Field: The Most Innovative Lending Facility In Crypto

The Pinto credit facility

This document provides a high-level intuition for the Field and its design. For a basic explanation of key terms, see The Field (Simply Put).

Creating a Competition to Lend to Pinto

One of the two primary problems that an algorithmic stablecoin must solve is how to reduce supply in an efficient fashion without compromising the utility of the currency (e.g., through rebasing).

Every time the price of the stablecoin is too low, there is excess supply on the market. The protocol needs a way to remove supply from the market in order to return the price to its value target.

Pinto uses the Field – its protocol-native credit facility – to efficiently attract lenders and reduce supply.

Pinto must offer an interest rate high enough that a prospective lender views it in her interest to lend to the protocol and is incentivized to lend immediately rather than wait for a higher interest rate.

There are two key components to incentivizing a prospective lender to do so: the first is to create risk for waiting, and the second is to minimize the benefit of waiting.

The first component is achieved through the introduction of a novel debt structure: Pods. Pods become redeemable for Pinto 1:1 when Pinto issues new supply in response to excess demand (i.e., the price being too high) on a first in, first out (FIFO) basis.

The FIFO structure introduces risk for potential lenders who wait to lend to the protocol because others may do so first, getting in line and thereby increasing the supply growth needed for the later lender to be paid back.

Even if the interest rate for lending to the protocol may increase in the future, offering a better return on an absolute basis, if the risk due to the potential increase in the number of Pods that must become redeemable before their loan will be paid back is greater than the potential benefit of a higher interest rate, lenders are incentivized to lend to the protocol.

The Field Process

1. Pinto are Sown (lent) in exchange for Pods.

2. Pods become Harvestable Pods (redeemable for Pinto) on a FIFO basis when the protocol mints new Pinto according to the target maintenance mechanism.

3. Harvestable Pods can be Harvested (redeemed) into Pinto.

Setting the Interest Rate Properly

The second component to properly incentivizing lending to the protocol is to minimize the marginal benefit of waiting to lend to the protocol.

Pinto needs a way to efficiently find the minimum interest rate at which it can attract lenders. On the one hand, the protocol wants to attract lenders in a timely fashion, so it is incentivized to raise the interest rate quickly to discover demand.

However, the faster the protocol raises the interest rate, the higher the benefit each potential lender receives for waiting to lend to the protocol. Counterintuitively, raising the interest rate too quickly actually delays lender participation and results in worse loan terms for the protocol.

Therefore, the efficient way for the protocol to raise the interest rate during periods of time in which the protocol struggles to attract lenders is to do so slowly and steadily. Generally, the protocol would rather experience longer periods of time below its value target in order to pay a lower interest rate to its lenders – and therefore more sustainably borrow from the market – than to rapidly raise the interest rate in a misguided attempt to quickly attract lenders.

Fine-Tuning the Field: Efficient Borrowing in Practice

The Field includes three mechanisms to optimize its lending: autonomous interest rate adjustments, dynamic debt issuance to minimize instances where the protocol offers more debt than there is demand for and an auction to minimize the interest rates paid by the protocol to borrow.

At the beginning of each Season (~1 hour) Pinto changes the Maximum Temperature, the maximum interest rate it is willing to offer lenders during that Season. The Maximum Temperature is a function of the current state of the protocol (i.e., price, debt level and liquidity level) and the change in demand for debt over the previous two Seasons.

Soil represents the number of Pinto the protocol is willing to borrow in exchange for Pods at any given time. If the protocol offers more Soil than there is demand for, the market may perceive the protocol as less creditworthy. The protocol uses the Cultivation System to keep the number of Soil available to a minimum until there is demand for it, at which point the protocol ramps up the supply of Soil to match demand.

The first 10 minutes of each Season is called the Morning Auction, during which the Temperature – the interest rate the protocol is currently willing to offer to lenders – ramps up from 1% of the Maximum Temperature to the Maximum Temperature logarithmically. This ensures the protocol minimizes the interest rate it pays every Season.

The combination of these three mechanisms with the FIFO structure of Pods enables the Field to operate in a highly efficient manner.

For a deeper dive into the Cultivation System, read more here.

Economics

Pinto is credit based and only fails if it can no longer attract creditors. A reasonable level of debt, a strong credit history and a competitive interest rate attract creditors.

Pinto never defaults on debt (although in the event of Pinto no longer attracting creditors, the loan maturity date would become infinitely far in the future – see Disclosures). The protocol is willing to issue Pods every Season.

In Summary

Pinto's Field combines a novel debt structure with three distinct mechanisms to create a competition between lenders to efficiently reduce supply without undermining the currency’s utility. Pods, redeemable on a FIFO basis, introduce risk to waiting and incentivize lenders to act immediately. The protocol raises interest rates slowly and steadily in response to the state of the system and changes in demand for Soil, minimizing the benefit of waiting and allowing the protocol to discover the lowest sustainable rate at which lenders will participate. The protocol dynamically ramps up the available supply of Soil to match demand, minimizing instances where it offers Soil in excess of demand for it, and conducts an auction every Season to minimize its cost to attract lenders. Together, these features ensure supply is reduced in the maximally sustainable fashion.

Go on to the next documents to refresh on the Field's key terms and then read more about the Cultivation System, or jump ahead to read about the Sun.