During a recent discussion with a few DeFi projects that it is collaborating with, Liquity Protocol’s Head of Growth, Kolten Bergeron, stated the following about twenty-five minutes into the chat:

“Whenever people think about stablecoins, particularly decentralized stablecoins…they kind of see us as competitors, but I don’t think I agree with that…for decentralized stablecoins to win, we have to work as a collective.”

This quote got me thinking about the potential synergies between Liquity Protocol and another stablecoin project that launched this year and is also built on Ethereum, Beanstalk Protocol.

Unlike Liquity Protocol, which offers a collateral-based stablecoin (LUSD) that is entirely backed by Ether (ETH) in its present version, Beanstalk offers a stablecoin (BEAN) that is based on its decentralized and credit-based algorithmic protocol. For a detailed and technical overview of how Beanstalk Protocol works, its whitepaper may be viewed here.

This post will specifically focus on Beanstalk’s decentralized credit facility, also known as the Field. To keep it simple, I will not address all of the other features of the project, and encourage readers to refer to the introductory overview to get a better sense of how its various components fit together.

My proposal to the Beanstalk Protocol DAO and stewards, as outlined in further detail below, is as follows:

Integrate LUSD as a one-click option on Beanstalk’s website for “active creditors” to sow Soil in the Field using LUSD directly in order to help uphold the price of BEAN whenever it falls below its USD peg.
Consider running a Liquity frontend to offer autocompounding functionality to “passive creditors” for a fee, which would allow for the automatic staking of LQTY rewards earned by LUSD holders in the stability pool, and then the redirection of LUSD and ETH earnings from LQTY staking to the Field whenever Soil is available. This could be referred to as “Protocol Enabled Lending of First Resort.”
If the aforesaid suggestions are implemented, Beanstalk stewards can assess analytics over time to consider whether it is worthwhile to put an autocompounding strategy into production to compete for Yearn’s Millennium Prize challenge.

LUSD in the Field

Essentially, the Field as a decentralized credit facility enables Beanstalk Protocol to stabilize BEAN’s price around its USD peg. Whenever BEAN’s price falls below $1, the protocol will issue debt, such that there is Soil that needs to be sown in the Field by interested creditors. Conversely, whenever BEAN’s price rises above $1, the protocol will mint new BEAN to help drive the price back down to its USD peg.

Currently, Beanstalk Protocol’s creditors can primarily purchase (also known as “sow”) Soil in the Field via ETH, and are then issued Pods; in essence, this action burns a portion of the oustanding BEAN supply to help its price trend back up to its USD peg. Pods are Beanstalk’s native debt asset, and may be harvested by creditors after a lockup period at a later date for BEANs, depending on the rate (also known as “Weather”) and associated variables at the time the Soil is sown. For more clarity on how all of this works, check out this guide to sowing on Beanstalk.

As it stands, Beanstalk’s creditors principally sow Soil in the Field via ETH. This raises a critical question: there may be interested creditors on the sidelines simply because they don’t want to part with their ETH entirely, so how can they get involved? This is where Liquity Protocol’s LUSD potentially fits as an additional money lego that is aligned with Beanstalk Protocol’s Ethereum-centered ethos.

Instead of using their ETH to sow Soil in the Field, an “active creditor” could borrow LUSD against their ETH as collateral; since there is just a one-time borrowing fee (as low as 0.5%) and no recurring interest charges on Liquity loan positions (called troves), the “active creditor” could then sow Soil in the Field via their borrowed LUSD. The lockup time for when the Pods they receive are eventually harvestable for BEANs would be incidental as long as creditors manage their troves by maintaining a conservative collateral ratio per Liquity’s parameters. Once Pods are harvestable for BEANs, a Beanstalk creditor can then pay back their LUSD debt and get their ETH collateral back from Liquity Protocol; this final point highlights the potential benefits of also launching a LUSD/BEAN liquidity pool, to ease transactions between both stablecoin assets.

A collaboration of this nature would be a win-win for both projects: Beanstalk Protocol would expand the number of its potential creditors and Liquity Protocol’s LUSD would gain further utility in the DeFi space. As Liquity Protocol is immutable in its present version and LUSD is entirely backed by ETH, Beanstalk would be integrating a decentralized, steady, stress-tested, and trust-minimized stablecoin asset as an added option for more creditors to use within its credit facility. A positive feedback loop would then be fostered, as LUSD borrowing activity would likely see an uptick whenever BEAN’s price falls below its USD peg, and in turn the added flexibility of enabling “active creditors” to seamlessly use LUSD to sow Soil in the Field in one click via its web interface would further help Beanstalk Protocol to stabilize BEAN, thereby enhancing BEAN’s use cases and value proposition as a credit-based algorithmic stablecoin over time.

Beanstalk as a Liquity Frontend: Protocol Enabled Lending of First Resort

For Beanstalk Protocol, it may also consider being a frontend operator for Liquity Protocol, enabling its creditors to interact with Liquity via its own web interface to borrow LUSD against their ETH directly there. In doing so, Beanstalk could streamline the steps its creditors would need to take in order to sow Soil in the Field via LUSD, and perhaps charge a fee for this convenience to support further protocal development. Liquity’s Frontend SDK may be viewed here.

As a frontend, Beanstalk would also stand to gain a share of LQTY rewards based on the kickback rate it sets for LUSD holders depositing to Liquity Protocol’s stability pool via its platform. As it stands, the total LUSD supply is around $900M. Of this amount, nearly two-thirds is deposited in Liquity Protocol’s stability pool, where depositors currently receive LQTY rewards that may then be staked for a portion of the protocol’s revenue in the form of LUSD borrowing fees and ETH redemption fees; LQTY is not a governance token and Liquity Protocol itself is governance-free.

Beanstalk Protocol could give users the option of automating the staking of LQTY rewards from LUSD stability pool deposits using its frontend; correspondingly, Beanstalk could give LQTY stakers the option of opting into becoming “passive creditors” for its Field. In this sense, the ongoing LUSD borrowing fees and ETH redemption fees that LQTY stakers earn from Liquity Protocol could be deployed by Beanstalk effortlessly whenever there is Soil to be sown in the Field, thereby autocompounding a user’s staking returns over the long run; in totality, this could be referred to as “Protocol Enabled Lending of First Resort.” Again, a fee could be charged by Beanstalk for this added functionality being automated in the background of its frontend, similar to how Pickle Finance is doing via its LQTY jar. And as Pickle Finance has shown, there is clear demand for this kind of autocompounding from DeFi users.

Autocompounding Galore

All in all, this discussion further reinforces the possibility of an autocompounding strategy built around Liquity Protocol being a possible contender for Yearn Finance’s Millennium Prize, as I proposed about a month ago when the challenge was first announced.

Having discovered Beanstalk Protocol after the fact, and considering its potential synergies with Liquity for augmenting the ability to partake in assymetric returns afforded to its creditors in the Field, I’m even more convinced now that this is worth exploring.

As Beanstalk Protocol is just several months old, more time is needed to establish itself as a reliable DeFi project to be considered for the Millennium Prize. Even so, by enabling the ideas noted above, analytics may be gathered to better ascertain if putting such a strategy into production and enhancing its yield potential via integrating LUSD in the Field is a worthwhile pursuit by Beanstalk stewards to eventually consider competing for the prize.

Summary

Over time, LQTY rewards to Liquity Protocol’s stability pool depositors will diminish per the issuance schedule set at Liquity’s genesis, and more LUSD borrowers will likely seek to deploy their LUSD elsewhere. By integrating LUSD in its decentralized credit facility known as the Field, Beanstalk Protocol would offer LUSD holders the opportunity to utilize their LUSD to sow Soil and receive Pods, thereby appealing to more potential creditors while better stabilizing BEAN’s price around its USD peg. Such an integration by Beanstalk may also open doors for synergies with other DeFi projects Liquity is involved with, such as Curve Finance and Olympus DAO.