their own yield adapters!). Many users will prefer the cheaper fees of Optimistic Alchemix and will continue to migrate as the feature set becomes more identical to mainnet.
  • With the increased demand will come increased need for liquidity. Alchemix is currently farming VELO through protocol owned alETH liquidity, which will be constantly claimed and locked to create an ever-growing stack of veVELO by which to incentivize liquidity. Additionally, Alchemix has plans to launch a Velodrome alAsset AMO (Similar to the mainnet Curve AMO) that would be able to deposit and farm VELO with excess transmuter funds (and withdraw and burn alAssets when needed to increase price), thus increasing the available alAsset liquidity, alAsset price control tools, and profitability of Optimistic Alchemix. Lastly, Alchemix can re-direct mainnet liquidity driving assets to Optimism if demand is more present there (CVX, CRV, SDL, TOKE).
6 Likes
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A couple more links to relevant proposals mentioned in the post, since I was limited in the # of links I could include:

Gitcoin Donations, rounds #13 and #15.

V1 retirement retirement information, being retired Oct 1st

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Additionally, this proposal was reviewed by Jack with VELO and the SNX Ambassadors. You can discuss here, in the OP discord (a thread has been created), or in the Alchemix Discord (here: Alchemix)

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Hey, you should verify the new proposal template v2 and add relevant information.

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Thank you for pointing this out - we will revise ASAP and edit post / comment here when we do.

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We have revised to match the current proposal structure. @Gonna.eth

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Glad to see more protocols looking to delegate their tokens. Although there are no standards on this point, my suggestion is that you fold the tokens to be delegated into one of your other asks – or to consider something creative with the OP that you would hold, e.g., devise some utility within Alchemix’s core offerings.

You could then draw down the delegatable OP over time, reacquiring it through market buys should you decide that governance power is something you’d wish to accumulate over the long term (and I candidly think it is!)

Separately, I’m not sure how to get around the KYC issue, and it’s probably worth some discussion. One thing we could do is arrange for a multisig with some KYC’d people on it and set it such that you need at least one KYC’d person signing off on any tx.

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I am an Optimism delegate [Delegate Commitments - #136 by jackanorak ] with sufficient voting power and I believe this proposal is ready to move to a vote.

KYC is an open issue but this should be part of the deliberation

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I’m an Optimism delegate with >0.5% of the current votable token supply and I believe this proposal is ready to move to a Snapshot vote (not an endorsement of the proposal itself but that I think it is ready for voting).

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I am an Optimism delegate [Delegate Commitments - #65 by mastermojo] with sufficient voting power, and I believe this proposal is ready to move to a vote

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I think holding the delegated OP for the potential to bootstrap a future alOP would be a good candidate. alOP would require a yield source, which would most likely come from either AAVE utility (or similar integration), or even better if Optimism eventually earns revenue and shares it with token holders. While we wait for this use case to emerge as a possibility, it gives us a say in what (I think) will be our largest/most popular L2 offering for a while. If it becomes clear this won’t be feasible, then we can look to extend / ramp up liquidity mining to attract more users (should it continue to be proven that our depositors are generally remaining deposited).

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Hi @Ov3rkoalafied , Thank you for your proposal.

I have few input and would appreciate if your could provide additional information.

  1. KYC part is negotiable or off the table ? I believe this will be done between your team and foundation.
  2. Do you have any dashboard where I can see stats on Optimism, I assume the deployment was on 19th Sept.

are you planning to migrate liquidity from other chain to optimism to jump start the launch?

  1. On self-delegation, would you consider using vault or lp token for self-delegation. Keeping 250K just for delegation is not a good of token, imo.
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  1. I asked around and looked through the forums, and I haven’t found any elaboration on the KYC requirement besides the one question (including discussions on where it was added). No one on the team has KYC’d before, and we have done plenty of deals without it, including an OTC sale of ALCX tokens shortly after the protocol launched. I believe KYC would be off the table for us, but we are open to other approaches if acceptable.

  2. We have deployed the contracts with small (100k) deposit caps. Currently we are working on completing staging for the UI with the live contracts, then we will announce and lift the caps. So there’s not really any stats yet (unless anyone wants to interact with the contracts directly, if they can find them!).

  3. See my comment above yours - we could hold onto the OP for an eventual alOP. Alternatively, since I’d like to keep the total quantity the same, we could put the 250k OP into the LP/depositor incentives and self-delegate over the course of time that we are drawing down from those.

Who would be good to ask about KYC? Ultimately is it just a DAO decision? Ie, we would go to vote with a “no” for KYC, and then the DAO could pass or fail it?

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The requirement came from OP Labs directly, most likely driven by whatever legal requirements they deemed satisfactory to protect the real world entity.

My current guess is that this items is a hard stop since Phase 0 projects were required to KYC themselves and this was not part of the discussion for Phase 0 nor part of the OPerating manual

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A good place to start the discussion would be gov-general channel on discord, another option would be creating a thread and getting community feedback and last option would be to directly contacting Optimism foundation team.

Please update the proposal to reflect the same.

any time line for this ? and what about co-incentives ?

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Just posted there, thanks! We do have one team member that would be willing to KYC, so will determine if that would be acceptable.

I’ve updated the proposal to reflect alOP.

Our matching incentives are all on the liquidity incentivization side, since that requires more incentives than the product side to maintain sufficient liquidity for depositors to take loans. Velodrome has done a good job at making liquidity more efficient, so we are incentivizing by taking a larger stake specifically in Velodrome - we own a sizable lock already, purchased more through AIP-49. That AIP also had us move $1 million of protocol owned alETH liquidity from mainnet to Velodrome. If we start to see TVL migrate from mainnet to Opti or a lot of fresh TVL come in on Opti and the incentives aren’t keeping up, then we can also redirect some bribes from mainnet curve to Velodrome (not yet approved by governance).

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What date have you determined to launch the vaults in Optimism?

Can you indicate the possible protocols to which you will delegate OP tokens?

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  • Vaults are live but with low deposit caps. We are working on finalizing the UI, it got delayed due to some DDOS attacks (so we are shoring up our main front end first). I will post here and edit the proposal as soon as we are fully live, including updating TVL when closer to voting. The new voting starts Oct 13th so should be plenty of time to get a bit of TVL.

  • The most likely protocols would be Velodrome (they will be a major partner for us on Optimism for alAsset liquidity, so our goals will be somewhat aligned), or SNX (they have some delegates who have also been active in our community and they have helped us with this proposal). Nothing has been officially decided yet.

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Will this distribution be 50/50?

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I am against delegation and self-delegation with tokens received through grants.

I think that if you want to give voice to Alchemix you can make purchase of OP tokens in the secondary market. Considering that in AIP-59 you make use of treasury (correct me if I am wrong) to buy VELO tokens, you can use the same resource to buy OP tokens.

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