Alchemix USD (ALUSD): one of the most volatile stablecoins on the market

Stablecoin, which we will discuss in this article, has failed to hold the title of a stable cryptocurrency due to the lack of a mechanism to maintain its underlying exchange rate.

What is Alchemix USD?

Alchemix USD, or ALUSD, is a decentralized stablecoin pegged to the US dollar exchange rate, like most other assets of its kind. Along with the ALCX token, ALUSD is one of the key assets of Alchemix's decentralized DeFi credit platform.

Alchemix is a synthetic stablecoin released by the Alchemix Finance team in March 2021. This team is also behind the development of the Alchemix lending platform.

The Alchemix platform is used to issue ALUSD stablecoin backed by collateral. For example, users can deposit DAI cryptocurrency and, in return, receive an ALUSD stablecoin according to the acceptable LTV or Loan-to-Value — the ratio of pledged assets to borrowed assets. This approach allows increasing the amount of available funds for the investor; for example, while his DAI is pledged, he can get additional profit in case of its rate growth, and ALUSD tokens received as a loan can be used for investment or in liquidity pools, which can provide extra income.

However, this approach has its risks: the fact is that if the price of one of the assets (borrowed or pledged) falls, the user risks losing his collateral completely if his LTV increases to 100%. The higher the Loan-to-Value ratio, the higher the risk of liquidation of the credit position for the user. For example, if the LTV is 70%, a user has pledged $1000 in cryptocurrency DAI and received $700 in ALUSD. In such a case, liquidation will only work if the stablecoin "decouples" from the dollar exchange rate and the value of DAI drops by 30%. The same will happen if the price of the borrowed ALUSD collapses by 30%. In both cases, the DAI tokens pledged as collateral for the ALUSD issue will be written off in liquidation. If the liquidation does not work, the user can either increase the pledged amount to reduce the LTV or return some of the borrowed funds.

If the borrowed amount is reduced to 50%, the risks will decrease, but if increased to 90%, they will be very high (many platforms do not even allow borrowing more than 70% of the pledged amount).

How does Alchemix USD work?

A built-in smart contract fully manages the process of issuing ALUSD stablecoin, making token issuance fully automated and autonomous.

A deposit in DAI token is required to issue Alchemix USD stablecoin on the platform. ALUSD is far from the first stablecoin that uses a similar token issuance model: the first algorithmic stablecoin, DAI, has a similar mechanism. It uses Ethereum (ETH) for collateral, as well as other altcoins and steblecoins like Tether (USDT) and USD Coin (USDC).

Pledged as collateral for the ALUSD issue, the platform further uses the DAI stablecoin to generate revenue on the decentralized finance (DeFi) marketplace. The income generated from the DAI collateral is, in turn, used to repay loans.

Alchemix USD problems

History has shown that many algorithmic and decentralized stablecoins, except DAI, carry high risks associated with the possibility of falling in value relative to the USD or, in other words, losing parity to the USD. One of the most striking examples of such a case is the situation with the decoupling from the USD exchange rate of the large stablecoin Terra UST, whose price began to plummet in May 2022 due to massive selling by investors. As a result, the token's price collapsed 98% from $1 to $0.02 in just one month.

Although the price of Alchemix USD has been holding steady at levels close to $1, there are several problems with this stablecoin:

First, the price deviates significantly (up to 5 percent or more) from the dollar exchange rate, both up and down, over long periods;
Second, which follows from the previous point, Alchemix USD is too volatile and cannot stay around $1 for a long time;
Third, the ALUSD exchange rate has repeatedly deviated by tremendous values. For example, in January 2023, the price of Alchemix USD reached $1261, and in June of the same year, it reached $1197, which is not at all acceptable for assets called stablecoins. Due to such large deviations, unforeseen liquidations of credit positions occur that investors cannot control, resulting in large losses.

Another problem with ALUSD is the lack of capitalization data. In July 2023, primary monitoring services such as CoinMarketCap and Dropstab stopped displaying ALUSD stablecoin capitalization data, but some metrics can be tracked. For example, FDV or Fully Diluted Valuation is the fully diluted capitalization calculated by multiplying all theoretically possible units of an asset by its current value. According to the Dropstab service, the FDV of the Alchemix USD stablecoin as of July 2024 is $175.7 million, which is not a small amount. However, the $175.7 million figure is very tentative due to the lack of actual capitalization data.

Conclusion

Although the ALUSD stablecoin is still actively used in the crypto market, its high volatility and associated risks do not allow us to rely on its reliability. This, in turn, will hamper the project's development, as critical partners are unlikely to want to get involved with a project whose stablecoin does not behave as it should for an asset of this category.