Beanstalk - Dynamic peg maintenance mechanism

Primer: Beanstalk is a decentralized credit-based stablecoin protocol. This article focuses on the dynamic peg mechanism that is fully decentralised, relying on a series of adjustments that seeks to incentivise different stakeholders to act in a manner that restores the peg

Introduction

Beanstalk uses an ERC-20 token called $BEAN as its Stablecoin. Beanstalk consists of three interconnected components: (1) a decentralized price oracle, (2) a decentralized governance mechanism, and (3) a decentralized credit facility. By using protocol-native financial incentives to coordinate these three components, Beanstalk creates a dynamic peg maintenance mechanism to regularly cross the price of $BEAN over its value peg without centralization or collateral requirements.

We’ve written at length about what Beanstalk protocol is all about from our podcast summary here. If the terminology is confusing, you should go back to take a look at the summary again to refresh your memory.

Price Peg Mechanism

Today, we’re going to focus exclusively on the unique price peg mechanism that can’t be found anywhere else in the DeFi space. But first, we’d like to offer an analogy of the mechanism.

We find that the mechanism is very similar to riding a bicycle. If you find yourself tilting to the left side, you adjust the handle and shift your body weight to restore balance. If you overcompensate and find yourself tilting to the right side, you make adjustments again to make yourself balanced and stable again. The bicycle can never be perfectly balanced at all times. It only appears to be balanced because of micro-adjustments made to fine-tune the whole system. The better you are at riding a bicycle, the lesser the magnitude of the deviations away from the stable position.

And that is exactly how the price maintenance for Beanstalk works. There are 4 optional peg maintenance tools available : (1) increase the Bean supply, (2) increase the Soil supply, (3) change the Weather, and (4) sell Beans on Uniswap. At the beginning of each Season, the Beanstalk price oracle calls up the price of $BEAN and evaluates the debt level to dynamically adjust the Bean supply, Soil supply and Weather.

$BEAN price low

When $BEAN price is too low, Beanstalk:

  • Increases the Soil supply

  • Raises the Weather

By doing so, people are incentivised to sow more Beans immediately to get Pods. Since the Pods ripen at a FIFO basis, the sooner the Beans are sown, the higher the returns will be. This causes the Bean supply to decrease and creates demand for Beans, thus the price of $BEAN will rise to restore the peg.

$BEAN price high

When $BEAN price is too high, Beanstalk:

  • Increases the Bean supply

  • Lowers the Weather

To increase the Bean supply, new Beans will be minted. 50% of the newly minted Beans will go to Silo Members and the other 50% will go to Pod Harvests. Beans will be distributed to the Silo Members based on the amount of Stalk held by the Members as a percentage of the total outstanding Stalk.

As the Bean supply increases, the price of $BEAN will fall and thus the price peg is restored. In order to prevent extreme inflation, there is an event called the Season of Plenty. This happens when the price of $BEAN is greater than $1, the debt level is less than 5% for 24 consecutive Seasons. Beanstalk will mint enough Beans, sell them directly on Uniswap for ETH in order to bring down the price of $BEAN to $1. The ETH will be rewarded to Stalk Holders and is immediately claimable.

Infographic

You can look at the infographic we’ve done up below to see the entirety of the dynamic peg maintenance mechanism. Remember the analogy of the bicycle? Beanstalk will adjust the Bean supply, Soil supply and Weather to incentivise the different stakeholders to act in ways that will restore the price peg of Beans.

There are other nuances not mentioned in this article because it is out of the scope of this article. Interested readers can pull up a copy of Beanstalk’s whitepaper to do a deeper dive into the details here.

Alternatively, one can always drop by their community to find out more:

Twitter | Medium | Discord

NFT giveaway

Beanstalk has a soon to end NFT project built on top of Beanstalk. Up to the top 10 sows in a Season are eligible for an NFT. The collection is called BeaNFTs Genesis and each NFT has different rarity levels that are generated based on the unique Sow transaction made. The BeaNFT event started at Season 1200 and will run until the start of Season 1800. Up to a maximum of 6000 total BeaNFTs can be minted.

The NFT has utility as well. Having a BeaNFT will grant exclusive access to a Discord channel, upon verification. NFT holders will also have voting power over BeaNFT fee distribution. More details about the BeaNFT Genesis Collection can be found in the Medium article here.

If you’ve bean thinking about Sowing your Beans, go for it! You will rather bean there and done that, then look back in Heinz sight and wished you’ve done it!