🧵 Algorithmic stablecoins: case of $BEAN
This thread was written by @DeFi_Made_Here. I am posting it to help him gain a bigger audience. Please go to his page and make sure to follow him for more great content! Everything below this was written by him.
First of all let's understand what kind of stablecoins exist and what are pros and cons for each of them. There are three main types of stablecoins: fiat-backed ($USDT, $USDC), overcollateralized ($DAI, $MIM) and algorithmic ($UST, $FEI).
The most popular stablecoins are backed 1:1 by fiat currency. Fiat collateral remains in reserve with a central issuer or financial institution, and must remain proportional to the number of stablecoin tokens in circulation.
Because the underlying collateral isn’t another cryptocurrency, this type of stablecoin is considered an off-chain asset. Users can not verify how real is the backing of the stablecoin and rely on regulators to investigate the legitimacy of the backing funds.
CFTC Fines Tether and Bitfinex $42.5M for ‘Untrue or Misleading’ Claims
coindesk.com/policy/2021/10/15/cftc-fines-tether-and-bitfinex-425m-for-untrue-or-misleading-claims/
Crypto-collateralized stablecoins are backed by another cryptocurrency as collateral. This process occurs on-chain and employs smart contracts instead of relying on a central issuer. You are locking your cryptocurrency into a smart contract to obtain stablecoins in return.
Crypto-collateralized stablecoins are also over-collateralized to buffer against price fluctuations in the collateral asset, so we can say that in some terms it is an inefficient use of capital. For example to take a loan of 1000$ you have to deposit 1500$ worth of collateral.
Algo stablecoins don't have any assets or collateral for backing them. So, how are algorithmic stablecoins classified as stablecoins when they don’t have any collateral for backing them up? Instead, they follow an algorithm for controlling the stablecoin supply.
With the rise in demand, new stablecoins will be minted to bring the price to the peg. In the event of considerably low coin trading, the system will reduce the number of tokens in circulation.
Algo stablecoins have the highest level of decentralization. On the other hand, they depend on continual growth for ensuring success. You should know that there is no collateral involved with algo stablecoins for liquidity, and everyone can lose money in case of a crash.
So let's come back to the @BeanstalkFarms. It is complex to understand all the soil, beans, pods, weather, etc terms there, but once you get it you can find great opportunities.
The protocol mints new $BEAN (stablecoin) when the price is above the peg and when it is below the peg users are incentivized to buy back $BEAN from the market and burn it (sow) for the Pods (NFT which is redeemable for $BEAN at 1:1 ratio when the price is above the peg).
Additionally users are rewarded with an interest rate (weather) for sowing $BEAN (or $ETH) into the Field (you need Soil which is representing how many Beans the protocol is willing to borrow)
Weather (interest rate) is currently 7080% and for lending 0.1 $ETH today you are getting 19000 Pods in return which is equal to 19000$. But all the Pods are redeemable on first in - first out principle.
At the current harvest rate (how fast the protocol is repaying the debt) newly sowed Beans will be repaid when Beanstalk m.cap reaches 1.3$ B (current m.cap is 42.2 M)
As I mentioned before you can harvest Pods when the price is above the peg: protocol mints new Beans and they are distributed to SIlo depositors (liquidity providers) and Pod owners in 50:50 ratio.
So to earn interest without waiting for a pod line you can deposit @Uniswap / @CurveFinance LP or $BEAN to the SIlo and earn passive income. You will be rewarded with $BEAN (when new Beans are minted 50% are distributed to liquidity providers), stalk and seeds.
Seeds are growing more stalks over time and Stalk is the governance token and also entitles users to a portion of future $BEAN mints. These are automatically deposited & compounded in the Silo. If you remove liquidity from the Silo your Stalk disappears.
Based on the last 30 days data the APY is ~15% for providing LP tokens. The longer you provide the liquidity in the Silo the higher is the return on your investment as your Stalk is growing.
There will be a possibility to stake LP tokens from @convexfinance so you will be getting $CRV and $CVX rewards on top of what you are getting now.
But I told you about 80% APR in the beginning and now I am telling you about ~15% APY. This is because I haven't told you about the market where you can buy or sell Pods.
You can place your order or fill someone else's order based on place in line, price and amount of pods.
Little below there is a chart which gives you a visual representation of the orders as per the position in line and price.
You can zoom in the chart to see the orders closer. I found out it has a small UI bug, some of the orders are shown very close to each other despite they have a big difference in the line order. And the place in line doesn't always align with the X-axis.
By searching manually through the orders I found very interesting offers. I will show a couple of them to you.
20% discount on the pods with a 1.5M place in line. As per current harvest rate (how fast the protocol is repaying the debt) you will be able to redeem Pods for the Beans in less than 3 month. 20% on stables in 3 months = 80% APR.
This order is already empty but you could have bought Pods with 85% discount and redeem it for the Beans in 10 months which will give you more than 100% APR.
Note that given APR are based on the last month harvest rate and it is subject to change. When @BeanstalkFarms start getting more adoption and there will be more demand for $BEAN the harvest rate might increase as well.
Summing up there are three ways to earn with @BeanstalkFarms:
- become a liquidity provider (I am waiting for the yield bearing tokens);
- sow Beans for Pods and wait for the Pod line (if you expect fast growth of the protocol);
- search for the best orders on the Pod market.
Please DYOR and consider all the risks associated with investing in cryptocurrencies! Do not invest more than you can afford to lose. Thank you and stay safe.
Remember that this thread was made by @DeFi_Made_Here. Follow his account for more great content on DeFi.