A brief analysis of the Stacks ecosystem project ALEX: How big is the potential for native BTC lending + fixed interest rates?

With the promotion of Ethereum lending platforms like Aave and Compound, the liquidity of mainstream crypto assets such as ETH has been fully utilized and developed. Users can save their USDT, ETH, and other assets to earn considerable interest rates, while those in need of funds can collateralize their assets to borrow the target assets, significantly improving capital utilization efficiency.

Currently, the industry landscape of the DeFi lending market has basically stabilized, but there are still two obvious pain points. The first is that most lending platforms offer floating interest rates to savings users, making it difficult for them to know the actual annualized interest rate;

The second is that the liquidity of BTC assets has not yet been fully developed. Due to the complex bridging process of BTC assets, many BTC holders remain resistant to Ethereum. As the highest market cap crypto project globally, BTC still holds a low share in the lending market. For example, in Aave, the supply of WBTC is $1.7 billion, accounting for only 9% of the total supply on the platform.

Therefore, this direction still holds enormous potential in the crypto lending market. The open-source DeFi protocol ALEX, based on the Stacks blockchain, aims to address the aforementioned issues by helping users conveniently obtain fixed-rate returns for a predetermined period through BTC, thereby accelerating the release of liquidity in the BTC market, which is valued at over $1 trillion.

How to integrate native BTC?

It is understood that the underlying Stacks blockchain integrated by ALEX aims to connect native Bitcoin to achieve the highest level of security while also supporting decentralized applications and smart contracts. Thousands of transactions on this blockchain produce a hash on Bitcoin, as part of the consensus, and Stacks transactions are automatically "settled" on each Bitcoin block, thereby connecting the Bitcoin network and the Stacks blockchain and expanding Bitcoin's functionality.

Due to the aforementioned characteristics of Stacks, it is possible for ALEX to connect native Bitcoin at a low cost. In the Ethereum ecosystem, users currently need to go through third-party service providers to convert BTC into wrapped assets like WBTC or tBTC, a process that is cumbersome and costly. Taking the bridging process of WBTC as an example, users must go through at least six steps: opening an account with a WBTC merchant, transferring BTC to the WBTC merchant, the merchant finding a BTC custodian, the merchant transferring BTC to the custodian, the custodian transferring WBTC to the holder, and the holder then transferring WBTC to Ethereum.

In ALEX's solution, BTC holders can directly use their BTC to participate in the DeFi ecosystem. Although there is a wrapping process, it is invisible to users and does not affect their experience. Additionally, this solution does not involve intermediary risks or KYC processes, significantly reducing costs.

Furthermore, ALEX will also support all native/SIP10 compatible tokens on Stacks in the future to enhance its ability to meet the evolving demands of the Stacks DeFi ecosystem.

How to achieve fixed income?

In ALEX, fixed interest rates are achieved through the token "ayToken," which is based on forward contracts. It is similar to bilateral forward contracts in traditional financial markets, specifying the underlying asset "Token" and the expiration date.

Borrowing users can mint ayToken by adding eligible collateral to the collateral pool and sell ayToken at a discount below the spot token price on the first day, returning the Token at maturity. Borrowers can purchase ayToken at a discount below the spot token price and reclaim the underlying asset at maturity when the forward price converges with the spot price.

Purchasing ayToken is equivalent to lending tokens at the implied interest rate of the ayToken price, while selling ayToken allows holders to borrow ayToken at a fixed interest rate. The implied interest rate depends on the extent of the discount between the forward price and the spot price at the time of the transaction.

How to utilize the AMM mechanism?

At the same time, ALEX employs the AMM mechanism to further enhance trading efficiency within the ecosystem, currently setting up liquidity guiding pools (LBP), yield token pools, and collateral rebalancing pools.

Among them, the liquidity guiding pool uses a weighted equation aimed at promoting capital efficiency for one token (base Token) relative to another token (ayToken); the yield token pool uses the Yield Token equation, specifically designed to facilitate efficient trading between ayToken and Token; the collateral rebalancing pool uses a weighted equation to dynamically rebalance between tokens and collateral to ensure that the minted ayToken remains solvent, especially in adverse market conditions.

Taking the ayBTC / USD pool as an example, this pool will implement a dynamic hedging strategy in response to BTC price increases, selling USD and buying BTC as BTC spot prices rise, and vice versa. The resulting rebalancing between USD and BTC will be executed by arbitrageurs participating in the pool's pricing curve. Borrowers effectively act as LPs (and receive ayBTC as pool tokens), and the USD collateral provided will be automatically converted into a basket of USD and BTC.

The main benefit of this mechanism is that ALEX can more effectively manage LTV (Loan-to-Collateral Value * 100%) and completely eliminate liquidation under appropriate LTV and reserve fund usage. However, this mechanism may also result in the dollar value of the collateral received by borrowers upon repayment differing from the original value.

Additionally, ALEX has launched a Vault to hold and manage all assets in ALEX pools, meaning that the Vault is separate from the funding pool, making it cheaper for users to build custom pools on ALEX and allowing developers to learn faster. Consequently, ALEX allows users to utilize flash loan features to arbitrage any price differences across two or more pools without holding any tokens.

Conclusion

Through the above design, the ALEX ecosystem primarily consists of four roles. The first role is the lender, who deposits tokens at a fixed interest rate for a fixed term; the second role is the borrower, who posts collateral and borrows tokens for a fixed term; the third role is the liquidity provider, who provides liquidity to the funding pool and ensures the smooth operation of ALEX pools; the fourth role is the arbitrageur, who reduces the price discrepancies between tokens in ALEX pools and market prices after rebalancing.

The effective operation of these roles can ensure the smooth functioning of ALEX's lending mechanism while achieving advantages such as low cost, high efficiency, fixed income, and no liquidation risk, further enriching user choices in the DeFi ecosystem.

Currently, ALEX's products have not yet officially launched, but as one of the earliest DeFi projects on the Stacks blockchain, and an innovative product that integrates native BTC liquidity, fixed-rate lending, and AMM mechanisms, it is still worth looking forward to its future performance.