- What were your initial thoughts when first working on the project?
- What is the utility of stablecoins?
What were your initial thoughts when first working on the project?
- We felt that decentralized technologies are going to be critical to some of the changes that are needed to preserve freedom and liberty.
- We realized that the high demand was driving up the borrowing costs of existing stablecoins was too high for them to be practical for many use cases, like decentralized prediction markets.
- Due to the shortage of stablecoins, the only thing you really see happening in DeFi is lending and yield farming, because nothing else is cost effective compared to that.
- The collateral requirements were causing the supply shortage, due to the opportunity cost of locking up large amounts of collateral.
- We were inspired by Empty Set Dollar (ESD), but saw some inefficiencies in the model. We thought we could fork it and make some improvements. We very quickly realized that it was going to require a lot more rethinking of different aspects of the model from the ground up. We determined that it would require an entirely new codebase and a new white paper to explain it.
What is the utility of stablecoins?
- Due to the volatility of something like ETH, it’s difficult to use as a medium of exchange.
- In order to be attractive to used for a variety of transactions, you need to be able to utilize it without worrying what it might be worth in the future.
welcome to the beanpod a podcast about decentralized finance and the beanstalk protocol i'm your host rex before we get started we always want to remind everyone that on this podcast we are very optimistic about decentralized finance in general and beanstalk in particular with that being said three things first always do your own research before you invest in anything especially what we talk about here on the show second while you're doing that research try to find as many well-developed opposing viewpoints as possible to get the best overall picture and third never ever invest money that you can't afford to lose or at least be without for a while oh and as a quick reminder publius uses a voice modulator to help conceal their identity it's certainly nothing to be afraid of but it does take a little bit of getting used to and with that on with the show so you talk about hamilton and the federalist papers as being kind of foundational to the american system of government couldn't agree more along with that how would you take us through some of your initial thoughts and philosophies as you began to work through the value of the project and going from you know whatever the idea was that started you down this journey to getting a product ready for initial launch with you know with something that could be um turned around and shown to other people and start to build the team and the community around that yeah there's there's a lot there as to like how how in god's name did we get here so there's a couple different things mostly right place right time for a lot that things came together in the way that they did but to give a little bit of context as to what some of those things were we've all been in uh crypto and exposed to crypto for a various amount of time but uh five six years and all really had the the bias uh that technology built on cryptographic primitives uh and decentralized networks in particular uh are going to be a major a major part of the advancement of many of the ideas of the the american constitution which today are certainly in jeopardy uh to say the least and when we think about the the role of this technology it's still very young and there's a lot of problems with that technology and so the starting point is we want to be a a part of uh advancing the adoption of this technology which we view as incredibly promising towards achieving some of the really important changes that need to happen uh in the not too distant future to keep things moving in the right direction and uh certain things that ensure individual freedoms and individual liberties are in our opinion really important to furthering individual freedoms and this technology very clearly offers offers a lot of solutions but that doesn't really get to why a stable coin or why bean stock and why did we actually do this so one of the things that most attracted us uh when we first got into crypto was the idea of decentralized betting markets uh for the degen in all of us and uh ultimately stuff like decentralized prediction markets are really potentially revolutionary stuff like auger which is a decentralized prediction market uh built on ethereum that they did an ico for in uh 2015 uh and then it launched in july of 2018. but augur never really reached any sort of significant adoption and that was something we spent a lot of time thinking about why and sure you have ethereum fees and friction there which makes order books difficult and there's lots of other complexity that you have to get right which ethereum makes potentially difficult but ultimately augur is live you can use it and so that didn't really make sense to us as why why it never got adopted and the thing that we we kind of settled on or uh came to the conclusion of was that the current structure of the markets the currencies you had available to use on auger uh made auger really impractical to use because you could either use ethereum for example which is super decentralized and native to the ethereum network or you could use ether excuse me but but the problem was that the value of ethereum was incredibly volatile and so you're making a bet on one thing but in reality you're also taking a bet on the price of ethereum and then you could edge your risk but then that's a pain in the ass and who wants to do that and so in reality using auger in a practical way to get exposure to the things that you wanted to bet on was easier said than done so in short auger also supports stable coins coins that are pegged to the value of a us dollar for example and so you would say well why don't people just use staple coins and the conclusion that we came to is that uh because of the really high borrowing costs on stable coins it made making markets on augur really impractical if you have to borrow at 10 or 12 a year uh or but even if you own the asset now you have to judge whatever you're using your money for against the opportunity cost of lending it out for 10 or 12 percent a year uh that really changes what is a positive expected value uh decision to make uh or at least the expected value on certain actions with that money have to be much higher and that makes using auger really impractical high borrowing costs make using auger really impractical and so then the question becomes well why are there high borrowing costs well in theory at least if you have an excess amount of demand for something there's excess demand that typically results in its price going up and because you have these various different stable coins that all have pretty good peg maintenance models they're all uh because of their collateralization all relatively good at maintaining a stable price at their peg value the excess demand for these stable points doesn't manifest itself in a high price for the stable coin it manifests itself in high borrowing costs so the conclusion that we came to was that there was this huge shortage of stable coins which the market was unable to meet uh it was unable to supply enough stable points to meet demand and that resulted in high borrowing costs which made using not just auger but lots of different cool tech across d5 really impractical and that's why in reality the only stuff that you really see happening across d5 right now is lending and yield farming because nothing else is cost effective compared to that and so why is it that you have a supply shortage in short it's really hard to uh if you have a collateral requirement uh to create a stable coin if you say for every stable coin we're going to issue we're going to hold a dollar in a bank account or a dollar of ethereum and a smart contract it's really hard to attract enough collateral to mint a hundred billion or a trillion dollars worth of stable coins and if you're going to lock up 100 billion or a trillion dollars of value in a bank account or in a cdp doing nothing well there's opportunity cost associated with locking up all that capital and accordingly any collateralized model is going to have some sort of high borrowing costs associated with the requirement to lock up collateral so that's still just our thoughts that doesn't explain why we actually got started working on this so if you go back to around september it's not september thanksgiving of 2020 esd was blowing up at the time and we published just happen to all be hanging out uh around thanksgiving uh you know each other from college and just happened to be in the same place around thanksgiving and we're catching up and basically we're talking about esd and its recent success and how that was really aligned with our prior convictions that there was this structural problem with the stable coin market and the fact that esd was blowing up said to us that maybe uh our our conviction was right because esd was an attempt at a non-collateralized stable court and so in short we decided to read the esd white paper together that evening and it was very cool and inspirational and there was a lot of great content there but at the same time there were some really obvious inefficiencies and problems in their model and despite the obvious or what were obvious to us uh issues with the model the market was really eating up esd and there was a ton of speculative demand for esd and so in short we decided that evening that we could make a fork of esd in what we thought would be a couple of months um two three months at most and make some improvements fix the issues that we saw with it and roll out a competitor a fork very quickly within a couple weeks actually we kind of realized that as we were thinking more and more about the model uh it was going to require a ground up rethinking of a lot of different aspects of the model and that would require an entirely new code base and a new white paper to explain it and accordingly it went from a two three month side project to what became like an all-intensive uh nine-month sort of sprint uh until we we ended up publishing or deploying on the ethereum mainnet uh the first week of august of 2021 so that's that's the the long and the short of it and we would just say that to go back to where we started this on why we decided to be anonymous and and use a suit on them despite the fact that we put our real heart and soul into the project and you would think you'd want to put your name on that and show it proudly that that's what we worked on that and certainly there's that aspect to it but because we put our heart and soul into it we want to give beanstalk the absolute best chance humanly possible to succeed at its goal to become a global decentralized autonomous issuer of money and we felt that the benefits of putting our name on it both to ourselves individually and potentially the ability to more quickly attract people to beanstalk in the short term was going to jeopardize or at the at the margin effect in a negative way uh beanstalk's chances of succeeding at that goal in the long run so that's how we got here that's great so there are a couple things that i was thinking about as you were as you were talking the first is um the utility of stable coins versus uh let's say value driven cryptocurrency like bitcoin or ethereum where there's where there's significant fluctuation in value and i feel like this is almost a chicken and egg problem for decentralized finance in general and you you seem to kind of hit at it that we've got all this really interesting potential for things that can be done on decentralized networks new types of transactions that can happen but because of the variability and value of let's say ethereum it makes it difficult to use that particular coin as a as a mode of transaction or as a currency of transaction so so that seems to be what turned you towards stable coins but then you put in this this idea of neutral carry versus negative carry and and we could talk about that more you know either here at some of the venue basically the idea that um the utility of a coin is somewhat opposed to its value as as a lending tool which unfortunately takes away its its utility it it makes it a more difficult or a less enticing medium of transaction or less enticing currency to use to actually do stuff and so the it seems like the problem that beanstalk is looking to solve is a to create a currency that is that is indeed stable that can be used for transactions where someone utilizing it doesn't have to worry about the price of ethereum right now as opposed to the price of ethereum in 10 minutes or the price of ethereum in two years so creating stability from that standpoint and then at the same time to have that that ability to be used for practical purposes without the user feeling like they're missing out on making some type of you know five six seven ten percent return on an investment so you know eventually when we get to the point where we use cryptocurrency to buy soccer balls or pay for haircuts there is both stability and utility for the coins that are available through systems like beanstalk yeah you said it quite well and the the core design principles of beanstalk are both the response to the current structure and the statement as to what things could be when incentives are properly aligned and so uh you know maybe we'll get into some parts of the specific mechanism to get to that and and how they create those effects but ultimately that's the name of the game right when you have well-defined incentive structures within a protocol you can create some sort of a new utility in the same way that ethereum miners or bitcoin miners are spending money and spending resources to create some sort of utility that can be applied more generally to various different protocols and beanstalk is trying to be one of them