Publius · June 5th, 2022
“We choose to go to the moon. We choose to go to the moon in this decade and do the other things (accomplishments and aspirations), not because they are easy, but because they are hard, because that goal will serve to organize and measure the best of our energies and skills, because that challenge is one that we are willing to accept, one we are unwilling to postpone, and one which we intend to win.” - John F Kennedy, September 12, 1962
As we approach the start of the Barn Raise, and the Replanting of Beanstalk draws nearer, we wanted to publish some thoughts on why we started, and continue to contribute to Beanstalk. Given the recent implosion of Terra and the subsequent general skepticism around the potential for a non-exogenously-collateralized stablecoin, this feels timely.
In our opinion, the biggest friction point holding back the adoption of permissionless technology (transaction fees aside) are the high carrying costs of stablecoins. On-chain economic activity cannot compete with off-chain economic activity because borrowing costs are so much higher on-chain. High stablecoin carrying costs are the result of excess demand. Supply cannot meet demand due to the opportunity cost associated with locking up collateral in a bank account or CDP.
Despite our conviction on the importance of a non-collateralized stablecoin, it required some serendipity for us to begin working on Beanstalk. In November of 2020, we happened to be in the same location around Thanksgiving, and hung out. At the time, ESD was the talk of DeFi. The hype around ESD, as a non-collateralized stablecoin, was aligned with our conviction about the frictions around collateralized stablecoin models. That evening, we read the ESD whitepaper together. While we were inspired by some of the contents, there were also apparent economic deficiencies throughout the model.
That evening, we decided to work on an ESD fork as a side project that we thought would take 2-3 months. While the original problem attempted to be solved was high carrying costs on-chain, over time we realized that Beanstalk was actually an attempt at creating decentralized fiat money, backed by nothing but the credit of the protocol. In the end, Beanstalk, while influenced heavily by ESD, was designed from first principles from the ground up. Instead of a 2-3 month side project, it was a 8+ month sprint to design, develop and ultimately deploy Beanstalk on the Ethereum mainnet on August 6, 2021.
Having appreciated the grand ambitions of Beanstalk, we decided to deploy the protocol in the fashion we believed would set the protocol up for the highest probability of long term success. There was no pre-sale, pre-mine, team allocation, or any sort of public or private funding round. We were totally anonymous. The first 100 Beans were minted when the protocol was deployed. Since then, Beanstalk has been allowed to run its course.
Over the next 8+ months, the Bean supply grew organically (without subsidies) to over 108 million. The value of assets trading against Beans in liquidity pools grew to ~$77 million. The Bean price crossed its peg of $1 over 4,000 times. And perhaps most importantly, Beanstalk decreased its debt level dramatically, from ~1600% to ~600%, demonstrating its ability to deleverage in an autonomous fashion. Until Beanstalk was attacked on April 17, 2022 and rendered temporarily useless. The attackers stole the $77 million of liquidity that traded against Beans, thereby destroying their value.
The version of Beanstalk that was attacked on April 17 was a significant improvement on the original model. The original Beanstalk model deployed in August, 2021, while good enough to not die during the first pump and dump that killed the vast majority of previous attempts at non-collateralized stablecoins (e.g., ESD, DSD, TSD, Basis Cash), wasn’t good enough to sustain itself in perpetuity.
Since launch, Beanstalk has been improved by more than a dozen substantive Beanstalk Improvement Proposals (BIPs). Most notably, BIP-7 introduced the Convert functionality within the Silo that is now a core piece of Beanstalk’s peg maintenance model. Unfortunately, the same permissionless on-chain governance protocol that facilitated the Beanstalk DAO’s implementation of these changes was attacked. Nonetheless, it is the success of each BIP in continuously improving the model, as evident in the data, that ultimately gives us hope about Beanstalk’s long term chances of success.
At present, it is unclear whether Beanstalk is good enough to sustain itself in perpetuity. There still remain some inefficiencies in the model. However, Beanstalk is likely good enough to continue to sustain itself in the short term. With the benefit of sufficient future positive iterations by the DAO, hopefully Beanstalk can sustain itself in the long term. We are very excited about the opportunity to continue participating in discourse with other members of the Beanstalk community on further improvements.
So here we are. About to collectively reembark on this journey. This time we are doxxed. There is nowhere to hide in the instance of failure. It is in that spirit that we take this opportunity to raise some of the questions on our minds about the long term sustainability of Beanstalk, and its role in the permissionless economy that is fast approaching.
Can fiat money be better than hard money, if arbitrary spending is entirely removed from the system? Is currency inflation acceptable if it is to create price stability, and the seigniorage is transparently, autonomously and fairly distributed? Is such an inflationary environment preferable to a similarly transparent, autonomous and fair deflationary environment (BTC/ETH)?
Can fiat money sustain itself without the rule of law to enforce its acceptance as legal tender?
How should we define success? If Beanstalk oscillates the Bean price above and below its peg for 10 years, or 100, or 1000, is that success? How many crosses need to be made in that time? If Beanstalk expedites the adoption of decentralized technologies by making on-chain dollars cheaper in the short and medium term, but is no longer needed and ultimately collapses because of the adoption of ETH (or BTC) as a global medium of exchange in the long term (which Beanstalk helped bring about), would that be success or failure? The lack of a good answer here is somewhat comforting.
What should Beans be pegged to other than just other fiat currencies? How does this affect the sustainability of the model given the massive tailwind the devaluation of the USD is for the protocol? Without this tailwind, is the model sustainable? What would it actually mean for Beanstalk to issue a Bean with the goal of being stable, not compared to another fiat currency, but some amount of purchasing power? What is price stability in the context of a sophisticated economy? Could Beanstalk sustain a Bean pegged to Bitcoin?
Is Beanstalk dependent on Bean eventually finding external utility, or is the model’s protocol-native utility sufficient? Given the nature of the Silo, what qualifies as external utility?
These are some of the questions we currently ask ourselves. While we lack all of the answers, we remain humble in pursuit of them.
The nature of these questions reflects our opinion that Beanstalk is likely already strong enough to scale significantly and sustainably, as it had started to prior to the attack. One of the main attractions of the more aggressive Barn Raise strategy laid out in BFP-72 is that Beanstalk is likely being Replanted with a ridiculously high Pod Rate in the worst a) macro environment in at least a decade, b) crypto market in years, c) stablecoin market of all time, and d) endogenous circumstances possible, as a result of the attack. This presents an incredible opportunity for the model to demonstrate its efficacy. We will all know very quickly if it is working or not.
But the thing about a system like Beanstalk is that it works until it doesn’t. You can never actually know if it works, only that it has worked so far. So much uncertainty is scary, particularly without a clear definition of success. Perhaps we are foolish for trying. While nobody can answer the above questions at present, the beauty of a free market is that time will.