Beanstalk University Class #63

March 14, 2023
0:00 Introduction • 0:29 Overview of what happened to SVB • 1:38 Publius’ thoughts on the risk of USDC • 6:30 Since this can happen to any asset would Beanstalk want to limit exposure to one asset? • 9:49 Could Beanstalk not use an oracle if it is invalid? • 13:35 What lessons can be learned from this event? • 18:55 Closing statements
Beanstalk University


Meeting Notes

Publius’ thoughts on the risk of USDC

  • When you are holding cash there is an expectation that you no longer own that cash and the bank are lending it out. When you own treasuries that are held by a custodian you are now owed something by the government. For USDC, they held some percentage of their collateral in a bank that experienced a bank run. There was an open question if the cash that Circle deposited will be able to recover. Publius thinks it is interesting how fast the markets moved after this news. This price movement also affected the 3Crv price, Beanstalk assumes the price of 3Crv is the virtual price. This affects Beanstalk because it assumes $1 and if that is not the case Beanstalk cannot accurately price one Bean. A Bean:Ether pool will reduce this risk.

Since this can happen to any asset that trades against Beanstalk would Beanstalk want to limit the exposure of one asset?

  • When the Stalk gauge system is implemented Publius thinks it is important to have rules or classes of assets that are voted on by Stalk holders. So Stalk holders could say Beanstalk should only have a max exposure of 20% to USDC. The maximum amount of liquidity Beanstalk accepts by one centralized source is X. The rules will have to be designed very thoughtfully.

Could Beanstalk not use an oracle if it is invalid?

  • Beanstalk would not be to take new deposits when the BDV oracle is paused. Currently, you can update your BDV but it only updates upward. There is an open question if Beanstalk should continue considering the oracle valid even if the oracle is invalid. This would create an arbitrage opportunity and this does not seem efficient to Beanstalk.

What lessons can be learned from this event?

  • Publius thinks there can always be a lot of lessons learned from these events. There was a bank run and the question was if depositors will be made whole. There was a lot of political pressure to make depositors whole. This is the continuation of the centralization of banking power. Publius thinks the heart and soul of a healthy economy should be small businesses and P2P. These actions should be done in local banks. Publius thinks this is what happens when the government has such a strong input on the economy and it is destructive to productivity.


How's it going for this? I'm doing well, man. How are you? Oh, this one here. So we kind of had a crazy weekend or an eventful weekend, and we're all in this class. Maybe to recap it, go over it, and then discuss its overall impact on on buying stock or what, you know, what? What do we think? Or take outtakes from it.So maybe just summarize it kind of quickly. Silicon Valley Bank have had a gap for whatever reasons, what they did. So there was a mismatch for their assets and liabilities that they had, which spurred the bank on. This bank run eventually led to the bank being sued and lost. So over the weekend there was what is also one of the customers, this assertive social circle uses that bank to hold some of their collateral, and that led to to use the c D pegging before before to continue their run on on its impact.And what happened there. I think what I thought was was interesting is that we always kind of looked at USC as the risk of years of keeping centralization and not really, you know, the collateral or the collateral that it holds was always thought of as the safe thing to an extent. But, but, but they did have it The, the, the the vector of attack in this case was that the collateral that the circle was holding was what these or sort of that it was, it was lost.What are your thoughts on this maybe that you know, the the risk of collateral is not only the the centralization, but also, you know, the risk of losing that asset for whatever reason.Well, fundamentally, when you're holding cash at a bank, you you no longer own the cash. And there's an expectation that the bank is lending out that money. Whereas when you own treasuries directly and they're held with a custodian, you're now owed something by a the government. And so the the basic idea is that what happened over the weekend is the percentage of USD C or the collateral for USD C that was patched, but some percentage of it was held that a bank that went experienced a bank run.And during that period of time where there was a question as to whether or not the the depositors in the bank, particularly the larger ones, would be made whole or not. At that point in time, there was an open question as to whether the cash that in effect circle had deposits in it or lent to Silicon Valley Bank.Whether that was going to be able to be recovered at that at face value or at at the value that circle believed. And what was fascinating was how quickly the market moved as soon as the news broke, pretty much. And then the the estimations of the pricing of the the risk associated with the cash held at the Silicon Valley Bank.So there was a lot of real time discussion happening on Twitter and more meaningfully in the markets around pricing the the the collateral under USD three and basically then that also had ripple effects into DAI, which is primarily collateralized by USD three and relative to or related to stock. Both the usdc and the dyed pegs are then affected.The three curve price where being stock assumes that the value of the three curve is the virtual price and in short, there there is a as has been experienced in the past where the usdc peg, for example, there is no factor from being into how much value the USD fear the Usdc or the Dai in the pool is actually worth.It's assumed to be a dollar, and when that's no longer the case and the pool becomes significantly out of balance, then Bienstock actually is unable to perfectly price or accurately price to even at the moment the value of a being relative to a dollar. So a lot of very interesting series of events and different things to talk about related to it.But ultimately it's, it's also a good reminder that the current implementation of Bienstock is not sufficiently decentralized from the perspective of the majority of the entirety of its liquidity at the moment is effectively exposed to things like this usdc fee fiasco or a similar fiasco for tether or even a similar fiasco for DAI, which is a much smaller thing.So the fact that all of being stocks liquidity is is still against the curve presents a significant risk to the system. So hopefully a bit pool will will alleviate some or a significant portion of that. So and the fiasco that you maybe described probably to an extent can be imagined for any maybe as a trades against against them.I understand of course that is in specific is kind of different given that if something happens, if the ecosystem starts to be more of a problem, then the price itself. But as you said, having a meaningful is going to alleviate some of that, let's say that. But do you think there is a percentage in general that you would want to target and be?You know, this is a range that is acceptable? No. As a trader, like, I'm seen as more than 20% or something like that. So when the stock gauge system is implemented, one of the factors that should likely be considered by the game system is the distribution of liquidity that trades against beans. And in theory it makes sense to have sort of rules or classes of assets that there are limits voted on in some capacity by stockholders.And so what that might look like is the maximum U.S. DC exposure acceptable to be in stock is 20% and so whether that's in its incentives for being USD C or USD C or being three curve because all of them are ultimately or even being die because all of them are ultimately usdc exposure in some capacity, there could be some cumulative consideration of the liquidity that's being provided, and then the incentives for providing liquidity to being stock change based on how much liquidity there is up to that rule.But then there could be a complementary rule around. There can be, you know, the maximum liquidity being stuck, accepts held by a single centralized party is, you know, y or something. And so anything it would be a similar rule. But, but it may be slightly different in the sense that there may be assets held by similar custodians or or issued by similar asset issuers that are the goal is to limit the exposure to anyone issuer of an asset or any one custodian or any one type of asset per se.So the rules in particular will have to be designed thoughtfully. And then also the way that the risks or the relationships between the various assets are encoded on the silo whitelist, such that CAGE participants can then vote on the rules and then the silo knows how to interpret the exposure that it has a based on those rules is not going to be so simple.But that's that, you know, from a generalized perspective, that's how being stock and try to limit risk to any one issuer. Okay, fabulous. I wanted to maybe discuss a little bit the the Oracle point or perspective. Let's see. So user feedback on chain and then, you know, the person that you know up until until a tripping at some point maybe let's say you know if you're used to order you'd be like I don't want to, but I'd like I can wait because I believe you know that or I don't agree, let's say with a panic.I'm I believe that, you know, it will actually peg or. So do you think that such an input or action can be done or implemented on chain or, you know, or can be part of an oracle, basically, where, you know, even though the price and that tool went down, we are not going to take action. Is that something valid to think of?Or you just have to pick a place and you know, if it happens, it happens. You can you can't liquidate. What do you mean by you have to pick a price By the have to pick a price. I mean, just pick a price. Oracle So whatever price it comes from, you know, from that point, this is it. Well, the price Oracle can be arbitrary, but you're asking like two different questions.One, what where does the price or the body of a of a given asset come from? And then separately, how should Beanstalk think about limiting them? So we should almost bifurcate the discussion. Right. And maybe, maybe what I'm thinking is, do you think having an option to disregard the Oracle price is something something was so, you know, the stock would have an input to be like even though this is the price we have to take.Maybe that's equivalent to oppose or something like that, but we disregard the disregard that Oracle price. Would you, would you suggest that in that situation the depositors continue to receive credit for the BDB, for that they lose stock and seeds for that period of time? I'm unsure here. I'm going to think that's what because currently when you deposit the issue is that you can't take new deposits.If the if the BDB or Oracle is passed currently the the BDB doesn't update or you can update your BDB, but it only updates upwards. And so to some extent there's no problem for existing deposits. If the if the BDB Oracle doesn't work for a short period of time. Uh, but there's a separate question as to whether or not to continue to consider the Oracle is valid even when it's known to be invalid.And that seems like a mistake because it introduces some sort of arbitrage opportunity in the system where you can basically take advantage of the inaccurate Oracle data, which is obviously suboptimal for being stock perspective. Okay. I think this is this is it from from my end on on discussing the Silicon Valley Bank, let's say spinoff published before maybe having any any initials on your end.Let's let's pause for a minute and see if any of the audience want to ask any question about about this incident or or anything about the charter. Okay. Closing topic, You what are the major lessons learned from from this incident? Well, there's always a lot to be learned, but the reality is that this was a pretty it was a bank run and the open question immediately became what's going to happen to depositors?And there was a lot of political pressure to effectively bail out the depositors and on the on the one hand, it would have been really horrible for all of those depositors in Silicon Valley Bank to do their money. On the other hand, this is the continuation of the centralization of banking power and the ability to issue loans and it's hard to imagine that having a very small set of banks is more optimal than having a lot of smaller community and regional banks, because lending is fundamentally a local phenomenon.And on the one hand, it's great to have big banks that can facilitate massive deals, the like the heart and soul of a healthy economy should really be small businesses and P2P transactions. And currently it's it's looking less and less likely that people and businesses are going to be able to bank with local banks. And that's very unfortunate from our perspective.And it just really further hammers home the need for the need for an alternative for for people to access credit in a in a fair fashion and furthermore, when you consider how from an economics perspective, the the crash of the bank effectively forced the hand of the government to backstop depositors to prevent a run on all of the other banks.At the end of the day, it's like a philosophical question is the is is saving the depositors worth what is effectively creating significant moral hazard of if you're running a bank, you may lose your job, but your customers are are always going to be fine. That's a so weird proposition to make to lender, right? So you can just lend however you want and you'll always be fine.Like, Yeah. And this is this is what is what happens when the government and in particular the the Federal Reserve and the Treasury have just such a strong input on the economy right now. And it's it's, it's in my in my opinion, largely destructive to productivity, that this is the way the incentive structures are working. And so the the need for a for an open system that people can opt into peacefully that is not, you know, having the scales tipped by a single participant and naturally trends towards more local and P2P transactions and at some point hopefully loans hopefully this is an alternative that people will ultimately find useful.So there's a ton of work to be done to actually facilitate real economic activity, which is something we've spoken about a lot. But this weekend is just a very potent reminder of why, why being stuck is inevitable from our opinion. And this is is where we're going. So we're excited to be on board and there's are a lot of work to be done.Agrees here on what I've been very excited to see or or really sensitive to whether it's potentially see the outcome of it.But thank you for this, as always, for taking the time to to go through this. And I think to see someone type in there, they're saying, I sound tired. Yeah, I didn't didn't get the best night's sleep last night, but sorry about sorry about that coming through. We still got the good the good news, though. All right. Well, take care, everyone.Thank you. You have a good one.