Silo: The Perfect Complement to Credit
The Pinto Deposit facility
Pinto fundamentally derives its value and scalability from its creditworthiness. However, creating stability in perpetuity is a significantly more complex problem than simply issuing debt in a sustainable fashion. The Silo, Pinto’s Deposit facility, handles everything from bank run minimization to yield distribution, volatility dampening and liquidity management.
The Silo consists of multiple interconnected layers of incentives that each play a part in protocol maintenance. This short document provides a high level overview of each component of the Silo and how it contributes. Subsequent documents go into detail to explain why each component is designed the way it is.
The Silo: Pinto’s Liquid Deposit Facility
Anyone can Deposit and Withdraw value from the Silo at any time. There are two types of tokens that can be Deposited in the Silo, Pinto and Liquidity Pool (LP) tokens – which are half Pinto and half non-Pinto – on the Deposit Whitelist. Value Deposited in the Silo earns a portion of all Pinto mints.
The Silo uses the following incentive mechanisms to complement the Field to create low volatility money with competitive carrying costs:
The Stalk System for bank run minimization and yield distribution;
Converts for the efficient use of existing liquidity for peg maintenance;
The Seed Gauge for the management of the distribution of liquidity; and
The Convert Bonus and Penalty System to complement the Seed Gauge and Converts for fine tuned peg maintenance.
The Flood to minimize growth when the protocol is of growing too quickly due to inorganic demand.
The Stalk System has two primary roles: minimizing bank runs and distributing yield.
Any time someone Deposits value into the Silo, their Deposits receive Stalk and Seeds corresponding to the Pinto Denominated Value (PDV) and asset Deposited. Stalk entitles Deposits to a pro-rata portion of all future Pinto mints, and Seeds yield more Stalk every Season (~1 hour).
All Deposits are subject to a Germination Period upon their creation, currently set to 1 full Season, during which they are not entitled to earn a portion of Pinto mints. The Germination Period is designed to eliminate the potential to earn Pinto mints without holding exposure to the system by Depositing, calling the gm function to trigger the start of the next Season and the distribution of Pinto mints, and then Withdrawing the Deposited value and the yield earned in a single transaction, thereby earning yield without risk.
Upon Withdrawal from the Silo, all Stalk, Seeds and Stalk accumulated from Seeds of the Withdrawn value are forfeited, thereby creating opportunity cost for leaving during a bank run and coming back later.
For a deeper dive into the Stalk System, read more here.
Converts enable holders of Deposited assets to change their exposure within the Silo without forfeiting Stalk.
When Deposited Pinto is Converted into Deposited LP tokens, the ratio of Pinto to non-Pinto in the liquidity pool the Pinto was Converted into increases, thereby decreasing the price of Pinto. Conversely, when Deposited LP tokens are Converted into Deposited Pinto, the ratio of Pinto to non-Pinto in the liquidity pool the Pinto was Converted from decreases, thereby increasing the price of Pinto. Converts between Pinto and LP tokens enable Depositors to actively contribute to peg maintenance by buying Pinto when the price is below its value target and selling Pinto when the price is above, using value already in the Silo.
Deposited LP tokens can also be Converted to other Deposited LP tokens in a similar fashion. LP → LP Converts do not necessarily affect the price of Pinto, but do affect the distribution of liquidity.
The Silo incentivizes (disincentivizes) Converts by adjusting the Seeds rewarded to a given Deposit type and awarding (applying) a Stalk Bonus (Penalty).
For a deeper dive into Converts, read more here.
The Seed Gauge has two dimensions: the ratio of Seeds between Deposited Pinto and Deposited LP tokens, and the distribution of Seeds among Deposited LP tokens.
Pinto autonomously adjusts the relative Seed allocation between Deposited Pinto and Deposited LP tokens to incentivize changes in their proportion within the Silo, thereby increasing or decreasing the price of Pinto without altering the overall liquidity in the protocol. In particular, Pinto uses the Crop Ratio to set the ratio between the number of Seeds for 1 Deposited Pinto compared with 1 Deposited PDV of the LP token with the most Seeds.
Pinto also autonomously adjusts the ratio of Seeds among the various Deposited LP tokens to incentivize the value Pinto trades against to be distributed as desired by the protocol. The optimal distribution of liquidity is defined via protocol governance and the protocol autonomously increases (decreases) the Seeds allocated to LP tokens that are underweight (overweight) compared with the optimal distribution.
For a deeper dive into The Seed Gauge, read more here.
The Dynamic Convert Bonus and Penalty System is the newest component of the Silo and remains a work in progress. It allows the Silo to fine-tune the incentives to perform a given Convert within the Silo by awarding (or applying) a Stalk Bonus (Penalty), enabling more granular peg maintenance than is possible merely with the Seed Gauge.
There are four subcomponents to the system: Dynamic Convert Up Bonus, Dynamic Convert Down Penalty, Convert Up Penalty and Convert Down Bonus. Whether a bonus is awarded or a penalty is applied depends on the state of the protocol and direction Converted.
To date, only the Convert Down Penalty is live. This was implemented first because of the overwhelming preference demonstrated by participants to hold Deposited LP tokens over Deposited Pinto resulted in the protocol spending the majority of its time below the value target, even when the price was often very close to it.
The next subcomponent to go live in the coming weeks will be the Convert Up Bonus, which will complement the Convert Down Penalty to create more regular oscillations across the value target in instances where the price is relatively stable and close to the value target and the protocol has a healthy amount of liquidity.
A Convert Up Penalty and Convert Down Bonus can be implemented in the future once data indicate such subcomponents would make meaningful contributions to peg maintenance.
For a deeper dive into the Dynamic Convert Bonus and Penalty System, read more here.
The Flood is the Silo's way to cool the protocol down when it is at risk of overheating. Algorithmic stablecoins are highly reflexive: when the protocol is growing, the returns generated for participating in the protocol attract more demand, which leads to more growth, etc. Often, a major growth cycle is followed by high levels of outflows from the protocol, leading to significant downside volatility.
The Flood is designed to minimize inorganic demand when the protocol is growing excessively by minting additional Pinto and selling the extra Pinto directly on the market. The proceeds of the Flood are distributed to Deposits in the Silo before it started to Rain – the protocol indicator that the protocol may Flood soon.
The Flood has demonstrated efficacy at minimizing excessive growth in both Beanstalk and Pinto's early days.
For a deeper dive into the Flood, read more here.
In Summary
The Silo has multiple layers of incentives, each with a meaningful role to play in peg maintenance. The Stalk System creates the foundation, minimizing the duration and magnitude of bank runs by creating an opportunity cost for leaving and coming back, and rewarding Depositors with Pinto mints according to the amount, type and duration of their Deposit.
Converts allow Depositors to seamlessly respond to price action and the Seed Gauge using value already Deposited in the Silo. The Seed Gauge allows the protocol to autonomously incentivize Converts towards the value target and ideal liquidity distribution by adjusting the relative incentives to hold any particular assets in the Silo.
The Convert Bonus and Penalty System allow the protocol to fine-tune the incentives – or disincentives – to Convert, given the state of the protocol, to complement the Seed Gauge and maximize the efficacy of the peg maintenance mechanism.
Lastly, the Flood dampens excessive growth when the protocol is at risk of overheating due to its highly reflexive nature.
Together, these mechanisms foster peg maintenance and liquidity management by aligning Depositor incentives with the well-being of the protocol.
Go on to the next documents to learn more about the components of the Silo, or jump ahead to read about the Field.
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