Automated market makers (AMMs) are among the most intriguing innovations introduced by DeFi. AMMs enable users to deposit digital assets vis-a-vis varying decentralized exchanges to become liquidity providers (LPs) themselves, such that cryptocurrencies are tradeable 24/7 via liquidity pools built on smart contracts.
When new DeFi projects launch, founding teams typically incentivize their liquidity by issuing the project’s governance/revenue capture token(s) to early liquidity providers via yield farming initiatives. However, a recurring issue DeFi projects face is the removal of liquidity by “mercenary liquidity providers” as yield farming incentives are depleted. This leads to inconsistent liquidity markets for their tokens, which is not beneficial for advancing accurate price discovery and the scaling of their projects over time.
Per an extensive analysis of liquidity providers in traditional yield farming opportunities, it was noted that:
A large majority of farmers appear to exit within the first 5 days of entering a farm, and half of all farmers never stay beyond 15 days.
More recently, some DeFi projects have attempted to address the issue of mercenary liquidity by offering their tokens at a discount by bonding liquidity. Accordingly, rather than projects essentially renting liquidity from liquidity providers and issuing their tokens to them at no outright cost under a traditional yield farming program (and with no assurance of ongoing liquidity provision), projects instead keep the liquidity and sell their tokens at a discount to the liquidity providers in exchange. This bonded liquidity is then retained by the respective DeFi projects for their own use on varying initiatives of their choosing, vis-a-vis similarly referenced ideas of “Protocol Owned Liquidity” and “Protocol Controlled Value.”
Following a recent reflection on public goods funding ideas, I have been considering why DeFi at large seems to have not taken into account the potential for altruistic agents to serve as liquidity providers. To my knowledge, there is no explicit opportunity for users with such a deportment to be recognized more so than others. This blog post offers a proposal for engaging “altruistic liquidity providers” and fostering mechanisms which may enable more DeFi users to consider adopting such a role themselves, by exploring its potential applicability to Beanstalk Protocol as an example.
Introducing Locked Deposits to The Silo: Liquidity as a Public Good
Beanstalk Protocol’s governance and yield accrual token, Stalk, as well as correspondent Seeds that generate more Stalk over time, are allocated to BEAN-only and BEAN/ETH LP depositors in its DAO and deposit interface known as The Silo. These deposits are currently withdrawable by users, such that Stalk and Seed associated with them are forfeited upon the deposits being withdrawn.
In this sense, Beanstalk Protocol rewards skin in the game in its distinct attempt to address the issue of variable liquidity. Furthermore, the protocol favors BEAN/ETH LP deposits in The Silo versus BEAN-only deposits, with LPs currently receiving twice the number of Seeds upfront for their provision of liquidity to the BEAN/ETH pool on Uniswap V2. The reason for this is explicitly noted in the protocol’s introductory guide:
Deep and consistent liquidity in the Bean:ETH Uniswap liquidity pool improves stability.
Stalk and Seeds are currently not tradeable as ERC-20 tokens. In the near future, they will become liquid assets and withdrawable from The Silo. If a depositor withdraws their Stalk and Seed, they will not be able to withdraw the corresponding deposit associated with them unless they return the Stalk and Seed to The Silo. Again, this reinforces the idea that Beanstalk Protocol’s governance and yield opportunities from newly minted BEAN when P>$1 for extended periods is offered to users that have skin in the game.
For users that are committed to the idea of supporting liquidity for a decentralized, algorithmic based stablecoin like BEAN indefinitely, the option implicitly exists for them to keep their deposits in The Silo forever. Yet there is no explicit acknowledgement of this commitment by Beanstalk Protocol, as they are extended the same allotment of Stalk and Seed as users which intend to withdraw their deposits. Accordingly, I am proposing that an additional category of deposits be incorporated in The Silo: locked deposits.
Locked deposits would be akin to “liquidity as a public good,” as they would be exclusively directed towards upholding a far-reaching continuum of liquidity for BEAN across its various liquidity pools over time; they would not be steerable by Beanstalk Protocol for any other purpose. This may mitigate liquidity crises that could undermine BEAN’s ability to scale to become a preeminent stablecoin in DeFi, per the above-linked paper and lessons learned mentioned therein from the financial crisis of 2007/2008:
The last crisis showed that banks had not prepared for a liquidity crisis…they have not addressed liquidity and other risks in capital markets…The danger is that contagion could spread illiquidity…
The suggested incentive for users to consider locked deposits is for Beanstalk Protocol to allot more Stalk and/or Seed to locked deposits upfront upon a user’s initial interaction with The Silo; this would enable the depositor to be recognized for their indefinite skin in the game position. Thus, there would then be two general categories of deposits within Beanstalk Protocol: withdrawable deposits (BEAN-only or BEAN/ETH LP) and locked deposits (BEAN-only or BEAN/ETH LP).
Locked Deposits as Yield-Generating NFTs
Uniswap V3 introduced the concept of NFTs as representative of LP positions. In contrast, Uniswap V2 represented LP positions as ERC-20 tokens, whose values changed to reflect the underlying value of the assets in the respective liquidity pool. Corresponding trading fees autocompound within a Uniswap V2 position, whereas Uniswap V3 enables LPs to claim accumulated trading fees without dissolving the LP position itself.
Accordingly, I propose that locked deposits in The Silo be represented by a special category of BeaNFTs, akin to the recently proposed idea of NFTs as Vesting Capsules. These NFTs would encompass the associated BEAN-only or BEAN/ETH LP position, as well as the Stalk and Seeds linked to such locked deposits; all of the aforesaid tokens would be locked therein, ad infinitum.
As for Stalk generated from Seeds over time, it could auto accumulate within the locked deposit as represented by the NFT, though this Stalk would not be withdrawable; the only withdrawable asset would be newly minted BEAN when P>$1 , akin to how accumulated fees from a Uniswap V3 LP NFT can be withdrawn without removing the tokens making up the LP position.
Accounting benefits from minting such NFTs may further promote users to consider locked deposits when interacting with The Silo. The potential for these NFTs to be accepted as collateral for loans on lending platforms in the future may also promote their broader appeal among Beanstalk Protocol depositors over time.
BeaNFT Marketplace for Public Goods Funding
As locked deposits in The Silo would be represented by NFTs, they would be sellable and/or transferable to other users; the underlying ERC-20 tokens linked to a locked deposit wouldn't be able to be withdrawn by their holders, but the record of the deposit would still be exchangeable as an NFT, and its value should rise over time assuming Beanstalk Protocol succeeds. This is because the underlying Seeds will generate more Stalk to increase the holder’s governance and yield stake in the protocol relative to other depositors, and the NFTs would be yield generating since newly minted BEAN when P>$1 would be claimable.
If sales are facilitated on an NFT marketplace affiliated with Beanstalk Protocol, such that users can trade NFTs representing locked deposits for BEAN, it would promote a positive feedback loop in building utility for BEAN itself as a decentralized stablecoin and unit of exchange, akin to what we are seeing now with TreasureDAO and its MAGIC token associated with its NFT marketplace on Arbitrum. A small fee denominated in BEAN may be charged on transactions in such an NFT marketplace, whereby a portion of the fees could be allocated to funding public goods.
Conclusion
By introducing locked deposit optionality to The Silo and incentivizing it appropriately, Beanstalk Protocol could promote consistent liquidity for BEAN by attracting more committed users and/or those driven by more altruistic motives under the proposition of “liquidity as a public good.” In doing so, Beanstalk Protocol may pave the way for other DeFi projects to consider the applicability of this approach to their long-term goals and stakeholder engagement efforts, as an alternative to and/or add-on to ideas such as “Protocol Owned Liquidity” and “Protocol Controlled Value.”
Although locked deposits and their linked Stalk and Seed would not be withdrawable from The Silo, their representation as unique BeaNFTs would enable their holders to sell/transfer them, utilize them as collateral for loans in the future, as well donate them or the BEAN yielded from them towards charitable causes of their choosing. An NFT marketplace as an extension of Beanstalk Protocol may further enable all of this to be realized, while advancing the demand for and utility of BEAN as a decentralized stablecoin in DeFi imbued with foundational features that augment its use for initiatives related to public goods funding.