Call for Ideas: YFI Tokenomics Revamp

I’ve intended to get more involved on this forum, and this looks like a good place to dive in. For a little background, I found my way to Yearn a little after hearing about the immaculate conception and the initial airdrop, and have a background in startups, corporate finance, and macro. I supported the growth mint in February.

I think this discussion should be more explicitly connected to the larger vision of what Yearn aims to be, and also to the narrative of how to communicate that - including why the token has value - to the intended audience.

As best I can tell, there aren’t any normies around these boards, and few of them seem to have used the protocol directly to date. If so, perhaps they are not an intended audience to focus too much energy on. This is not a criticism of Yearn at all, but a recognition of the empirical reality and the role Yearn seems more likely to play in the future of DeFi. Active vault unique users are in the low thousands. Ethereum scaling progress and gas fees are also not likely to be ready for the normies soon. All of which is to say that addressing their unit bias, which is truly absurd to see on a daily basis (EOS volumes even pumped into a top spot this week) is probably to confuse the narrative unless we are interested in the price action pump and even higher volatility than the past. Plus, the sentiment and many great ideas shared here seem to favor incentivizing governance. Holders need to be capable of understanding how this complex protocol actually works. This is a challenge even for sophisticated investors who are just now in the process of starting to understand Ethereum. Woofy is already available and meme-worthy and can be revived. Beyond that, I’m not sure addressing unit bias is worth the effort (or the cost to the unique YFI narrative).

Should Yearn more tightly focus the narrative on being a DAO-to-DAO and DAO-to-B protocol? I see it as possibly being a pervasive middleware and liquidity sink that offers the highest yields, and can abstract away all of the hard, complex inner workings of DeFi for other protocols built on top and for more consumer-oriented applications to come. This would be a significant moat. I am also in favor of solutions with built-in insurance to abstract that away as well. If this is the intended audience, tokenomic design and narrative should be focused on it. The DAO-to-DAO story is the most immediately clear to me.

With respect to DAO-to-B, sophisticated investors will be starved for yield for the rest of this decade of financial repression. Real rates have reached historic lows, and even high yield corporate bonds now yield negative real rates. These investors also currently have all of the liquidity. Yearn can choose to position its narrative as a solution, and the story of why the token has value can be interwoven with that. If the protocol wants a non-extractive relationship with its token holders, what tokenomics would further incentivize real world funds to deposit billions in capital into the protocol? What narrative could we clearly communicate to this audience? They way corporations return cash in this era is via buybacks. Appreciation is also more of the narrative these days than boring old dividends. For the record, I am not in favor of KYC or having to worry anything about permissioned CeDeFi.

I’d also be very interested to hear opinions from LeXpunK on the regulatory risks of making various types of changes to tokenomics.

To comment briefly on the talk of additional minting above, the current treasury looks healthy, the protocol is already quite profitable, and I view the likely trajectory as follows: revenues growing exponentially with expenses growing linearly. Yearn is positioned to generate substantial cash flows. This is part of the narrative that the TradFi audience will come to understand. This is also why we don’t need VCs and don’t need to think like a conventional start up. In addition to the strong income statement and cash flows, if we can also design a better way to incentivize token appreciation, we can also grow the balance sheet strategically through treasury holdings.

To reiterate, I think we’d be best served to focus on how we weave this into the overall narrative, and the narrative probably should be capable of being communicated beyond DeFi natives. Yearn has the best origin story in all of DeFi, and it continues to do very well. Token value accrual needs to be a clear part of that story. Which also means it shouldn’t be meddled with often, and shouldn’t be too complicated.

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It’s becoming clear to me that everyone in this forum is smarter than me, but I’m honestly not sure what that means for Yearn. I can’t seem to fathom why we would not be focusing on building a relationship directly with end users right now. Through my simple eyes, that means getting the token in more wallets.

Isn’t web3 about users saving souls by bringing others into communities? if someone wants to own the yearn token, who cares if they’re in a vault?

Yearn is a solution. Yet, we don’t always know what problems to focus on.

Is it possible the problems will reveal themselves as the user base grows?

  • I would also favor a veCRV-style model or some form of lockup mechanism that increase voting power and enable some fee sharing with locked YFI (veYFI) holders.

  • Also in favor of pushing the setting of strategy allocations to veYFI holders and introducing an Aave-style backstop mechanism (rewards come with responsibility and risk).

  • For the fee sharing, I would use the share of proceeds going to veYFI holders to market-buy YFI and distribute those to veYFI holders weekly. There should be an option for those YFI rewards to be automatically added to the locked balance for auto-compounding (a bit like how iFARM works for Harvest.Finance), but people who prefer liquidity may untick the box and are free to sell them; ideally this is not a tick-box, but a staker-defined %, and maybe the portion that is not automatically locked could be paid directly in stablecoin.

  • The protocol management and performance fees should be voted by veYFI holders. So should the fee split between protocol treasury, strategists and YFI holders, while each forced to stay within a certain range to avoid any party getting rekted (we could have an on-going system of gauche a bit like 1inch DAO for the Aggregation Protocol).

  • While I would love to use veYFI as collateral in the Iron Bank, I don’t think this is compatible with a backstop mechanism.

  • Very much like the ideas 4 & 5 of @m_script3_10 (discount on vault management fees and allocation of votes for protocol controlled tokens).

  • I don’t really see the point of a token split, but I am neutral there. The beauty of crypto-enabled fractionalized ownership is that we really don’t have to care about the number of units, what mater is market cap, and we already have $WOOFY to address potential unit bias.

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I believe this ship has sailed - many parts of Yearn are very likely to be illegal under current US securities law.
Off the top of my head:

  • Depositing funds in a yearn vault or strategy is a securities transaction since the transaction passes the howey test.
  • The buyback mechanic on the YFI token likely makes the YFI token itself pass the howey test
  • Yearn’s operations qualify it as a money services business, but it is not licensed to operate as one.

I don’t want to derail this thread with a discussion about whether Yearn is breaking any securities laws. I just want to point out that it is probably not productive to evaluate tokenomics revamp mechanics through the lens of existing securities laws.

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A lot of people here have mentioned veCRV.

PieDAO has recently launched its own version of veCRV that have some slight difference that may better serve YFI holders.

Staking power does not decay, so there is no compulsive lock extension. Staking power is scaled by time staked, so longer commitments increase staking benefits. You can stake multiple lots at different lengths. I find this is beneficial because it does provides a cleaner way to eventually exit if you so choose without years of progressively decaying ability.

CRV locks have become largely dominated by DAO’s over users because DAO’s have benefit of passing on boost. Here, we don’t exactly have a boost, as we don’t have a token to distribute as incentive. However we could possibly add an incentive here a la staking module plays.

Insurance is a big thing. It was mentioned earlier that YFI’s use of debt against YFI to repay the loss of hack worked out well and was repaid from protocol fees. Perhaps we can leverage the staked YFI in a boost style manner by allowing users to point their YFI as available collateral to back particular vaults. Instead of boost %, you have insured % of deposit, which is not tried yet afaik.

I can imagine a world where certain tokens pay bribes for protocol insurance. If needed, insurance would borrow against veYFI who’s insurance weight is pointed towards that vault. This debt would have priority to be repaid over time from protocol fees.

On this note, it could be very interesting to pass through debt for stakers, by fascilitating borrowing against their veYFI as a proxy for borrowing against underlying YFI. This should reduce the users vote weight proportionally to debt drawn, but not change the boost from time locked. A user can only point unused collateral as insurance backing, and perhaps an loss event may trigger liquidation if big enough vs insured portion.

Alternatively could just use boost as reduction in performance fee, which could create reduction in performance fee as a service dapps, but that would compete or possibly replace the share of performance fee given to partner dapps which direct liquidity.

Perhaps also, the use of KPI options to encourage early stakers. Doesn’t have to be too large.

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Love this idea. It doesn’t have to be through Olympus Pro (although that makes sense to me), but protocol-owned liquidity seems like a powerful mechanism.

A few suggestions have been to combine a few different token models (backstop, veCRV) into one and have YFI be a multi-function asset. I’m wondering if there might be unforeseen consequences (or synergies) with this approach? What about just having extra complexity that makes YFI ‘jack-of-all-trades but master of none’, and without a focused narrative (which can also be important)?

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Some great suggestions. I think we should include the use of yearn nft’s for early access to new strategies. Reduced performance fees, Greater APR etc as a consideration (depending on rarity of nft) in yfi tokenomics changes

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Just wanted to share my view that I agree with the philosophy that a key purpose of a platform’s native token should be to reduce systemic risk of said platform. For YFI, this pairs well with insurance being added as a feature of Yearn’s vaults (perhaps a hybrid of what has been suggested: baseline, implicit insurance for all deposits, alongside an “opt-in” product line to perpetually insure deposits at a higher % of coverage). YFI stakers then become the underwriters of the insurance, and fees accrue to them as a result of taking on this added risk. This creates a flywheel: rewards for staking incentivize users to buy/stake YFI, which raises the price of the token, which increases the amount by which vaults can be insured, which improves the overall quality of the vaults, which increases deposits, which increases fee revenues, etc.

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I feel like, as DeFi supporter in the broader term, every protocol should avoid forking everything from others just to avoid some fees or whatever. I am for forking if it is actually aimed to build a better product or reduce risks but I really favor the “let’s integrate with other protocol that already built the tools” approach as it manifests the will to be part of something bigger, it builds a wider and stronger community where the interests as well the success of the whole space is shared between every participant and, lastly, shows that Yearn acknowledges a good product when it sees one.

I hope this thoughts doesn’t come out as rude, as it was not my intention but I am really in favor of integrations over forking :sweat_smile:

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I agree with the spirit of what you are saying - there is no point in distributing the treasury to YFI holders for simply holding the token.

However, I think there are valuable feedback loops that can be enabled by distributions when combined with other mechanics.

Consider a system where YFI can be vote-locked to earn veYFI. A certain percentage of protocol income is dedicated to YFI buybacks, while the rest goes towards the treasury. Instead of burning bought-back YFI, it is distributed to veYFI holders.

When capital is needed to reward YFI contributors or grantees, funds from the treasury are used to buy YFI and to create vote-locked YFI tranches that are given to the grantee.

Example: Imagine a 1 YFI bounty is posted to deliver feature Y. A contributor delivers feature Y and completes the bounty. Their compensation is divided into the following tranches before being disbursed:

  1. 0.33 YFI, vote locked with 1 week expiry.
  2. 0.33 YFI, vote locked with 3 month expiry.
  3. 0.33 YFI, vote locked with 1 year expiry.

The goal of this system is to lay the foundation for an incentive structure that has the following properties:

  1. Create a financial incentive for veYFI holders to increase protocol revenue as a whole.
  2. Prevent speculators from extracting the system’s financial incentives.
  3. Align the interests of grantees with the interests of the protocol as a whole.
  4. Allow grantee compensation to scale with the magnitude of their contribution, even if the magnitude of their contribution is underestimated when they originally receive the grant.

There are several important considerations made in the system above.

  1. No YFI is minted in the above system. Dilution is a terrible thing, especially when important contributors get diluted. Many Defi projects skim over the impact of dilution because there’s so much dumb money entering the system that dilution rarely causes price action. I believe Yearn is better than that.
  2. Buyback-and-burn rewards all token holders, which I believe is a massive waste of distributions. There is no reason to reward token holders who do not have a long term relationship with Yearn.
  3. Paying for grants/bounties with vote-locked YFI is roughly analogous to a grant that vests over time. If a grant was paid with unlocked YFI, it may be immediately liquidated by the grantee - eliminating any incentive alignment between the grantee and the protocol.
  4. veYFI should not provide any kind of boosting benefit. Boosting and Gauges are features of the veCRV system that address problems that only AMMs encounter. The goal of an AMM is to have ample liquidity and to be resiliant against vampire attacks. Boosting, gauges, and liquidity mining are intended to create incentives to achieve that goal. If the community truly wants some kind of veYFI utility like boosting, then the feature needs to be designed with yield farming in mind, not liquidity provision.
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Really like this framework. Very thoughtful. Pragmatic for tokenomics and growth.

I like the line of thinking tiarizzi93 & dripdrop

I appreciate the opportunity to share my thoughts. A lot of giga-thoughts listed above, way above my pay grade. $YFI was my entry into DeFi. I am a supporter of the team and admire how they were instrumental in DeFi’s growth. I will continue to support and want to see the protocol continue to win.

I agree with the notion that a disconnect exists between the value of $YFI token and $YFI protocol success…with value not passed along to unit holders…otherwise, why would we be talking about this?

Perhaps we can improve the “Utility benefit//value extraction” mechanism to holders of $YFI. Incorporating some time based mechanism for reward eligibility i.e. the longer you hold, the larger the share of reward pool shared???

“Utility benefit” is achieved//produced, every time $YFI is used in different strategies and, if value is generated through that strategy, it gets passed on to unit holders, as a reward.

Three potential considerations to increase the “utility benefit” for $YFI;

  1. Capital growth strategies - allocate $YFI token for capital strategies, for example, like some strategies from ape.tax, etc…so holders benefit from potential growth of strategies using $YFI,
  2. Yield Generating strategies - allocate $YFI token for yield strategies, utilizing scale//the full power of Yearn’s treasury to harvest attractive yields, and
  3. Reward payout strategy - $YFI token holders can earn a share of the protocol revenue, based on a time mechanism - the longer the support, the larger the share.

1 + 2 + 3 = “Utility benefit” ==> distributed to stakeholders through some distribution mechanism, i.e. zap harvesting available to holders.
Just my two woofy’s worth… good day sers.

Just wanted to comment that @fubuloubu and @dripdrop are very much in line with what i think about revamping tokenomics.

Agree also that giving away YFI to holders without any work seems bad alignment of incentives, there are several mechanisms that have been mentioned that we need to improve decentralization on and this needs incentives/penalizations. (see below)

Problems that need solving in our mechanisms that we want to explore in v3:

  • Adding a strategy to a vault without the need for msig operation (current governance). If we change this to be governance by voting/timelock, How can we stop this from being gamed? a strategy that has not been reviewed by the internal review security process could have a huge loss or be hacked or even be a rug pull itself? do we allow anyone to propose a strategy or only whitelisted addresses, who decides who is trusted? do we have a delegate voting where security experts have the sign off and are delegated by holders, do we discuss like MAker risk before adding a strategy like they would a backing asset? keep in mind the problem here is that current system allows for fast turnaround of strategies to prod, any system involving voting and discussion may take weeks where a strategy will no longer be profitable or even discussing in public a strategy may make it no longer profitable since its zero sum with competitors (although the future seems to favor long term strategies more than weekend affairs of LM nowadays)

  • Currently there are good incentives to be a strategist but none around risk evaluation of code and security reviews before attaching a strat, this has led to have a bottleneck around needing security experts to vouch for strats, maybe outsourcing this to token holders with a penalization/staking aspect may be an option (insurance also sounds like another option). Incentivize DAOs like yacademy to sign off or stake to review strategies that are secured (risk framework + reputation system?)

  • Vault allocations. There should be an optimal allocation that can be applied to a vault to get the best APY under current on chain conditions, somebody needs to do the analysis off chain and calculate and propose the change on chain. This is currently not well incentivized and needs to be more decentralized if possible, managament of vaults is a tricky business, and current system needs additional on chain data to improve. Some strats cannot go at the front of the queue because they risk liquidation or loss, others can and so on. I think future versions of the vaults need to express these parameters on chain to make decisions, still not sure if a delegate expert team voted by holders is the way to go here, again these decisions are daily, this is not Maker adding a token that can take 3 months discussion, these decisions need to be balanced quickly and in a decentralized way, not an easy problem to solve without risking potential loss of funds or security exploits.

  • Solve the whale problem. The vault needs to track best APR out of optimal allocations to avoid a whale favoring bad allocations, say Compound decides to vote for allocation of strategy funds in their system although AAVE has higher APR%, these changes need to be evaluated onchain and penalized or blocked somehow.

  • Emergency conditions. Timelock and governance mechanisms may be part of some of the above functions but i believe emergency state needs to be without a timelock, worst case scenario we should limit scope of emergency functions but still can act in a good time to salvage a bad situation from becoming worse.

All of the above problems seem more fitting to be rewarded YFI for good management and burning YFI if an actor acts in the wrong way during these operations.

If this operations are decentralized more, it makes sense for protocols upstream to hold YFI and be more involved in governance/management to configure the vaults for optimal yield, yearn becomes the decentralized automated yield function others can participate on.

P.S we are also exploring off chain trusted computations like STARKS where we can simulate and prove the calcs to send to vault state and validate a computation was made off chain with on chain code which is handy for vault allocations, but not sure this can be implemented on next version since its bleeding edge tech, but something that we are looking to discuss/explore in the future as part of decentralizing management of yearn vaults.

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