Dialogue ALEX: How to Build a DeFi Ecosystem Based on Stacks

Bitcoin is known as "digital gold" and has recently been referred to as "value storage," but it can actually be much more than that. What Bitcoin truly lacks is the concept of an ecosystem. To become an ecosystem, smart contract compatibility is a challenge that must be overcome. Stacks is attempting to address this issue. The complete DeFi protocol ALEX, built on the Stacks blockchain, aims to make the Bitcoin market more vibrant.

In this edition, Catcher Insight invited ALEX co-founder and CEO Chiente Hsu for an AMA session. During the session, Chiente Hsu shared valuable insights with the community about ALEX's operational mechanisms, the development status of Stacks, and the future landscape of DeFi. The full transcript is organized below, hoping to help and inspire you in understanding the DeFi ecosystem based on Stacks.

Catcher Insight: Please provide a detailed introduction to ALEX, including aspects such as features, team, and financing?

Chiente Hsu: ALEX is the first complete DeFi protocol built on Bitcoin through Stacks smart contracts. ALEX brings vitality to Bitcoin, allowing new projects to launch their tokens, and users to trade, lend, and yield farm.

There is nearly one trillion dollars of dormant funds in Bitcoin wallets that ALEX aims to unlock. Bitcoin is the ultimate means of value storage, becoming the foundation of a new financial system and the new open decentralized internet, Web3.

ALEX is a suite of DeFi functionalities, with our core products including: a launchpad for discovering and participating in IDOs to build top projects within the Stacks ecosystem; a DEX for trading and placing limit orders; fixed-rate and term lending with no liquidation risk; liquidity mining, staking, margin trading, and yield farming.

ALEX was founded by Rachel Yu and me. We both come from traditional finance, having developed quantitative strategies for major Wall Street banks including Credit Suisse, Goldman Sachs, JPMorgan, and Morgan Stanley. Our team consists of financial quantitative analysts, smart contract developers, and experienced UI/UX developers.

In terms of financing, we raised nearly $6 million in seed funding from strategic venture capital firms such as White Star Capital and OKEx. They not only provide us with advice on important decisions but also introduce us to other DeFi and interesting projects to broaden our horizons.

We also have world-class advisors who provide us with guidance in various fields, such as token economics and project development.

Catcher Insight: What is the official launch date of the ALEX mainnet and the detailed roadmap for the IDO release? How is the feedback from the current testnet?

Chiente Hsu: We are launching $ALEX through the IDO for those who contributed to our testnet. Recently, the ALEX testnet has been closed.

Our IDO process is roughly as follows: starting January 3, users can exchange tALEX (testnet token) for IDO tickets; on January 10, our mainnet will launch from our Launchpad; IDO tickets will be submitted with $STX to validate the tickets, and only verified tickets can participate in the IDO lottery; the IDO lottery will be held on January 17.

When the protocol has sufficient liquidity, we will launch features such as lending and margin trading, followed by our order book DEX. On January 17, ALEX staking, AMM DEX, liquidity mining, and yield farming will be added to the mainnet.

Since October 10, we have run a very successful testnet with over 16,000 Discord members and 23,000 Twitter followers.

Catcher Insight: As the first DeFi project built on Bitcoin through Stacks, what is the basic operational mechanism of ALEX? What advantages does it have compared to Ethereum DeFi projects?

Chiente Hsu: ALEX is built on Bitcoin through Stacks smart contracts, which ensure the security and finality of the Bitcoin network.

First, most DeFi projects are currently built on ETH or other blockchains. ALEX is a DeFi built on Bitcoin through Stacks.

ALEX is also a complete DeFi, not just a trading protocol or lending or IDO platform; we encompass all these functions. We are not an isolated protocol on a sidechain, but a part of the Stacks ecosystem.

The advantages of native Bitcoin DeFi lie in security and logical consistency. WBTC on Stacks maintains the asset value of BTC unlike WBTC on ETH or similar chains, but loses the network (you cannot verify unpermissioned/on-chain BTC resolution). WBTC on STX can directly reference the actual original BTC assets on the BTC chain.

Catcher Insight: What is the token issuance plan for ALEX? What are the application scenarios for the token within the ALEX ecosystem?

Chiente Hsu: The issuance of ALEX tokens begins with the IDO we discussed earlier. More details can be found in our Tokenomics paper, which is easily accessible at www.Medium.com/alexgobtc.

There are three key application scenarios for tokens in the ALEX ecosystem:

1) Gradual governance decentralization

2) Gradual liquidity decentralization

3) Quantitative risk framework for the ALEX reserve pool

1) Regarding gradual governance decentralization, the goal of the ALEX Foundation is to become a mature DAO, allowing the ALEX community to have full control over on-chain and off-chain governance decisions. At the same time, we recognize that this is a transition that must be carried out gradually. The first step towards gradually achieving governance decentralization is to create the ALEX Genesis DAO.

2) Gradual liquidity decentralization has been mentioned above, but our token economics intentionally design "caps" and "gates" to filter hired capital and select LP providers who have a long-term interest in the protocol and community.

3) The risk management of the ALEX reserve pool is unique in that it uses complex quantitative methods similar to those used by major financial institutions.

Catcher Insight: On-chain lending requires a complete infrastructure, such as oracles and stablecoins. What is the current construction status of Stacks in these areas? What is the relationship between ALEX and the Stacks team?

Chiente Hsu: We are building two types of price oracles based on AMM pools.

1) "Instant" oracles are the latest but have less elasticity against manipulation.

2) "Elastic" oracles are not the latest but are more elastic against manipulation.

For stablecoins, we will use the native USDA of Stacks.

The relationship between Stacks and ALEX is that we are part of the first Stacks accelerator. We position ourselves as the financial hub of the Stacks ecosystem, providing comprehensive DeFi and Launchpad services for new projects and communities to ensure liquidity for their token issuance.

Catcher Insight: Permissionless lending and expanding the institutional market are currently hot topics in the Ethereum lending ecosystem. What are ALEX's plans in these areas? Are there any other product plans?

Chiente Hsu: So far, the barriers to using funds among institutions are one of our confidence in DeFi applications. Rachel and I work closely with traditional financial institutions.

Therefore, we are in a unique position to bridge Bitcoin DeFi and the institutional market. We are actively talking to various fund managers to understand their needs and bring them on board. Making it easy for institutions to integrate Bitcoin into ALEX, order book DEX, etc., is a feature we have already built that will facilitate institutional participation. Additionally, the collateral rebalancing on our platform has no liquidation risk, which is an important risk management framework appreciated by institutional participants.

Catcher Insight: What operational strategies does ALEX plan to adopt next to increase user engagement and market presence? What considerations and plans are there for community building?

Chiente Hsu: We need to continue innovating to attract new users.

The first step is to become an indispensable part of the Stacks ecosystem. For the mainnet launch, we have integrated well with CityCoins (Miami Coin and New York Coin) and USDA (stablecoin). We are also collaborating with various Stacks projects to help them launch their tokens on ALEX.

At the same time, we are growing together with Stacks in two aspects: cross-chain capabilities and the scalability of Stacks.

Finally, I believe this is ALEX's unique positioning: connecting traditional finance and DeFi. Because I believe that in five or ten years, there will be no TradFi, CeFi, or DeFi. We can provide users with the best financial services.

Catcher Insight: In addition to the frequent security incidents in DeFi itself, there have been several significant market corrections recently. ALEX claims to eliminate liquidation risk through dynamic collateral rebalancing. How is this achieved? What measures have you taken to ensure ALEX's solvency?

Chiente Hsu: On all other DeFi platforms, when you borrow, your collateral is in a liquidity pool. If the collateral is Bitcoin, the value of your collateral is the value of Bitcoin, which is highly volatile. If Bitcoin drops and your loan value falls below the protocol's minimum value, you will be liquidated, your position will be sold, and you may have to pay fees of up to 50% of the collateral value.

We have created a collateral pool that includes two types of assets: risky assets and risk-free assets, controlled by a rebalancing equation that actively responds to the market by continuously shifting the weight of the pool between risky and risk-free assets.

As risky assets, such as Bitcoin, rise, the liquidity pool will shift towards risky assets to capture upside gains. When the market declines, the liquidity pool will shift towards risk-free assets to minimize losses. When the market drops and the pool value falls below a preset threshold, it triggers a "risk aversion" condition, completely transferring the balance in the pool to a risk-free state.

It's like putting a seatbelt and airbags on your collateral; in an emergency, it will protect the value of your collateral so that you won't risk liquidation.

The solvency or risk management of the ALEX reserve pool is accomplished through quantitative methods.

Value at Risk (VaR), a statistical framework for quantifying risk exposure. Commonly applied in TradFi, it is defined as the maximum dollar amount of expected loss over a given time frame.

Statistical modeling focuses on extreme events with very low probabilities. To amplify market dislocations, we simulate "jumps" in cryptocurrency price movements, which means prices may suddenly drop to unprecedented levels.

In the event of a "black swan" event, the first line of defense is the ALEX reserve pool. The primary income of the Reserve Pool comes from trading fees. If the reserve pool becomes insolvent, it may issue more ALEX tokens, subject to community voting.

Catcher Insight: DeFi has always been one of the important tracks for industry development. What do you think the future market will look like? Where will the next breakout points be? What are ALEX's future goals?

Chiente Hsu: 2022 will be very interesting for Stacks, as we will see new projects in the ecosystem, whether Bitcoin DeFi, NFTs, or DAOs, to support the growth of its ecosystem. Stacks is also entering the multi-chain space with the proposal to provide Bitcoin value to other ecosystems, currently building five cross-chain bridges for this purpose.

In the second half of 2022, we expect the release of ALEX 2.0, with off-chain order book DEX, application chains, and subnets all in development.

ALEX's vision is to become the "gold standard" of DeFi in terms of transparency and decentralization. We are creating financial services for users, which is the first truly permissionless peer-to-peer financial network, suitable for both the banked and unbanked.