When Beanstalk Farms became a supporter of Blec Report back in February, I didn’t know much about the project aside from the fact that the team must be committed to transparency if they’re willing to sponsor my work. The Beanstalk crew was aware that their support would open them up to my unbiased review of their project and that their financial support wouldn’t affect my opinions one way or another.
I’ve spent the past several weeks learning about critical aspects of how the protocol works. Following is an unbiased and objective review of the Beanstalk protocol.
First and foremost, before we get into any of the details of how Beanstalk works, it’s important for you to understand that this project is under the total control of a well-documented multisig admin key. This key is capable of making unlimited updates to the protocol and even draining all of the liquidity from the required Curve pool. The team hopes to change this one day in the future, but until then, if you do choose to engage with Beanstalk, you should not engage with any money that you’re not completely willing to entrust to an anonymous stranger. The same goes for any DeFi project that is fully upgradable by an admin key.
Secondly, it’s important for you to understand that this protocol was exploited in the past for $181 million. The exploit occurred due to a manipulation of Beanstalk’s decentralized governance system. After the exploit, the team chose to continue development but centralized the protocol under the above-referenced admin key. This change sealed off the vulnerability and will prevent it from being exploited again, but it also centralized the development of the project under a small group of developers.
What is Beanstalk?
Beanstalk is an experimental protocol that aims to develop an unbacked, low volatility form of money tracking the US Dollar and potentially any asset’s price. Its current iteration is an uncollateralized algorithmic stablecoin with a soft peg to $1 USD.
BEAN has been in a steady depeg for months, currently sitting around 91 cents. The developers claim that this “normal behavior” that its credit-based system is designed to correct eventually. Whether or not you agree that this system can work organically should dictate whether or not you use Beanstalk.
Here’s a very simplified look at how this “credit-based” system works from the lender’s point-of-view:
- You use ETH to buy BEANs off the open market (currently limited to Curve BEAN/3CRV liquidity pool).
- You lend those BEANs to the protocol (they get immediately burnt out of circulation) and receive PODs at the current multiplier (which is at a massive 11,000%).
- PODs are theoretically redeemable for BEANs “in the future” (you hope).
- Example: if 1 ETH = 2000 USD and 1 BEAN = 1 USD, you will receive 2000 BEANs, and if you agree to burn those BEANs you’ll receive 218,400 PODs that you may be able to redeem for 218,400 BEANs.
So, here’s the catch. You can’t redeem those PODs until the following occurs:
- When BEAN value is over $1, just enough PODs can be redeemed to help bring the price down to $1.
- The PODs are redeemed in the order that they were created. Currently, there’s a backlog of over 800m PODs that would have to be redeemed before your’s gets redeemed.
Beanstalk has a number of other ancillary features, but the mechanism that I described above is the most important part of this ecosystem for you to understand before using it.
How’s it going?
BEAN is currently valued around 91 cents and the lending multiplier is at an astonishing 11,000%. The high multiplier aims to encourage lenders to participate by buying BEANs off the open market & burning them, and in doing so, they’d drive the price up toward $1.
But, this incentive is not working. Not yet, at least. You can buy and burn $100 worth of BEANs with the “promise” of receiving $11,000 worth of BEANs in the future. However, it seems that those who have been exposed to Beanstalk thus far have decided that this is not a sustainable system.
Beanstalk’s dedication to developing a new kind of stablecoin is admirable, and the team deserves recognition for being open to constructive criticism. However, stablecoins should not be gamified to the extent that they can’t even work without the involvement of speculators. Currently, this is the place that Beanstalk finds itself. Users can participate by lending BEANs to the protocol, but they are gambling on whether or not more people will be attracted to the high multipliers and also decide to speculate. This creates an unstable, and unsustainable, situation for a “stablecoin”.
But, there may be hope!
It’s worth noting that the Beanstalk team is actively working on improving the protocol.
There are a number of “governance” proposals upcoming (“governance” is in quotes because tokenholders do get a vote, but it is largely ceremonial, as these changes are actually getting deployed by the multisig). One of these proposals would result in a change to the incentives offered for staking.
Today, users can stake either BEANs or BEAN/3CRV LP tokens to gain voting rights in the protocol (aptly named “stalk”). But if they want to switch from holding BEAN to holding Curve liquidity, their voting rights are affected.
Once the proposal passes and is implemented by the multisig, BEANs will be able to be seamlessly swapped for BEAN/3CRV liquidity back and forth without giving up earned governance voting rights. This change could result in more people removing BEAN/3CRV from the Curve pool and converting it to 100% BEAN, theoretically driving the price of BEAN back up towards $1.
If Beanstalk does see an organic push back towards its peg, that could mean a great payoff for those who have enough faith in the system to support it by buying & burning BEAN today.
While there’s no guarantee that these changes will be successful, it’s encouraging to see that the team is aware of the problems and is actively trying to fix them. Regardless, Beanstalk is a high-risk experiment, and you should definitely not treat it as an investment. Not yet, at least.
If you’d like to learn more about Beanstalk, visit their website. Questions? Drop a comment below.