Primer — Beanstalk is a permissionless fiat stablecoin protocol. Beanstalk relies on credit as opposed to collateral and is designed to remedy the rent-seeking collateralized stablecoin market. It aims to create a decentralized, liquid, blockchain-native asset that is stable relative to the value of a non-blockchain-native asset.
Disclaimer — This article will be the first of the series about Beanstalk. I am writing this as part of Beanstalk’s community grant program.
Beanstalk deployed on Ethereum on August 06, 2021. It grew organically to $100M in market cap and attracted $144M in long-term incentivized liquidity within a little over eight months.
Earlier this year, on April 17th, 2022, Beanstalk lost nearly $182 m in a flash loan attack. An attacker identified and exploited flaws in the governance design, enabling the attacker a controlling stake in the protocol. As a result, the attacker drained the liquidity pool of its assets and got away with $77 million. I have covered the exploit in an article. Give it a read!
Beanstalk launched the Barn Raise with the intent of bringing the community together to recapitalize Beanstalk. Unfortunately, it coincided with the time when billions were wiped off due to the implosion of Terra, and the space was full of skepticism around the potential of non-collateralized stablecoins.
I will be covering the Barn raise at length in a subsequent article as part of this series.
Rising from the Ashes
While the stablecoin world is still rife with the Terra UST collapse, this story is one of success, a downfall through a brutal exploit, and then recovering & rising through a community that has found a path together. How often has it happened?
On Aug 06th, 2022, Beanstalk relaunched the protocol after going offline for four months and one year after its initial deployment. It has completed two security audits from smart contracting auditing firms Trail of bits and Halborn. The protocol has shifted to a community-run multisig wallet until a secure on-chain governance mechanism is implemented.
The protocol continues to push towards solving the existing stablecoin problems. The team believes that Beanstalk will permit blockchain-based enterprises to compete with non-blockchain-based businesses by creating a low-volatility blockchain native asset with competitive carrying costs.
Application building is already underway on the network. Root Protocol, on July 26, announced a $9 million seed round to create marketplaces for finance, commerce, and sports betting on Beanstalk.
Beanstalk in Perpetuity — Path Forward
One of the most significant friction points holding the adoption of permissionless technology is the high carrying cost of stablecoins. The existing models of stablecoins require collateral, and increased demand for stablecoins means an enormous amount of collateral needs to exist. The lack of collateral restricts the scalability of collateralized stablecoins. This phenomenon has resulted in limited supply and high borrowing and lending rates. Thus, on-chain economic activity cannot compete with off-chain economic activity because of the higher borrowing costs. The supply cannot meet the demand as the carrying costs for stablecoins is much higher.
There is no denying the need for non-collateralized stablecoins, but at the same time, the economic deficiencies of these models need to be identified and improved. Furthermore, Beanstalk is an experimental technology. While it is likely good enough to continue to sustain in the short term, it would need positive future iterations to sustain in the long term.
We will be discussing Beanstalk at length throughout this series. So stay tuned for the next chapter!
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