(This article is only a project research and does not represent any investment advice) AlloyX is a DeFi protocol that aggregates tokenized credit, bringing liquidity, composability and efficiency to the real-world asset ecosystem. AlloyX helps protocols, DAOs and institutional investors provide liquidity for tokenized credit on the chain while reducing capital drag. AlloyX's aggregation platform enables users to build and customize investment strategies based on their yield, risk and liquidity preferences.
Credit protocols in real-world assets (RWAs) present an immediate opportunity for AlloyX. RWAs are tangible assets that exist in the real world and are brought on-chain through tokenization, such as loans, accounts receivable, invoices, and real estate. Since 2020, tokenized RWA credit has continued to grow as a crypto asset class, with deposits exceeding $1 billion at its peak in mid-2022. However, with the huge growth of seemingly only one asset type in RWAs, this asset class is not only fragmented, but also very diverse on various parameters that investors need to consider.
The underlying tangible assets (i.e. borrowers) in the pools in the credit agreement represent many regions, industries, business types, and maturity cycles. For example, the Goldfinch Senior Pool represents on-chain loans from countries in Africa, Latin America, and Southeast Asia, covering fintech debt, consumer loans, and SME loans. When investors allocate funds to a credit agreement, in addition to considering the broad risk categories in the asset pool, they also need to consider DeFi and blockchain-related risks, such as blockchain downtime risk, smart contract risk, governance risk, and protocol risk.
In addition, due to the long-term nature of its asset holdings, RWAs also often have difficulty managing liquidity for withdrawal needs. The loans in the credit agreement have a maturity period of several years, which means a long lock-in period for the capital invested in the RWA. During this lock period, users cannot withdraw their USDC or use it as collateral. If the credit protocol still wishes to support drawdowns, it could set aside a portion of the total locked value to handle redemptions, but this would result in significantly lower performance returns from the asset pool due to idle cash.
Original intention
The AlloyX project team experienced early on when working with credit protocols and borrowers, and even if real-world businesses have sound financial and operational conditions, liquidity providers still face huge challenges when lending real-world assets on the chain. As operators and investors, they found inefficiencies, and this was an opportunity to create a platform that abstracts away complexity and makes it easy for anyone to invest in real-world assets and earn returns.
product
Users choose the "themed vault" they want to invest in by depositing USDC in the vault, and then they will receive vault tokens. When users want to withdraw, they can exchange vault tokens for USDC.
How RWA Vault Works
AlloyX’s vaults combine Credix Finance’s overcollateralized tokenized credit (digital tokens backed by real-world assets such as loans or debt instruments) with smart contracts for tokenized U.S. Treasuries to provide DeFi investors with access to real-world asset liquidity. Vaults on AlloyX follow a simple yet powerful principle: lenders provide funding in the form of USDC to the vault, which aggregates the assets deposited into the tokens, which are allocated and run according to the vault’s preset parameters. By depositing USDC, users receive vault tokens based on a floating exchange rate and earn yield. What makes AlloyX different is its automated allocation across multiple credit protocols, where USDC is deployed according to the vault’s allocation rules.
To suit investor preferences, users can also create their own vaults after approval from the AlloyX DAO. These customized vaults can invest in whitelisted assets in AlloyX's partner credit protocols. Once funds are deposited in the vault, the allocated funds will be directed to the partners.
The repayments of the underlying borrowers flow back to the vault on the AlloyX platform through the credit protocol. Depending on their liquidity needs, investors can redeem their share of the repayments in the form of vault tokens or convert them into USDC.
Each entity investing and redeeming on the AlloyX platform will need to complete Know Your Customer (KYC) with compliance partner Parallel Markets, saving them the time and resources of undergoing multiple KYC processes across individual agreements.
At the same time, AlloyX creates a seamless and efficient ecosystem that allows users to customize strategies in the tokenized credit market, earn capital returns, and benefit from automatic reinvestment of repayments.
Lending: Users can lend their capital to a vault to earn yield. Deposit USDC and receive vault tokens based on a floating exchange rate. Repayments are automatically reinvested, or converted to USDC to meet redemption needs.
Management: Users have the option to create their own vaults containing target assets and trading desks sourced from partner credit agreements.
Overcoming the Challenges of Tokenized Credit
AlloyX was developed by a team with deep expertise in fintech lending, credit underwriting, investing and blockchain technology. When investing in RWA, the core founding team experienced first-hand the limitations of tokenized credit investing.
Unlike some crypto loans, most credit protocols require investors to lock up their funds for a set period, which means it cannot be used for collateral or accessed until maturity. As RWA lending grows, lenders will demand easy access to liquidity and the ability to diversify their investment positions. Until now, crypto investors have not had the option to easily develop customized strategies in RWAs. Investing in different credit protocols requires going through multiple KYC onboarding processes, which takes a lot of time, effort, and resources. All of these issues are barriers to RWA growth.
To date, the total number of active RWA loans has reached $530 million and continues to grow amid the crypto bear market. Analysts from both Coinbase and Coinmetrics expect the tokenization of RWA to continue to grow significantly, a trend driven by increasing institutional adoption and demand for cryptocurrency transparency and attractive use cases.
AlloyX Advantages
Flexibility and composability: Users gain control over their investment strategies by tailoring them to their liquidity needs, target returns, and risk tolerance. Easily blend real-world correlated assets including U.S. Treasuries to maximize investment potential.
Enhanced liquidity: If needed, users can withdraw part of their funds before the loan matures and gain access to liquidity.
Diversification: Build a diversified investment strategy by pooling funds from various credit and US Treasury protocols. By spreading investments across multiple pools and assets, users can potentially reduce risk and maximize returns.
Simplified onboarding process: Save time, effort and money with a streamlined onboarding process. Complete only one KYC process to access multiple credit agreements, eliminating the hassle of duplicating paperwork.
Automatic Reinvestment and Reduced Drag: AlloyX simplifies the investing process by automatically reinvesting funds at every payout cycle. This puts your capital to work continuously for returns, minimizing idle funds and maximizing earnings potential.
route map
With the seed round, the team has integrated with nine credit protocols. The gold room mixed with Credix Finance and US Treasuries will be launched in early Q3 2023 and will be available to non-US users. The product roadmap will continue to focus on integration with other DeFi protocols and establish a DAO organization. Since its inception, AlloyX has reached a total locked value (TVL) of US$5 million and achieved an average yield of more than 18%.
Summary
At the end of June, AlloyX announced that it had received a pre-seed round of financing, led by Hack VC, with participation from Circle Ventures, Digital Money Group, Stratos, Lecca Ventures, MH Ventures, very Early Ventures, Archblock, dao5 and Credix Finance.
AlloyX hopes to build a diversified credit portfolio backed by real-world businesses on the blockchain. AlloyX enables protocols, DAOs, and institutional investors to easily and conveniently build diversified RWA investment strategies, and AlloyX provides borrowers with a flexible and efficient platform to manage all RWA investments based on their own returns, risks, and liquidity preferences. AlloyX believes that by leveraging encryption and blockchain technology, it can provide a more efficient, transparent, accessible, and fair contribution to the RWA DeFi ecosystem.