Alchemint: one of the most exciting components of NEO’s Smart Economy

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Alchemint is a decentralized price-stable cryptocurrency management system run on the NEO blockchain. In short, it’s a stablecoin enabled via smart contract technology. I attended Neo Dev Con in San Francisco back in January and one thing that caught my eye was this bullet on the slide Piyosh Chaplot of Neo Global Fund presented. It showed the project ‘Alchemint.

Why do we need a stablecoin?

In order for cryptocurrency to become currency of choice it’s going to have to conquer the volatility battle. With rapid Bitcoin price increases everyone is going to hoard Bitcoin as an investment. This decreases spending but increases savings.No one in their right mind is going to buy a $5 cup of coffee with Bitcoin if they believe it’s going to 10x in the next month. When price is declining, holders reasonably sell it as fast as they can. Similar to hyperinflation, the value of their ‘currency’ falls and purchasing power declines.

The case for why Bitcoin isn’t a currency

Wild volatility does not make for a good currency. Bitcoin is increasingly viewed more and more as the digital version of gold – a store of value, and not a currency. Bitcoin’s total supply is fixed. No new Bitcoin will be created once the block rewards disappear many decades from now. Deflationary economies encourage hoarding. As mentioned above, Bitcoin is increasingly viewed a store of value, not as an everyday medium of exchange.

Properties of cryptocurrency should exhibit three characteristics:

  • Unit of account
  • Medium of exchange
  • Store of value

Cryptocurrency at its best might be able to achieve all three above but also:

  • True ownership. You own your Bitcoin as long as you safeguard your private key.
  • Elimination of third parties, truly peer-to-peer. No intermediaries. I personally don’t believe a true stable coin is going to do away with a third party altogether, but it can surely decentralize it much further than a Reserve Bank.
  • Divisible to more decimals than fiat currency.

Even real currency isn’t free

If anyone was ever curious how much it costs to product fiat currency. The Fed doesn’t simply “print” money without spending (link).

Denomination Cost of production
$1 and $2 5.6 cents per note
$5 11.0 cents per note
$10 11.7 cents per note
$20 10.0 cents per note
$50 12.9 cents per note
$100 13.2 cents per note

Competitive models: three approaches to stablecoins

Centralized approach: Tether

  • Centralized – subject to point of attack such as government seizure, capital flight risk by team, inability to expand beyond current balance sheet as tether is pegged to USD

Pegged approach: Basecoin

Decentralized approach: Bitshares

  • Use smart contracts as collateral
  • Alchemint also takes this approach

Honesty in the team

I found this quote on page 7 I really enjoyed.

we recognize the technology of the whole industry is not mature enough, and Alchemint’s technology is not the greatest in the world. However, we have a untied and pragmatic team that has a common philiosophy and works in harmony. With a good starting point for technology, the rest is to improve continuously in the progress of development.

~Page 7, Alchemist English whitepaper

The mechanics of Alchemint

The closest analog I can find to Alchemint is a decentralized version of the U.S. Federal Reserve. Similar to the Fed, Alchemint can reduce money supply by issuing a series of IOUs with digital assets (NEO) as collateral. In much the same way the Fed can issue bonds in exchange for your hard earned USD. Alchemint will also be able to generate SDT tokens as you mortgage your NEO using smart contracts.

There are some differences between the Fed and Alchemint. The public will be able to view the size of collateral in the Alchemint system at all times. Additionally, the smart contracts it deploys is run simply through code without the intervention of a centralized party or undue influence from malicious players. Imagine the Fed Chair secretly under the influence of an interest group. No such scenario exists with Alchemint.

Smart Assets Reserve (SAR)

The most critical part of the Alchemint system is the Smart Assets Reserve (SAR). SAR is a smart contract to generate the mortgaged digital assets mentioned above. Individuals can create SDT with the following steps:

  1. Send NEO into an SAR to generate SDUSD, another token in the Alchemint ecosystem
  2. To close the contract and retrieve original amount of NEO the user will need to pay back the generated SDUSD in step 1 with a interest, to be paid in SDT (another Alchemint system token)
  3. If the price of NEO drops below a liquidation level, the mortgager must post additional collateral above the liquidation level. If the lender fails to meet this level, the network has the authority to liquidate the SAR and request additional bonus.

The liquidation and auction function

Alchemint devised a solution for the devaluation of NEO and SDUSD. The liquidation mechanism mentioned above attempts to resolve this. Much like a bank is required to have reserves on their balance sheet against the loans they posted, a borrower in the SAR will need to increase their collateral to meet the liquidation requirements. In this way, each borrower is incentivized to calculate how much additional NEO they need stashed away as potential reserve. If the borrower fails to meet this reserve their collateral will be posted to auction.

Refer to Alchemint’s whitepaper to find out more about the Oracle – the network’s real time price evaluator for liquidation thresholds.

Alchemint feedback mechanism

Initially, SDUSD is set to 1:1 with USD. As SDUSD deviates from this threshold a feedback mechanism will be triggered. The solution Alchemint proposes aims to incentivize the market to arbitrate the SDUSD:USD ratio until it reaches equilibrium at 1:1.

In the beginning, there was NEO

Alchemint will accept NEO as the only form of collateral at first. Over time, Alchemint will expand to other digital currencies. In my view, this makes sense a multi-protocol world. Neo may not be the only game in town in the long view.

SDT Token

Participants in the private and public sale of Alchemint will receive SDT token. SDT tokens are used to pay commission/interest when borrowers redeem their principle of the SAR. SDT holders will also have voting powers to decide risk management characteristics of the system. 70% of total SDT tokens will be sold. When SDT is paid to redeem principle, that SDT will be burned.

SDT cheat sheet (as I am writing this I have had to edit STD to SDT several times!):

  1. SDT is deflationary. SDT will be burned when an SAR is closed
  2. SDT is payment to redeem collateral posted.
  3. SDT is also a governance token. Decides risk management measures.
  4. 30% of tokens will be issued for sale. Raises questions when will the remaining 30% be sold and further issue decentralized governance

Stablecoin should start from solving the problems of stability of currency, payment and settlement, and become the bridge between the real economy and the digital economy in order to pay an important role in the trends of block chain technology in future.

~Page 41, Alchemint whitepaper

The Team and Roadmap

Core team

  • Zhang Ting – Chief Financial Master
  • Qi Feng – CTO
  • Zhang Wei – Product Director

Advisors

  • Sun Ming – Fenbushi Capital
  • Prof. Wang Yanming
  • Chen Yu – Founder of Juxiu Capital
  • NEO Council
  • Pauline Xu – Hayek Capital
  • Liu Ming – Former COO of Tron, founder of BPA
  • Cindy Fang – BK Fund

Think critically

If you’re going to invest in Alchemint you should have a series of critical questions:

  • Who programs the Alchemint smart contract?
  • If it’s a handful of developers, isn’t this project subject to the same due influence as the Fed Chairman?
  • Assume the smart contracts get the ratios wrong, how quickly will changes to the smart contract be deployed as an upgrade?
  • Step 3 of the SAR above functions as lenders (individuals receiving SDUSD via the SAR with NEO as collateral) becoming individual banks with a liquidation level (similar to banks having reserve levels). How are liquidation levels set? The rest of the network acts like a creditor, majority shareholder, or government actor forcing non-compliant banks to default.
  • SDT tokens holders participate as governance makers. What is the token holders do are apathetic and do not vote? What if they are wholly unqualified to make risk management factors in a project as ambitious as stabilizing currency?
  • In my opinion, it’s not the technology that’s the major source of value in this project. It’s the economic design behind their project. The success of Alchemint hints on its ability to execute it’s SAR correctly. It also hinges on its ability to bring in quality governance participants. Managing a successful economy is difficult – I realize how much of an understatement this is.

So what do I think?

I’m bullish on the need for a stablecoin. Alchemint’s approach to decentralize (as much as it can) governance and risk management measures is a good choice as long as the governance nodes know what they are doing. I am concerned retail investors hoping to receive SDUSD tokens will overextend themselves without understanding reserve capital will be needed to meet liquidation thresholds – but perhaps over time participants will learn along the way. Their roadmap of eventually bringing on more than just NEO as a digital asset as collateral shows me they are NEO agnostic despite having first come to my attention at Neo Dev Con. One of these days, a former high ranking Federal Reserve official is eventually going to join a stable coin team further cementing the legitimacy of such a project. Watch out for this token, I think it will be a worth substitute to centralized solutions such as Tether.

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