Elixir: The Alchemix Algorithmic Market Operator

When Alchemix was originally launched, we never anticipated our peg stability module, the Transmuter, to exceed 9 figures in value, with both the alUSD and alETH transmuters holding over $100m in value each. To take advantage of this, Alchemix began deploying these reserves in Yearn and passed the extra yield from these deposits to DAI and ETH depositors in Alchemix. This enabled us to have a killer feature — boosted yield, which at times, doubled the amount of interest paid to Alchemix depositors.

Recently, it dawned on the Alchemix team that these DAI and ETH reserves could be more-intelligently deployed in order to better benefit the Alchemix ecosystem. Instead of these assets passively making money elsewhere in DeFi, it makes much more sense to use these funds actively in the market to earn the protocol income and to better manage our pegs.

Introducing the Alchemix Elixir

The Alchemix Elixir is a contract inspired by FRAX’s Algorithmic Market Operator (AMO). Their AMO allows them to expand and contract the supply of FRAX in LP pools, with FRAX3CRV LP being the most predominant. They mint and deposit FRAX when the token price is above their peg, withdraw and burn FRAX when the token price is below their peg. They also farm with the LP in Convex, earning the protocol income in the process.

Through its own automations the Alchemix Elixir would take a similar approach to market operations, with the exception that we cannot mint alUSD into the LP pools.

See below for a diagram that shows how funds flow through the market.

The Elixir will be jump-started by migrating the v1 Transmuter TVL to it. This process will be completed over the course of 6 weeks so we can ensure a safe transition of funds. From there, all additional funds going to the Elixir will come from debt repayments in Alchemix. Once the funds are deposited into Elixir, the contract will supply liquidity in our primary curve pools — alUSD3CRV LP for alUSD, and alETH LP for alETH. Since the Alchemix protocol will be continually depositing DAI, USDC, USDT, and ETH into Elixir, it deepens liquidity and helps to maintain the peg.

The TVL in our Transmuters, if added to the current Curve LP pools, would result in Alchemix controlling ~40% of the liquidity for both alUSD and alETH. This gives Alchemix enormous control over the peg. Curve allows for single sided withdrawals and deposits, and bases the exchange price on the relative balance between the tokens in the LP pool. If a pool is overbalanced with alUSD or alETH, it means we are below 1 USD for alUSD and 1 ETH for alETH. Alchemix can restore the peg by single-sided withdrawals of alUSD or alETH, thus rebalancing the pool and restoring the peg. These withdrawn alUSD and alETH tokens would be removed from circulation, with the potential to be redeployed to their Curve pool should the peg heal and be able to support the addition of alUSD without moving it off peg again.

The next function of Elixir is to generate revenue and build long term liquidity for the protocol. Elixir will do this by making a Convex flywheel strategy. Alchemix has been accumulating CVX tokens via Olympus Pro for several months, now holding ~250k CVX. We want this asset because it gives us power to direct rewards from the Curve and Convex protocols, and the more of it we have, the more we can sustainably incentivize our primary liquidity pools. We also incentivise our Curve liquidity via Votium, which we deposit ALCX in to incentivise CRV and CVX rewards for our pools. Protocols do this because for every $ input, there is a 1.5–2x multiple in the $ amount of CVX and CRV rewards. The more CVX we vote with, the more ALCX we get back as a rebate for voting for our pools, too. So between this multiple and the Votium rebates, it greatly enhances the efficiency and longevity of our emissions.

When we stake our own Curve LPs on Convex, we get CRV and CVX rewards. Elixir would harvest and lock the CVX we farm on Convex for the flywheel strategy. 10% of the CRV rewards would be staked in cvxCRV, with the yield it makes going to growing the AMO balance, and 90% of the CRV rewards would be sold off for alUSD and alETH and be passed along to depositors in the form of boosted yield. Because boosting yield involves buying and burning alETH and alUSD, it doubles as a peg-strengthening operation. Interestingly, at the moment of this writing, 90% of the current CRV rewards in our CRV pools exceeds the yields from Yearn, meaning we are providing a comparable amount of boosted yield while also increasing the rate of our CVX acquisition.

The Elixir is a significant upgrade to our peg stability module. The concentrated management of our protocol controlled value aligns it more closely to our interests.

The ancient tomes of alchemy describe a mysterious fluid known as “Elixir”. It was thought to have the power to turn base metals into gold and even grant immortality. In that sense, the Alchemix Elixir is true to its name, with the peg-stability mechanisms and CVX flywheel bringing long-term price stability and sustainability to Alchemix alUSD and alETH. It’s a new era for Alchemix, and we’re happy to be bringing magic to DeFi yet again.

Contracts:

alUSD Elixir: 0x9735f7d3ea56b454b24ffd74c58e9bd85cfad31b

alETH Elixir: Soon

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