Beanstalk is a stablecoin (1 $Bean = $1) protocol built on Ethereum. So what differentiates it from other stablecoins already in existence? Beanstalk uses credit instead of collateral to create a decentralized, liquid, blockchain-native asset. (USDC and USDT are reliant upon Coinbase and Tether and DAI needs collateral to be used). Simply put, by buying and staking $BEAN you have a high-yield interest account on US Dollars not controlled by a centralized institution.

The vision? To dominate the $100B+ potential stablecoin market and become used in a variety of other protocols and DeFi applications. It could be compared to MIM which has been lately widely adopted as evidence of the huge demand for USD on the blockchain that is not being met. However, there is a huge difference between those 2 protocols, in $BEAN you do not have to lock up any collateral.

· Goal: Learn how to earn a yield on Beanstalk and understand the terminology of the protocol, specifically the “Field” and its outstanding rewards.

· Skill: Beginner / intermediate

· ROI: Possibility of higher yields (currently 1700%) that should not be associated with an incredible risk as long as demand follows (I will explain the process).

How does $BEAN keep its $1 peg?

The value of 1 $BEAN is algorithmically pegged to 1$ USD dollar. But how exactly does this happen? When the price goes below the peg, Beanstalk burns $BEAN by issuing debt (called pods) that you can buy at a one-time fixed interest rate (which is the “weather” and currently is 2200%). When it rises above the peg, Beanstalk prints more $BEAN’s increasing the supply which ends up lowering the price because of supply/demand economics. Let´s introduce first some terminology and concepts that are required to fully understand the mechanism.

SILO= Beanstalk DAO. For beginners and people from traditional finance to understand, the SILO would be like the equity part of the balance sheet of a company. Here we have $BEANS stakers and LP providers who can also stake their LP tokens. In exchange, they receive a stalk token that entitles them to passive interest in the form of future Bean mints.

Field= the Beanstalk credit facility, basically where the magic happens. As an example, it would be the liability side of the balance sheet of a company (will explain later).

Pods= debt asset of Beanstalk. You sow $BEANS in the “Field” in exchange for pods. Sowing beans is basically burning beans in exchange for 1* 1700% pods (the 1700 % reward is the current fixed interest known as “weather”. I will develop this concept later). These pods convert to $BEANS in a 1:1 ratio when pods are harvested (which could be 2 weeks, 2 months …), depending on what position you hold in the pod line.

**Soil **= number of beans that the protocol is currently willing to borrow.

Weather: interest rate for sowing beans. At this time is 1700%, so when you burn beans (sow) you receive principal + interest= 1 + 1 * 1700% = 18 pods.

Pod line: stands for the total outstanding debt of the protocol. The total number of yet to harvest pods and convert them to $BEANS. So how does the harvesting of these pods happen? It happens every time price is higher than peg, and for the price to be higher than peg ($1) demand for $BEAN has to increase (more people buy $BEAN either to SILO or to sow in the FIELD, this excess of demand makes 1 BEAN > 1$ USD, which leads to the issuance of new $BEANS, which due to the now excess of supply causes prices again to return to peg and those new-minted $BEANS are used by the protocol to pay back the debt (pods, remember on a 1:1 ratio, we had 17 pod, we get 17 beans, when initially we had 1 bean) and people who have staked their $BEANS and SLP in the SILO on a 50/50 basis. So if 1000 $BEANS are minted by the protocol to create an excess of supply and return to peg, 500 $BEANS go to the FIELD to harvest pods in the pod line and the other 500 $BEANS go to the SILO to pay interest to the stakers and liquidity providers.

Simply put, every time there are more people buying beans than selling them (in 1 season period, which is 1 hour), more beans are issued, and these newly minted beans are used to reward both stakers and LP of bean (passive investors) and lenders of bean (pod holders, active investors).

How exactly do I earn yield?

Now that I have explained the terms let’s put it all together with a TradFi example to fully understand it:

Imagine Beanstalk as a company, where the Field is the liabilities shown in a company´s balance sheet. This liability part of the balance sheet shows the outstanding debt the company already owes (pod line) and the amount is yet willing to borrow (available sow). The balance sheet also shows the amount of debt it has already been able to pay (pods harvested). This outstanding debt of 44.1M is to be paid at a fixed average % interest of 1705%.

So, how will the company pay it and what order will it follow to pay its lenders/creditors?.

Once you lend money to Beanstalk (by burning the 1 BEAN that you bought in the open market) the Company will give you the principal + interest [1 bean + (1 bean*1705%)] in the term of pods, so 18.05 pods. The company then assigns to you the last position in the pod line.

Of all the possible methods that exist in traditional finance to repay the debt (LiFo or average cost), I strongly believe FiFo is the most suitable for the “company” because not only it is a way to reward early adopters and people who got in early, but imagine what would happen if they implemented the opposite method, LiFo (last in first out) = nobody would want to lend $ BEAN to the protocol because once they do someone else would come and get paid before him, creating a spiral where first ones are stuck and not able to materialize the return.

Once you are assigned a position in this pod line, the company will begin its economic activity. If the year (in this case is 1 hour), the season, ends with profits (because it has been able to attract demand to the project and new people come and buy $BEAN, making it to unpeg to the USD so 1 BEAN > $1) The company will pay its outstanding debt (50% of the “profit” goes to the pod line, and the other 50% to the equity holders, which are stakers of Bean and LP) by the issuance of more $BEAN. You will then see your position in the pod line move more towards 0 when harvesting will occur.

To sum up, 1700% APY is a fixed rate of lenders, however, there is risk associated (that is why it´s not that certain or “fixed” that you will receive that APY, it could be 2 weeks, 2 months, all depends on the demand for the $BEAN token).

The big picture

If you followed the thought process you now know there is only one thing required for all of this to work and that is demand. As long as the protocol has the demand it will be a success (being a fully decentralized stablecoin that does not need collateral, but credit, it should not be that hard to reach, moreover with the huge demand that is currently being taken place for USD stablecoin on the blockchain). Probably nothing.