How Beanstalk Works

Publius explains how Beanstalk works

Beanstalk does not have any collateral requirements. Beanstalk uses credit instead of collateral to create Bean price stability relative to its value peg of $1. The practicality of using DeFi is currently limited by the lack of decentralized low-volatility assets with competitive carrying costs. Borrowing rates on USD stablecoins have historically been higher than borrowing rates on USD, even when supply increases rapidly. Non-competitive carrying costs are due to collateral requirements.

Beanstalk relies on three native assets and three interconnected facilities to regularly oscillate the price of Bean across its value peg:

Tokens

Beanstalk issues 3 tokens:

  1. Beans — Beanstalk ERC-20 fiat stablecoins;

  2. Stalk — illiquid yield-generating governance tokens; and

  3. Seeds — illiquid tokens which yield 1/10000 Stalk each Season.

Primary Facilities

1. The Sun

Beanstalk uses the Sun to create a cost-efficient and protocol-native timekeeping mechanism. The Sun keeps time on the Farm in Seasons. Each Season is ~1 hour long. Beanstalk adjusts itself to return the Bean price to its value peg at the beginning of every Season.

In practice, Beanstalk does not calculate the price of 1 Bean. Instead, at the beginning of a Season, Beanstalk calculates deltaB, the sum of the time and liquidity weighted average shortage or excess Beans across liquidity pools on the Minting Whitelist;

The Sun uses deltaB to determine how to change the Bean supply and Soil supply.

2. The Silo

Beanstalk uses the Silo, the Beanstalk DAO, to create a robust decentralized governance mechanism. Farmers can earn yield from passive participation in Beanstalk governance by Depositing assets on the Deposit Whitelist in the Silo to receive Stalk and Seeds.

Stalkholders can submit and vote on Beanstalk Improvement Proposals (BIPs) and collect a portion of Bean supply increases. A diverse community of Stalkholders creates decentralization.

To encourage consistent security:

  • Seeds yield Stalk every Season.

  • The associated amount of Stalk and Seeds from a given Deposit must be forfeited when it is Withdrawn from the Silo.

Deep and consistent liquidity in liquidity pools that Beans trade in improves stability. Liquidity providers to liquidity pools whose LP tokens are whitelisted can also Deposit their LP tokens in the Silo to earn Stalk and Seeds. At least 1 LP token Deposit type earns at least as many Seeds as Bean Deposits.

The Bean vs LP Seed distribution, or more specifically, the Bean to Max LP Seed Ratio, determines the relative benefits of holding Bean exposure vs exposure to at least 1 particular LP token in the Silo over time.

Conversions within the Silo between Bean and LP Deposits serve a major role in peg maintenance (see Convert Whitelist).

3. The Field

The Field is Beanstalk’s decentralized credit facility. Anytime the Bean price is too low, Beanstalk uses the Field to attract lenders who can lend their Beans to Beanstalk, which are subsequently burnt in exchange for Pods, Beanstalk’s native debt asset. Pods are paid out on a First In, First Out (FIFO) basis when new Beans are minted.

Soil is the number of Beans that can be lent to Beanstalk at any given time. Any time Beanstalk is willing to issue debt, there is Soil available in the Field. Any Beans not in the Silo can be Sown (lent) to Beanstalk in exchange for Pods.

Pods have a fixed interest rate and unknown maturity date. The number of Pods that grow from 1 Sown Bean is determined by the Temperature— the Beanstalk-native interest rate — at the time of Sowing. Pods become Harvestable (redeemable) for 1 Bean on a First In, First Out (FIFO) basis when new Beans are minted.

Creating Stability

Beanstalk requires a diverse set of participants, including Silo Members (people who Deposit assets in the Silo), Sowers (people who lend Beans to Beanstalk), and arbitrageurs. Beanstalk aligns the incentives of every individual participant to maximize price stability and create a diverse, decentralized economy. Beanstalk-native financial incentives consistently increase censorship resistance, stability and liquidity over time.

At the beginning of each Season, the Sun calculates deltaB (the cumulative time and liquidity-weighted average shortage or excess of Beans across liquidity pools on the Minting Whitelist), Beanstalk's debt level, the change in demand for Soil over the previous 2 Seasons, and Beanstalk's liquidity level, and dynamically adjusts the Bean supply, Soil supply, Maximum Temperature and the Bean to Max LP Ratio to bring the price back towards the peg.

When the price of Bean is too low (i.e., deltaB is negative), Beanstalk:

  • Increases the Soil supply by deltaB, subject to the cap in EBIP-2;

  • Raises the Maximum Temperature; and

  • Adjusts the Bean to Max LP Seed Ratio based on Beanstalk's debt and liquidity levels.

By increasing the Soil supply and raising the Maximum Temperature, Beanstalk can decrease the supply of Beans and therefore bring the price of Bean back up to its peg (assuming there are willing lenders at the given Temperature). In principle, a reasonable debt level and consistent credit history attracts lenders.

When the Bean price is too high (i.e., deltaB is positive), Beanstalk:

  • Increases the Bean supply by deltaB, subject to the cap in EBIP-2;

  • Lowers the Maximum Temperature; and

  • Lowers the Bean to Max LP Seed Ratio.

By increasing the Bean supply, lowering the Maximum Temperature and lowering the Bean to Max LP Seed Ratio, Beanstalk can bring the price of Bean back down to its peg.

To align the interests of Stalkholders and Sowers, 1/3 of Bean supply increases are distributed to Stalkholders and 1/3 go to Pod Harvests. The other 1/3 are distributed to Active Fertilizer holders as part of Beanstalk’s recapitalization plan after the April 2022 governance exploit (see Barn section).

In order to prevent inorganic growth, if the Bean price is too high and the debt level is excessively low for a Season, Beanstalk sells Beans directly each liquidity pool on the Flood Whitelist to return the price in the BEAN:ETH Well to $1.

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