Alpha Finance: A Cross-Chain DeFi Product Suite | Deep Dive
Review Date: May 12, 2021 |
INTRODUCTION
Alpha Finance Labs primary mission is to first identify and understand prominent problems arising in the DeFi ecosystem then iterate on a product solution that will capture a large unaddressed market demand. The protocol is a suite of DeFi products that exist across multiple chains in order to maximise the fees captured and distributed back to ALPHA stakers.
Their core product Alpha Homora, a leveraged yield farming and liquidity providing application has attained a solid product-market fit that has a $1.3B in total value locked across Ethereum and Binance smart chain. The team is set to launch a new derivatives product focused on simplified perpetual swap trading and the launch of Alpha Hormora V2 that has the potential to attract even more yield farmers and liquidity providers. On- chain metrics and the team’s innovation means this is a seriously undervalued DeFi blue chip and is set for a large re-rating.
Alpha Product Suite
Alpha Finance Labs aims to develop cross-chain Defi products that address an unfulfilled part of the market as the DeFi ecosystem continues to grow on Ethereum and to other layer-1 blockchain protocols. The team has shown real innovation by developing solutions in leveraged yield farming, decentralized derivatives and a unique oracle aggregator. The following will describe each product of the Alpha product suite and how this ecosystem can offer value accrual for Alpha token holders.
Alpha Homora (V1 & V2)
Alpha Homora is the first ever leverage yield farming and liquidity providing product in DeFi. This means yield farmers and LP’s can borrow assets to further increase their APY. For example liquidity providers can earn more trading fees by representing a larger part of a liquidity pool from borrowed assets. Based on the demand to borrow assets ETH lenders can earn a substantial interest on Alpha Homora on the supply-side.
The key aspect of Alpha Homora that makes it more attractive than traditional borrowing from money market’s is it’s interest rate model. The interest to borrow assets is entirely dependent upon the utilization rate (the amount of assets borrowed relative to the pool size). This model is responsible for a higher utilization rate of money market protocols meaning more fees will be generated and distributed back to ALPHA stakers [1].
Alpha Homora V2 built upon the core idea of V1 but offered more room for growth with the introduction of new leveraged pools on Uniswap, Sushiwap, Curve and Balancer attracting more yield farmers and liquidity providers to the protocol. Additionally, V2 expanded the range of assets yield farmers and liquidity providers could borrow beyond ETH and stablecoins. Finally and probably the most innovative feature of V2 is using LP tokens as collateral for yield farming. The LP tokens that are supported are from the decentralized exchanges mentioned above [2].
On the lending side of Alpha Homora V2 multiple interest bearing tokens were introduced beyond the original ibETH including ibDAIv2, ibUSDCv2 and ibUSDT [2]. There is still more to come on how these new interest bearing tokens can be used across the DeFi ecosystem most likely accepting these tokens as a form of collateral to increase capital efficiency.
AlphaX
A large emerging market in the DeFi ecosystem is derivative products that allow traders to gain leveraged exposure to a crypto asset. These products are larger than centralized exchange spot markets with Binance having over $100b in volume every day. On-chain derivatives are in their infancy and face the problems of liquidity and transaction latency but Alpha Finance recognise the immense opportunity this new ecosystem holds in DeFi.
AlphaX is a decentralized automated market maker (AMM) for perpetual swap trading. The aim of this product is to allow leverage yield farmers via Alpha Homora to hedge their positions and to attract leverage traders [3].
A core focus of this product is to actually simplify leveraged trading for retail with an accessible UI and to abstract from the complexities of trading perpetual contracts such as the funding rate. Decentralized derivative protocols also offer superior security requiring no KYC or custody of assets.
- No Funding Rate: Funding rate is a recurring payment paid by either longs or shorts to the opposite side of the market in order to keep their perpetual position open. AlphaX is removing this complex concept and baking the funding rate into the price so less educated traders do not need to concern themselves with it.
- Tokenized leveraged positions: When a position is opened on AlphaX it is tokenized meaning that token can be traded, staked or used as collateral in other DeFi protocols. This creates a secondary market for leveraged positions creating more interoperability for Defi protocols wanting to integrate this feature.
- Dynamic K: AlphaX is a constant-product AMM similar to Uniswap (x*y = k) which can offer lower slippage for perpetual traders if K is dynamic. A dynamic K mitigates large amounts of capital needed to move price if K is high and large slippage when K is low.
Alpha Oracle Aggregator
Oracles are a platform that aggregates real-world data from APIs that smart contracts can use to execute functionality based on some conditional requirement. It connects on-chain code to off-chain data.
In regards to DeFi, financial data is paramount and Chainlink has become the primary solution that powers this sector of decentralized financial innovation. Oracles must be secure in the data they provide and efficient in the mechanism they provide it on-chain to ensure financial applications work securely and efficiently.
Alpha Finance has built an Oracle aggregator that ensures scalability, flexibility and security for the suite of Alpha products. The data providers for this Oracle service is Chainlink and Band protocol plus Uniswap’s V3 time TWAP [4].
Aggregating data from multiple oracles ensures pricing is consistent and reliable in case an Oracle service experiences downtime issues. It’s possible that other DeFi protocols could integrate Alpha Finance’s new oracle solution to protect against oracle downtime and ensure feeds are correct based on the difference between multiple price feeds.
Alpha Tokenomics
Alpha Finance labs want to develop a suite of DeFi products that address inefficiencies in the market and deploy those products across multiple blockchains. It was imperative to design the ALPHA governance token such that token holders can benefit from the growth of the protocol and the revenue the product suite captures across chains.
So far the leverage yield farming product Alpha Homora v1 is deployed on Ethereum & Binance smart chain and v2 soon to be deployed on Ethereum mainnet. The fees generated by these multi-chain products are distributed to those who stake the ALPHA token [5]. The more products and multi-chain deployments of these products the larger the protocol revenue via fees which are distributed back to stakers. This means APY for staking over time will actually increase.
Beyond the fee distribution model to stakers the Alpha team also launched a five tier system based on the number of ALPHA staked in the staking contract. The more Alpha one staked the more features that are unlocked in the Alpha product suite [5]. For example higher tiers of Alpha stakers have the ability to have more leverage on the Alpha Homora product. At this present time 61.6M ALPHA tokens are staked which is 21.56% of circulating supply [7].
On-Chain Data Analysis
The Alpha product suite currently has a total value locked (TVL) of $1.5B with $872m deployed on Alpha Homora V1 and $479m deployed on Alpha Homora V2 plus a $139m locked in on Binance Smart Chain.
Nansen AI over the past few weeks has shown incredible on-chain data in which the majority of circulating supply is being purchased OTC via centralized exchanges such as Binance. Additionally, a large percentage of this smart money spot flow has entered the Alpha staking contract to capture the value accrual and access higher tier features for the Alpha product suite. Funds such as 3 Arrows Capital, DeFinance Capital and numerous high net-worth wallets have purchased the majority of ALPHA on Binance as shown by the 7.7m ALPHA outflow from the Binance 1 wallet.
Team & Backers
The co-founders of Alpha Finance Labs both hold esteemed positions and qualifications the first being Tascha Panpan, previous investment banker and ex-head of strategy at Band Protocol. The lead developer Nipun Pit is a 4 time gold medalist at the International mathematical Olympiad, MIT graduate and Ex-CRO at OZT Robotics.
Alpha Finance has strategic advisors of the best funds in DeFi including the Spartan Group, Multicoin Capital and DeFiance Capital and initially funded by Binance labs [8].
Summary
Alpha Finance is not a set protocol but an ever expanding product suite that addresses untapped areas in the DeFi market that is deployed across multiple layer-1 blockchains to maximise fee capture. The tokenomics of ALPHA are strong, allowing stakers to capture the fees generated by the cross-chain Alpha product suite and also unlocking functionality based on the amount they have staked. The team behind Alpha Finance labs is one of the strongest in
DeFi and has shown constant innovation addressing opportunities that arise as the DeFi ecosystem evolves.
The composability potential for the Alpha products is tremendous, bringing an ever increasing amount of market participants and volume to leverage yield farming, derivatives and more. On-chain data has shown funds accumulating ALPHA over the last few weeks which means that this protocol is set for a large re-rating by the market.
REFERENCES
- https://alphafinancelab.gitbook.io/alpha-homora/what-is-alpha-homora
- https://alphafinancelab.gitbook.io/alpha-homora-v2/
- https://blog.alphafinance.io/inside-alphax/
- https://blog.alphafinance.io/alpha-finance-launches-alpha-oracle-aggrega- tor-with-data-from-band-protocol-and-chainlink/
- https://alphafinancelab.gitbook.io/alpha-finance-lab/alpha-finance-lab-main/ alpha-token
- https://alphafinancelab.gitbook.io/alpha-finance-lab/
- https://alphafinance.io/
- https://blog.alphafinance.io/investors/
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