The recent addition of ALCX Tokemak reactor has led to many questions in the Alchemix Discord. This post attempts to collect the common questions and provide simple, understandable answers.
What is Tokemak?
Tokemak is a DeFi protocol that aims to improve the efficiency of providing token liquidity. The protocol is explained in greater depth here: Introducing Tokemak | The Utility for Sustainable Liquidity.
Why is Tokemak accepting ALCX deposits?
Tokemak provides a new avenue for obtaining a return on ALCX tokens. Holders can deposit ALCX tokens with Tokemak in order to become an ALCX Liquidity Provider (LP). Tokemak deploys these tokens to the ALCX reactor in order to boost ALCX liquidity, which can help to improve the price stability of the ALCX token. Tokemak LPs receive TOKE token rewards in return for their deposits.
How do Tokemak LP rewards work?
Tokemak have provided a helpful explanation: Toke Rewards/Cycles Reminder. Note specifically that Tokemak LP positions are cyclical, meaning that rewards are accrued from the beginning of a cycle and can only be claimed from the beginning of the next cycle (and onwards).
Why do Tokemak LPs only provide a single token type?
Tokemak has established an innovative way of providing liquidity. ALCX LPs first deposit their tokens into the ALCX reactor. Holders of Tokemak TOKE tokens can then stake their TOKE in order to control the direction of liquidity to their preferred reactor (i.e. the ALCX reactor). This is known as being a Liquidity Director (LD) and is why DeFi protocols with Tokemak reactors are incentivised to hold TOKE tokens. With this system, the Liquidity Provider is not exposed to Impermanent Loss and the experience is more comparable to a normal single-asset staking pool (i.e. the Alchemix ALCX staking pool). See Tokemak: Key Terminology for a more detailed explanation of the actors in the Tokemak ecosystem.
What is the tALCX token?
The tALCX token is a derivative of the ALCX token, issued by Tokemak as part of the process of providing liquidity to a Tokemak reactor. Tokemak have provided a more in-depth explanation here: Tokemak 101: What is a tAsset?.
What are the benefits of holding tALCX?
The holder of tALCX tokens is entitled to TOKE rewards, proportionate to the number of tALCX tokens held. The holder of tALCX tokens can also stake them with Alchemix, or exchange them back 1:1 for ALCX at the conclusion of any Tokemak cycle. See Toke Rewards/Cycles Reminder for an explanation of Tokemak cycles.
What is tALCX staking?
tALCX staking involves providing tALCX tokens to the Alchemix DAO, in return for ALCX rewards. Staking tALCX tokens in Alchemix allows the Alchemix DAO to take over the Tokemak LP role, and thereby to accrue TOKE staking rewards. In return for this, the Alchemix DAO issues ALCX token rewards to the tALCX staker. This means that by staking tALCX, TOKE token rewards are foregone in favour of accruing ALCX token rewards instead.
What are the benefits of holding TOKE?
See Tokemak's post on Tokenomics.
What are the pros and cons of becoming an ALCX LP in Tokemak?
Pros:
- Potentially attractive APR (variable, based on the amount of ALCX staked in the pool and the current Tokemak emissions of 700 TOKE/day).
- Accumulate TOKE rewards.
- Support ALCX liquidity.
- Permit further staking of tALCX tokens in the Alchemix tALCX staking pool.
Cons:
- ALCX tokens deposited in Tokemak only begin to accrue rewards on the commencement of the next cycle. In the worst case, a maximum of 1 cycle may elapse before rewards begin to be accrued.
- tALCX tokens are not currently accepted for Alchemix snapshot votes (may be changed in the future).
- It is not possible to compound ALCX rewards because they are forfeited for TOKE rewards instead.
- The cyclical nature of Tokemak LP positions makes of deposited ALCX less liquid. Withdrawing from an LP position can only occur after the current Tokemak cycle has been completed, and in the worst case can mean a delay of at most one Tokemak cycle (currently 24 hours, but will be extended to 1 week in future). Refer to Tokemak's own Toke Rewards/Cycles Reminder for a graphical explanation.
What are the pros and cons to staking tALCX via Tokemak and Alchemix?
Pros:
- Support ALCX liquidity and receive ALCX rewards instead of TOKE rewards.
- Potentially higher APR than ALCX Single Staking (due to cons).
Cons:
- Staking involves additional contract interactions => higher gas expense and greater smart contract risk.
- The same illiquidity applies to ALCX staked in Tokemak when trying to withdraw (i.e. must wait for the current cycle to complete).
Staking tALCX via Tokemak and Alchemix involves costs more gas, why would I do it?
There are two main advantages to this approach:
The Alchemix DAO can accrue TOKE tokens. TOKE tokens can be used by the Alchemix DAO to strengthen ALCX liquidity in Tokemak, or to direct Tokemak liquidity to partner protocols as part of protocol <-> protocol collaborations. This helps Alchemix over the long run and may aid in ALCX price stability and/or appreciation.
Staking tALCX token is inherently more long-winded and complicated. There are additional risks and downsides. Therefore, in the long run the tALCX staking pool should offer a marginally higher APR than the regular ALCX staking pool.