Beanstalk says, "Let's improve Defi by improving stablecoin tokenomics"

Hmm... where should i begin? After writing two blog posts on Solana I knew I was addicted to writing tech blogs (especially blockchain and crypto). This blog is about a new innovation in the stablecoin space - Beanstalk.

What is Beanstalk you ask?

Beanstalk is a decentralized stablecoin protocol built on Ethereum. Stablecoins (the coins whose values are pegged to real life assets or references like USD) play an important role in Decentralised Finance (DeFi).

Most of the stablecoins are collateral based i.e they require collateral backing by an asset, for eg. USDT is backed by US dollar and hence it is a fiat-collateralized stablecoin. This removes the decentralization aspect from stablecoins.

Beanstalk stablecoin is collateral free and it's price is stabilized by algorithms which I'll explain below.

What problems does Beanstalk aim at solving?

• It eradicates the need for collateral backing to lend stablecoins by using credit based mechanism to provide stability which is much better than a Non-blockchain-native assets.

• It removes interaction with centralized operators making it more decentralized.

• The illiquidity problem that occurs due to collateral requirement by other stablecoin protocols, as they require more and more collateral to borrow stablecoins.

How does it solve these major problems? - Working Explained.

There are 3 parts to this solution:

1. Beanstalk Price Oracle
2. Beanstalk DAO or "Silo"
3. Decentralized Credit facility or "field" Beanstalk has a time keeping mechanism called season which is similar to an epoch and it for 1 hour.

First of all before we start with these 3 parts, beanstalk issues 3 ERC-20 tokens

• Bean - The main stablecoin of the protocol.
• Stalk - The governance token used for the Beanstalk DAO.
• Seeds - which equal to 0.0001 Stalk and are issued every season.

Beanstalk price oracle

Beanstalk creates two Uniswap Pools USDC/ETH and BEAN/ETH pool to create a price oracle. When the ratio of the two pools approach equality or become equal then the price of 1 BEAN equals 1 USD.

Trading directly with ETH instead of USDC makes it more decentralized as USDC has centralized operators.

A time-weighted average price of BEAN is calculated every season (1hr).

Beanstalk DAO or Silo

People participate in the beanstalk governance by depositing their BEAN in the silo to get SEEDS and STALK. STALK is a governance token that the members can use to vote on decisions or proposals for the DAO. In return they get additional small percentage of BEAN supply as interest. This incentivization attracts a large volume of deposits from diverse communties which in turn creates a more decentralized and robust governance mechanism. Security is maintained through three tactics:

• SEEDs yield stalk every season.
• The amount of seeds and stalk get forfeited if a user withdraws his Bean deposits.
• Deposits can be withdrawn at any time but after withdrawal a user has to wait for a day to deposit them again (24 seasons).

Due to deep and consistent liquidity in the BEAN/ETH Uniswap pool, the price remains much more stable. As we know if we provide liquidity to any protocol they give us Liquidity Provider or LP tokens, these LP tokens can be deposited in any yield farm, but it's recommended (in this case) to deposit BEAN-ETH LP tokens in the silo to earn twice as much SEEDS and STALK than by depositing the BEANs themselves.

Decentralized Credit facility

Coming to the secret sauce of Beanstalk - community lending, i.e. Beanstalk eradicates collateral backing and it instead uses community deposited BEAN funds as credit (the depositors lend their BEAN) to create a much stabler and liquid blockchain native asset.

In return for their deposited BEAN, lenders get Beanstalk debt-asset called PODs. Keep in mind the BEAN stablecoin users (the retail investors that may use BEAN for trading with other assets) are actually the borrowers that borrow against the credit supplied by the BEAN depositors (the people actually involved in the protocol). The borrowed credit has a fixed interest rate and an undefined maturity date.

There is a pre-approved number of BEANs (called "Soil") that can be lent depending on the market price of BEAN in that season.

This fixed interest rate on PODs is termed as "Weather" and it helps in determing how much PODs that would "grow" or be offered from one "sown" or deposited BEAN. These PODs ripen or can be made redeemable when the price of BEAN is $1 on a first in, first out basis when the BEAN supply may increase in the pool.

So how do these three parts of the solution work in harmony?

BEAN oracle calculates a TWAP every hour (season) as discussed above to actually get the market price feed of USD to peg and the current debt-level is also calculated Now the task is to stabilize this price, to do it the known parameters such as BEAN supply, Weather (fixed interest rate on credit borrowed) and Soil (The preapproved amount of BEAN to be lent can be changed according to the demand of BEAN in each season), these parameters are varied accordingly to create a stable BEAN value. Here are some practical situations mentioned in the original blog.

"When the Bean price is too low, Beanstalk increase the Soil supply and raises the Weather".

"When the Bean price is too high, Beanstalk increases the Bean supply and lowers the Weather. Half of Bean supply increases go to Pod Harvests. The other half are distributed to Stalk owners and Deposited in the Silo".

"A reasonable debt level and consistent credit history attract creditors. When the Beanstalk debt level is excessively high or low, the Weather changes more aggressively to return Beanstalk to a more reasonable level of debt. Beanstalk is willing to issue debt every Season".

With this I conclude my blog on Beanstalk, it has truly been a great experience to deep dive in Beanstalk protocol.

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