Overview
alUSD is the stablecoin produced by Alchemix, a DeFi protocol that pioneered the concept of self-repaying loans. The mechanism is elegant: users deposit yield-bearing stablecoins (like DAI or USDC via Yearn vaults or Aave) as collateral, borrow up to 50% of their deposit as alUSD, and the yield generated by the collateral automatically reduces the debt over time. Eventually, the loan repays itself entirely — no liquidation risk, no manual repayment needed.
alUSD is soft-pegged to $1 through arbitrage mechanisms: if alUSD trades below $1, users can buy cheap alUSD and use it to repay their Alchemix debt at face value; if above $1, users can borrow alUSD and sell it. This creates a self-correcting peg mechanism, though it's less rigid than fully-backed stablecoins.
Alchemix V2 expanded the protocol to support multiple collateral types and yield strategies, improving alUSD's resilience and flexibility. The protocol has maintained operations since 2021, making it one of the more mature DeFi-native stablecoins.
Peg Stability
alUSD's peg has generally held near $1 but is softer than collateral-backed stablecoins like DAI or LUSD. The arbitrage-based peg mechanism works but requires active market participants to correct deviations. During periods of low liquidity or market stress, alUSD has traded at modest discounts to $1. The protocol introduced a Transmuter mechanism that allows 1:1 conversion of alUSD to underlying stablecoins (DAI, USDC) over time, providing a hard floor, though conversions are not instant.
Collateralization
Collateralization is the protocol's strongest attribute. alUSD is always overcollateralized at a minimum of 200% (50% LTV) — meaning $2 of yield-bearing collateral backs every $1 of alUSD. Because the collateral is earning yield, the effective collateralization ratio improves over time as the debt is automatically repaid. There is no liquidation mechanism because the overcollateralization makes it mathematically impossible for debt to exceed collateral (assuming the underlying yield strategies remain solvent). This is a genuinely safer collateralization model than most stablecoins.
Security
Security depends on multiple layers: Alchemix's own smart contracts, the underlying yield strategies (Yearn, Aave), and the base stablecoins (DAI, USDC, USDT). Alchemix suffered a significant exploit in 2022 when a bug in V2's alETH (not alUSD) contracts led to the loss of user funds, though the team handled the incident responsibly and refunded affected users. The V2 contracts have been subsequently re-audited and hardened. The multi-layer dependency chain (Alchemix → Yearn → Aave → stablecoin) creates compounding risk.
Decentralization
Alchemix operates with a DAO governance structure and multisig admin controls. The protocol is more decentralized than centralized stablecoin issuers but relies on team-managed infrastructure for yield strategy selection and contract upgrades. The underlying yield sources include both decentralized (Yearn) and centralized-adjacent (USDC) components. Governance participation is modest.
Adoption
alUSD has a dedicated user base but limited broader adoption. The self-repaying loan concept is niche — it appeals to DeFi-native users who understand yield optimization but hasn't penetrated mainstream crypto use. alUSD liquidity is concentrated on a few venues (Curve, Velodrome), and its use as a medium of exchange is minimal compared to DAI or USDC. The protocol's TVL is modest but stable.
Risk Factors
- Yield dependency: Self-repaying loans require sustained DeFi yield; yield compression extends repayment time
- Multi-layer risk: Composability with Yearn/Aave/stablecoins creates compounding smart contract risk
- Peg softness: alUSD peg is less rigid than major stablecoins; can trade at discount
- Past exploit: 2022 exploit (alETH) demonstrates smart contract risk in the protocol
- Limited adoption: Niche user base limits liquidity and trading opportunities
- Stablecoin risk: USDC depeg (March 2023) and DAI regulatory risk pass through to alUSD
Conclusion
alUSD is one of DeFi's most clever innovations — a stablecoin produced through self-repaying loans that eliminate liquidation risk while maintaining strong overcollateralization. The mechanism design is genuinely elegant, and the protocol has demonstrated resilience through multiple market cycles.
The 5.9 score reflects strong fundamentals (overcollateralization, no liquidation) tempered by adoption challenges and the inherent complexity of multi-protocol dependency. alUSD is better understood as a DeFi yield product that happens to be a stablecoin, rather than a stablecoin competing with DAI or USDC for payments and trading use cases.