This course will provide a simple guide into what the Beanstalk protocol is, how it functions and its significance in the crypto space. This course has been created for an entry level user. For more detailed information please see the official “About beanstalk” page or the official Beanstalk whitepaper.
Beanstalk is a decentralised protocol, this means that it runs on an open source and permissionless network. This network is Ethereum, a network of computers that process code simultaneously, in multiple places across the globe. A record of these functions and processes is called a ledger and is stored identically, on every computer on the network. This prevents a single point of failure in the network, providing robust security and censorship resistance. Additionally any user can participate in the network as it is permissionless, providing a fair equal playing field.
The Beanstalk protocol is made of a smart contract, which is essentially a program or piece of code, that runs on the Ethereum network. The decentralized nature of the Beanstalk protocol allows its financial services to be used by anyone, without the need of a “middlemen” that may interfere or charge for a service.
In its purest form, Beanstalk is attempting to create a scalable, decentralised stablecoin. A stablecoin is a token that aims to maintain a “stable” price relative to the value of an external reference. This external value is most commonly set to $1 USD for ease and widespread usage. Although other national currencies and assets can be used such as gold.
Stablecoins provide a low volatile option to transact value in the cryptocurrency space. Stablecoins have been extremely popular in recent years, with their supply increasing from under $1 billion USD to around $170 billion USD, as shown in Figure.1. Stablecoins are attractive due to their ease of availability, censorship resistance and stability. Although current models heavily rely on centralisation, collateral and charging users a fee for usage.
Stablecoins such as Tether and USDC are both said to be backed 1:1 with various assets valued in USD. This provides them value but sacrifices decentralisation as these assets require management by a central, regulated authority (Circle and Tether Holdings). Alternatively stablecoins such as DAI and MIM remove centralisation by providing value through on chain collateral. Here, users provide crypto assets in return for a portion of that value in stablecoins. As on-chain funds used for collateral are limited, so too is the growth of these stablecoins. These systems also require payment via an interest rate that is charged to participants, further detracting from their utility. These limitations have led to the creation of algorithmic stablecoins and Beanstalk.
Algorithmic (algo) stablecoin protocols aim to create a more decentralised stable coin that is true to the idea of decentralised finance. Although they have the same goal as the above coins, they achieve it through a different process. Broadly speaking, algorithmic stable coin protocols maintain a stable peg by controlling the supply of a token, to adjust the market price. Increasing supply when token price is above the peg and reducing supply when token price is below the peg. This allows for a system with minimal centralisation and no need of collateral, just code. Beanstalk protocol is an iteration of previous algo stable coins but uses a credit based system to provide value and create a stable peg.
The Beanstalk protocol is a credit based stablecoin protocol. It functions to maintain its native stable coin BEAN at a price of $1 USD. It is labelled as credit based because it uses debt to maintain peg, rather than a collateral based model. See Figure. 2 and Table.1 for an outline of the Beanstalk protocol key terms and mechanisms.
The protocol uses a few mechanisms to expand or reduce Bean supply in order to move the price to the $1 peg. This process relies on rewarding users with incentives to participate in the peg maintenance and decide any changes that might need to be made to the protocol. This decision process is called governance and is determined by voting.
Users who own Stalk get a vote relative to their percentage of ownership of total Stalk. Stalk is earned from depositing Beans into the Silo. Users who deposit Beans into the Silo also earn Seeds. Seeds generate 1/10000 Stalk each Season, increasing overall Stalk for the user. If a user removes Beans from the Silo, they forfeit a portion of Stalk and Seeds, dependent on the Season ID of beans that are being withdrawn. The yield on Stalk and Seeds incentivise users to not remove Beans from the Silo.
The protocol uses a price oracle to determine the value of a single Bean. This oracle is a piece of code that compares the price of USDC:ETH to BEAN:ETH, it does this each hour. This price feed is used to determine how the protocol is going react to maintain its peg. This 1 hour period is termed a season and is the protocol's internal time keeping method.
When this oracle finds that the price of a Bean is higher than $1, the Silo mints additional Beans. This raising of supply is aimed at bringing this price back down to its peg. These additional Beans get distributed 50/50 to the Silo (as yield to Stalk holders) and Field (as debt repayment for Pod holders). This mechanism rewards holders for participating in the protocol.
If the price oracle finds that the price of a single Bean is below $1, the protocol creates soil and places it in the field. Soil is a tool used to lower the circulating supply of Beans and therefore increase price. Soil allows users to “Sow” their Beans in return for Pods. The amount of Pods given per Bean depends on the “Weather” value. The Weather is an interest rate updated at the beginning of each Season. This rate is variable and is dependent on how far the price of a Bean is away from the peg, in addition to a number of other factors. This Sowing of Beans reduces the overall supply of Beans in an attempt to restore the peg.
The amount of Soil is a measure of how many Beans the protocol would like to borrow from users. Users who Sow their Beans, are called creditors. This is where the term “credit based stablecoin protocol” earns its name. These Pods “ripen” as Beans get minted from the Silo and eventually become redeemable for Beans. This minting occurs when the price of Bean is above $1. The ripening is determined on a first-in, first-out basis, meaning that its exact date is uncertain but early creditors will be paid before later creditors.
This mechanism provides creditors with incentive to lend Beans to the protocol, as they will get back additional Beans once the maturity date has been reached. It also allows the protocol to effectively reduce the circulating supply of Beans. This process of sowing beans to the field is termed “Bean farming” and offers a way of earning interest on stable coins.
It’s time to test your knowledge and deepen your understanding about the Beanstalk protocol! Follow the below link and complete the quiz provided;
Beanstalk Quiz - https://forms.gle/wEoPrDoawpQ7Vraz7
If you would like to get involved and become a bean farmer, go to the official Beanstalk application or see the “How To Beanstalk” document, for step by step instructions.
If you have any further questions join the Beanstalk Discord through the link below and ask away!