Beanstalk Farms proposes that Frax Finance lend FRAX to Beanstalk via Fraxlend for its upcoming Barn Raise as its first credit activity, under the following terms:
Allocation: 5M FRAX
Interest rate: 500%
Token type: Liquid non-fungible, with rights to a pro rata share of one-third of new Bean mints until Barn Raise debt is repaid
Vesting period: Interest earned from Bean mints has no vesting period
If passed, this proposal would mean that the Frax community commits to lending 5M FRAX to Beanstalk at a 500% interest rate, paid off over the course of what is estimated to be several months beginning in early July. At the rate of new Bean mints in the week prior to Beanstalk’s governance exploit on April 17, Frax’s loan plus interest would be repaid in ~28 weeks. Note, however, that this is a very crude estimate and past growth is in no way an indicator of future growth.
Participating in the Barn Raise is a great proof of concept for the credit-based Frax model, which has been discussed significantly in the wake of the collapse of LUNA. Beanstalk will begin paying out interest on loans immediately after the protocol restarts in early July.
In practice, a credit backing would facilitate significant profit opportunities for the algorithmic supply of FRAX at the protocol level, and simultaneously dramatically improve the value proposition of buying FXS during a down cycle.
Beanstalk Farms believes that this proposal would be the beginning of a highly symbiotic relationship between Frax and Beanstalk.
Beanstalk is a decentralized stablecoin protocol built on Ethereum, using credit instead of collateral to create $BEAN, a stable and scalable asset pegged to the US Dollar.
Beanstalk was initially launched in August 2021 with just 100 Beans and no traditional funding. Over the past eight months, Beanstalk organically grew to $100M in market cap, attracting $144M in long term-incentivized liquidity.
Until the on-chain governance attack on April 17, Beanstalk’s model was working exactly as designed. During the two weeks prior to the attack, the protocol:
- Paid ~$25M back to creditors, reaching a total of ~$50M paid back since Beanstalk’s inception;
- Distributed ~$25M in interest to Depositors in the Silo;
- Attracted ~$110M in new liquidity across three liquidity pools (BEAN:ETH, BEAN:3CRV and BEAN:LUSD);
- Received approval from the Curve community for the BEAN:3CRV liquidity pool to receive gauge; and
- Reduced the protocol debt ratio by more than 50%.
From Day 1, Beanstalk has been owned solely by members of the Beanstalk DAO via a decentralized, on-chain governance structure. However, a bad actor exploited that very structure to steal all Silo assets, including ~$77M in non-Bean liquidity. This was an attack on Beanstalk’s governance model, not its economic design.
Despite this hurdle, the Beanstalk community has emerged stronger than ever and core contributors are working around the clock and without pay to get the protocol back online.
Barn Raise Overview
Since the exploit, Beanstalk Farms, Bean Sprout and Publius have had numerous conversations with capital sources interested in supporting Beanstalk’s effort to recapitalize the ~$77M in liquidity stolen from the protocol. Beanstalk has already received formal commitments of 20%.
The initial plan was to hold the Barn Raise shortly after the exploit, but conversations with larger sources of capital indicated the need for a more straightforward investment structure as well as a bit more time. The Beanstalk community also expressed strong interest in participating.
As a result of these conversations, the DAO will hold a fundraise beginning on Monday, June 6 at 4:00pm UTC and ending on Monday June 27 at 4:00pm UTC by which outside capital will lend the ~$77M to Beanstalk at 500% Weather in exchange for tradeable non-fungible tokens that earn a pro rata share of one-third of new Bean mints until being fully repaid. The Silo and existing Pod Line (outstanding protocol debt) will each earn one-third of new Bean mints until the tokens are fully repaid, at which point each will earn one-half. Interest earned will be in the form of Beans, which can then be swapped for any other crypto asset or Deposited into the Silo, Beanstalk’s native liquidity center.
Recapitalized liquidity assets in the Silo will be subject to a vesting schedule based on the percentage of the new debt repaid. If pre-exploit Silo Members choose to Withdraw before the debt has been fully repaid, they will face a haircut proportional to the amount of the debt repaid at that point.
Prior to Unpausing Beanstalk, a number of governance and security measures will be taken to protect the protocol from potential bad actors, including, but not limited to:
- Removing on-chain governance and instituting community-run multisig wallets for all Beanstalk and Barn Raise contracts, custodied by core community members and contributors;
- Undergoing two end-to-end audits with Halborn (began on May 9) and Trail of Bits (beginning in early June);
- Launching an ongoing bug bounty program with Immunefi and other leading platforms; and
- Allocating capital to retain security experts as core contributors and consultants;
- Creating a separate contract for the Barn Raise from Beanstalk itself.
For more information on governance and security changes, please refer to The Path Forward.
Commentary on Recent Events
In light of Terra’s recent collapse, we find it important to clearly articulate why Beanstalk’s three primary anti-reflexive mechanisms make it better suited to mitigate and survive a bank run. It is important to keep in mind that no economic system is impervious to bank run behavior, and Beanstalk makes no promises of holding a silver bullet. What it does do, however, is thoughtfully design incentives that aim to return the price of Bean to peg in all situations.
- The Field - Beanstalk’s native credit facility
Beanstalk relies on credit instead of collateral to maintain price stability. At its core, the Field relies on an implicit assumption that at some interest rate, there will always be a bid for debt, even during bank runs.
Take, for example, the period in September 2021 when the price of Bean fell to $0.24. The Weather, or interest rate, on protocol debt slowly increased as designed to entice lenders to burn their Beans for a future gain. However, lending at a price of $0.24 acts as a multiplier on the interest rate (in this case, ~4x), which strongly incentivizes peg maintenance.
The Field also repays debt on a FIFO basis, so lenders are incentivized to lend immediately. Whereas with Terra, there was no mechanism to reward immediate UST-Luna conversion or interest rate, so the optimal strategy for anyone looking to take a long position in Luna during the bank run would be to wait for the price to continue dropping before entering.
- The Silo / Stalk System - Beanstalk’s native liquidity center
Beanstalk’s native liquidity center, the Silo, is designed to incentivize participants to make long-term deposits. Every Bean or LP Token deposit receives Stalk and Seed. Stalk is a governance token which also receives a share of new Bean mints, and Seed generates new Stalk every Season. However, when the initial deposit is removed from the Silo, all associated Stalk and Seed must be relinquished. As a result, since Stalk grows over time, deposits are heavily incentivized to remain in the Silo. This protocol-native utility was absent from Terra, which only offered real utility in the way of Anchor’s yield, which was heavily subsidized and unsustainable.
In the event of a bank run on Beanstalk, Beans must be withdrawn in order to sell. As a result, the more Beans are removed, the more each remaining Stalk is worth. So as a bank run deepens, the incentives for staying the Silo actually grow.
- Convert - Additional Silo functionality
Convert functionality in the Silo allows participants to swap Bean for LP Tokens, and vice versa, to take advantage of Bean price arbitrage opportunities. When converting, Grown Stalk is not lost, so the option is purely yield-maximizing.
Since being implemented, Convert has had two major impacts on Beanstalk as a system: reducing price volatility and increasing the ratio of liquidity to total Bean supply, the latter of which suggests the protocol’s longer-term sustainability. From an individual participant’s standpoint, Convert allows peg maintenance to become a profit-maximizing activity, further bolstering short-term price stability.
Future Potential Beanstalk <> FRAX Integrations
Beanstalk Farms is excited about the possibility of building a strong relationship between Beanstalk and Frax Finance. Core Beanstalk contributors have expressed interest in a number of potential collaborations, including:
- Depositing Harvestable Beans (i.e. repaid Beans from the Barn Raise) into the Silo will allow Frax to participate in Beanstalk’s long-term growth;
- Creating and launching a BEAN:FRAX and BEAN:FPI liquidity pools shortly after Beanstalk’s relaunch, which will create a new growth vector for both protocols; and
- Allowing FRAX to be a whitelisted token for Barn Raise participants to lend.
Beanstalk proposes that Frax Finance participate in Beanstalk’s upcoming Barn Raise as Frax’s first loan via Fraxlend. If Fraxlend is not live by the time the loan is needed (end of June), then the loan will be deployed in an alternative manner decided between the two protocols.
Beanstalk Farms appreciates the Frax Finance community’s consideration of this proposal and is happy to help answer any questions about Beanstalk or the Barn Raise.
For: Lend 5M to Beanstalk at 500% interest rate via its upcoming Barn Raise.
Against: Do nothing.