YFi burn as currently implemented does not work, and Staking is obviously a better way of distributing the rewards pool than the current burn model. However the current burn model is not the only burn model we could consider. The following is another model for distributing the pool rewards through a Burn model that I think has some merit but would like to get feedback on.
TLDR: Use the Rewards Pool funds (fees generated for system by the protocol) to purchase YFi from the market and burn them.
The system would work something like this:
- Protocol fees are added to the rewards pool over time
- At a set point the fees in the rewards pool would buy YFi from the market
- The YFi bought by the rewards pool would be burned
This system would be somewhat similar to a stock buyback in traditional finance. In current traditional finance these buybacks have earned a bad name due to the moral hazard inherent in the system, but in reality buybacks are really just a more tax efficient method of paying dividends (which are roughly equivalent to Staking).
More tax efficient - Each Fee distribution through Staking can be a taxable event, whereas capital appreciation through outstanding token deflation is not until sold
More direct feedback to YFi price appreciation - Fees are used to buy YFi on the open market, putting incremental upward pressure on price while also reducing supply. Paying out the fees to Stakers takes capital out of the YFi system
Harder to target these fees to governance participants - Reducing YFi supply will raise price for everyone, whereas Staking only distributes rewards to Stakers/Voters. There are ways to mitigate this, for instance the purchases could be made from whichever YFi Pool the Governance Staking comes from so that incremental buying hits that pool first. A hybrid model, where a portion (say 10%) goes to Governance Stakers/Voters and the other 90% is used to buy and burn YFi. Thus there is added incentive to Stake/Vote relative to just holding YFi
I think this idea is worth discussion, and I’m interested on feedback on any of the above points. In particular the technical implementation, while it doesn’t seem overly complex, is outside my are of expertise. Frontrunning the reward buy is something to consider as well.