Thread by @JackNiewold

I want to talk to you about a new financial primitive.

One that's still very new in crypto.

One that might break stablecoins like Tether and UST.

A 🧵 on Beanstalk 🌱

Or, how debt and credit might revolutionize DeFi

1. THE PROBLEM

Centralized Stables like Tether hold dollars off-chain. The issue? Supply is constrained and the usage can be censored.

Decentralized Stables can't be censored, but require overcollateralization, so they're limited in supply.

Stables can't keep up with demand.

If there aren't enough stablecoins to go around, and there's not enough collateral to produce all of the stablecoins required, what's the solution?

What if don't have collateral in the first place: what if we issue a stablecoin based on credit?

Obviously this wouldn't work anonymously. You wouldn't use a stablecoin that some anon might promise to pay back at some point in time

But what if it's a protocol with programmatic supply? What if it's governed by a smart contract?

Then, I can use credit without trust.

This is the premise of Beanstalk and its stablecoin, $BEANS.

$BEANS = $1

The protocol is designed to create:

• Selling pressure if $BEANS > $1
• Buying pressure if $BEANS < $1

And it uses borrowing to do so. This combination of buying and selling should keep price at a $1.

We want price to be stable.

If $BEANS trades at $1, we're in a state of equilibrium.

What happens if $BEANS trades BELOW $1?

This is a 'depeg' event. In this case we have to incentivize the buying of $BEANS.

How do you do it? With debt.

When 1 $BEANS < $1, Beanstalk issues debt, promising to pay people back more $BEANS in the future.

This debt mechanism is called a Pod. You can think of it as a bond, as it gives you a right get paid back in the future.

Right now, for example, you can buy Pod # 600,000,000 for about 3 cents. That Pod will someday mature into a Bean worth $1.

So after Beanstalk pays back all the Pod holders that came before you (in chronological order), that Pod turns into 1 bean.

In exchange for loaning some money to the protocol in the form of Beans, you get paid back around 30x once the 600 millionth pod gets minted

These pods can be traded on the open market as well, so they're liquid.

Closer to the front of the line = will be minted soon = more valuable

End of the line = will be minted someday = more speculative

Here's what that market looks like:

What if lots of people want $BEANS at the same time?

Price goes up and it depegs. Now 1 $BEANS > $1

We have to create selling pressure.

How? By flooding $BEANS onto the market. The protocol repays debt to Pods holders that loaned stablecoins when price was below $1.

Remember, the oldest Pods holders get paid first, so their investment finally gets paid off.

They made a bunch of money and get paid out in stablecoins.

They sell their stablecoins to realize the gain and pull price back down.

That's the basic mechanism behind the protocol.

There are a few features we haven't touched on:

• a liquidity farming program that pays out rewards
• a 'Silo' for $BEANS that pays out interest on stablecoins
• 'Stalks' and 'Seeds' for boosted rewards and governance

Has it worked so far? Well, the protocol has definitely depegged a couple of times, but it's always returned to peg.

This protocol will be a lot more volatile than collateral-backed stablecoins.

Price will (hopefully) continue to stabilize as trust in the mechanism improves.

THREATS:

• Some instability is required for new supply to come on the market
• Interest rates pump unsustainably as supply expansion slows. No one thinks they'll get paid back.

OPPORTUNITIES:

• The governance token will soon be tradeable & give access to a % of new tokens

HOW TO APE:

Well, you could buy some Pods with the hope that your 'Bond' gets paid off eventually. With the newest bonds, you can make 70x

Or you could wait until the governance token launches, then buy.

Or you could farm the governance token, then sell that to awaiting apes.

We've seen other protocols try to do some, but none with the long-term durability of Beanstalk.

Will it work? It would solve a LOT of problems in DeFi.

But I'm excited to just hold my Pods and see how this plays out.

Liked the thread? Give it a RT, I’ve got it linked below.

Give me a follow for more like it: @JackNiewold

https://twitter.com/JackNiewold/status/1504546656271929344?s=20&t=xuLCJQeFU-vCO6n44bIGXA

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No one paid me to write this, just thought the mechanism was interesting.

No governance token, so I'm not looking for exit liquidity

Could be a massive ponzi

Some info on how Beanstalk varies from past credit-based iterations

https://twitter.com/bean_merchant/status/1457770815584292872?s=20&t=GwmtP-XAu1eU9zjiv0fXsA