0/ Tradfi folks love to shitpost in crypto to show how clever they are. There are half-truths here that should be clarified. What Alchemix is going is not entirely new. In Tradfi it is called hypothecation/rehypothecation but there are some differences.
https://twitter.com/profplum99/status/1378742034618490885
1/ Hypothecation occurs when a borrower promises the right to an asset as a form of collateral in exchange for funds.
2/ Rehypothecation occurs when the lender uses its rights to the collateral to participate in its own transactions, often with the hopes of financial gain. Clients who allow their assets to be rehypothecated are compensated with reduced borrowing costs or a fee rebate.
3/ As it is established, doubly pledging the collateral of the clients allows the banks to borrow additional funds. Now the same collateral bears the burden of multiple debts. This is the risk with rehypothecation.
4/ Rehypothecation is legal in most jurisdictions. In order to contain risks, in the United States, rehypothecation of collateral by broker-dealers is limited to 140% of the loan amount to a client, under Rule 15c3-3 of the SEC.
5/ In Tradfi, the collateral can be used in any way the bank or dealer fancies which makes the process opaque and risky. In the case of Alchemix, the collateral is being used to generate yields to pay down your loan. This is the critical difference.
6/ Because the yields in crypto are high (and mostly overcollateralized), doing this makes sense. In Tradfi the yields are so low that it would take forever to repay the loan, unless you go out significantly in the risk curve.
7/ Can a borrower take the borrowed alUSD, convert to Dai and replicate this transaction a few times. Yes they can, but you can also do this in Tradfi today. That doesn’t make it a scam. That just makes risk management trickier which is why you limit the loan to collateral ratio.
8/ Also on Ethereum high gas fees limit the number of iterations somewhat.
9/ Bottomline: Alchemix is taking some ideas from Tradfi to create a product that is unique and less opaque/risky. It is also a product that makes sense in the context of crypto.
10/ How people choose to use the product is their own discretion. If someone wants to take a crazy amount of risk, there are easier ways to do it in crypto. I think Alchemix is novel and there will be a lot of demand for the product.
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