Alchemix Finance

Ensuring that sufficient liquidity is maintained for alAssets is the primary challenge for Alchemix. So far, liquidity has been restricted to stable pairs and a trial of alUSD/alETH pairing on Uniswap v3 with Arrakis. This proposal requests governance approval for $50k of discretionary funds in ALCX from the Alchemix treasury to be granted to the Bizgov subDAO to run some liquidity pilot programs. These pilot programs will spin up new pools, test how they perform, and evaluate if our liquidity costs can be reduced with some of these new pools. This would also show if these pools would cost-effectively generate enough volume for Chainlink oracles to be operated.

Context

Alchemix currently operates liquidity pools in the form of alUSD<->stablecoins and alETH<->ETH.

Liquidity pools need to be able to provide a certain amount of yield to incentivize people to provide liquidity. Yield comes from two distinct sources: Swap fees and incentives. The larger the trading volume, the larger the swap fees. However, if there is not enough volume and consequently yield from swap fees, protocols that need a certain pool to exist usually pay incentives to LPs (Liquidity Providers) to supplement the swap fees. Protocols usually use their governance tokens for this purpose, which is mostly the case for Alchemix as well.

Needless to say, this incentivization cycle costs money, and every protocol would like for more swap fees, such that they would not have to pay to incentivize the liquidity pools.

The only swap fees that the alAsset pools currently accrue come from people taking an Alchemix loan and then swapping their alAssets to other assets, or from Alchemix depositors buying discounted alAssets to repay their loans and net a small profit in the process (this volume also generates a very small amount of additional volume in other alAsset pools to arbitrage the price difference, but this is negligible).

This means that for alAsset pools, almost all of the rewards come from liquidity incentives, paid by Alchemix (there are reward multipliers that we gain by bribing curve voters instead of using direct ALCX emissions, but this proposal does not intend to go into details on this mechanic). On Curve, alAsset pool swap fees make up ~0.2% yield, while incentives make up the rest, which ranges from ~4% to ~12%.

1. There are a few different mechanics through which this could change. The more use-cases alAssets receive in other protocols, the more frequently people would buy and sell them. It has been the goal of Alchemix to seek out and enable such use-cases, but there have only been a lower number of integrations to date. The BizGov subDAO will continue to work on getting alAssets onboarded in as many places as possible, but this is a continuous process.
2. If alAsset pools are used to facilitate trades for external assets, then swap fees accrue even if traders are not trying to buy or sell the alAssets themselves. However, the current liquidity pools do not enable this use-case, as there are no pools that connect alUSD and alETH pools.

Test Pools

This proposal seeks governance approval to run tests to determine if by setting up pools that connect our fractured liquidity, enough volume can be generated to lower our overall incentivization costs.

The reason for the uncertainty is that volatile pools (where the two assets in the pool are expected to fluctuate in value compared to each other) require much higher reward APRs to run. So the volume that is generated by such a pool that then flows through the base alAsset pools needs to be high enough to justify the certainly higher APR that we would have to pay for the volatile pool itself.

We have run only one such test lately, through the Arrakis UniV3 alETH-alUSD pool. The learnings from this experiment are included in the appendix in the forum post for this proposal.

The first thing to identify is the right DEX(es) and protocols for the experiment. We need to be able to ensure that the pools are concentrated, while at the same time being able to provide rewards to LPs. The second is to figure out which chain (or chains) to run the experiment on, but Optimism seems like the prime candidate. We also might need to test different pool compositions (alETH-alUSD, alETH-USDC, alUSD-ETH for example) and different fee tiers, so that we can identify the pool (or pools) that generate the best results.

Voting

Voting is single-choice.

The choice of Approval allows $50k in ALCX to be spent over the course of this trial run on pool incentives chosen by the Bizgov subDAO. The choice of Disapproval does not allow any funds to be spent for this purpose.

1. Approve
2. Disapprove
3. Abstain