YFI Token Economics
Michael Anderson, Framework Ventures
There is currently a lack of clarity around two core components in the YFI token economic model: inflation and fees. As part of YIP 31, 50% of the YFI inflation will go to “LP Rewards” but does not disclose any of the details. The current fee model is based on a “dust” approach to collecting and redistributing, and it’s too hard to assess how sustainable that is into the future. Thus, we want to propose a token model that solves for both and builds a competitive advantage for YFI.
Our long-term competitive advantage will be the effective use of highly valued YFI token inflation. We have already seen some and can assume that there will be more variants of YFI competitors seeking to opportunistically steal attention and market share. The advantages that YFI has now are it’s first-mover position, high-quality community, and engagement momentum which ultimately leads to a higher token value, for now. As stewards of this ecosystem, we need to adjust the token model to continue to build an advantage for YFI.
Our model constructed about under the following assumptions and perspectives:
- The current fees are assumed to be ~0 or not regularly occurring/automated
- YFI inflation should align specifically with long-term participation in and proliferation of the whole ecosystem
- The fee pool should flow back to active YFI participation
- The overall design assumes perfect competition with any YFI variants on yEarn Strategies (parasitic vaults - no defensibility with high performing strategies as they can be replicated)
An informed and active community is the lifeblood of any successful blockchain ecosystem. YFI holders and stakers are able to vote with their tokens on all parameter changes in the system, on proposing new ideas, and on implementation of new proposals (as defined in YIPs 10 and 12). YFI holders should want to be governance participants, but we should incentivize long-term and consistent participation in the governance process.
Voting with YFI can only occur with staked YFI in the governance contract, as is currently the case in V2. We propose 60% of YFI LP inflation that will be used to distribute to governance stakers, accruing more YFI the longer the YFI is staked in the contract. Stakers must have voted in one of the last three quorum-reaching proposals to unstake YFI and to redeem their YFI rewards (there will at least be a “check-in” vote once per month to provide a participation opportunity if no other proposals come up for a vote).
- % YFI inflation to a gov rewards pool (i.e. 60% of the inflation going to “LP rewards”)
- Method of determining “active” participation in governance
Liquidity providers in yVaults will provide assets (e.g. USDC) to be used productively by the systems’ Strategies, earning a return in the form of that yVault’s asset upon exiting. To provide proper accounting, each yVault has its own LP token (e.g yUSDC) which is minted and burned at entrance and exit from the pool. To further incentivize pool participation, the staking of LP tokens will accrue YFI rewards. Similar to the governance streaming rewards, the longer the LP tokens are staked in the contract the more YFI tokens are earned.
While yVault LPs will be earning high APRs based on the different Strategies using the Vault’s assets, we believe that these users should be participating in the YFI governance process as well. We propose distributing 40% of YFI LP inflation to LPs who stake their LP tokens. We also believe that all Strategies are ultimately not defensible from free riders in the long run. As such, we need to ensure that YFI inflation for LP stakers is a strong incentive for discerning collateral providers to choose YFI over competitive variants.
Initially, the types of LP tokens that will receive staking rewards are the yVault LP tokens generated from participation in each Vault. Eventually staking rewards could go to Balancer pools or new platforms that don’t exist yet. Governance voting would enact these changes.
As an LP provider and staker of LP tokens, here is the additional yield that can be earned from YFI inflation in excess of the Vaults’ APR, based on TVL and YFI price:
- % YFI inflation to a gov rewards pool (i.e. 40% of the inflation going to “LP rewards”)
- Method of adding, removing or adjusting distribution to LP staking pools
In the long run, the YFI token’s value will be determined by its ability to capture sustainable cash flows from the platform. Implementing a recurring “management fee” on the yVault users based on their participation will leave a strategic hole open for YFI competitors to undercut leveraging the same Strategies available on yEarn. Instead we should incentivize long-term participation in the yVaults by adding fees when entering and exiting the vaults, advantaging consistent participation.
Model 1- Ultimately, we will need a sustainable fee model to drive YFI value. We propose implementing a 0.2% entrance fee and a 0.3% exit fee for all of the yVaults. The fees (denominated in the Vault’s token) will be used to purchase YFI on the open market (i.e. 1inch) and then added to the governance staking rewards pool and distributed to all current stakers of YFI tokens as a streamed reward. We call this model a “buy and pool”.
We have limited data, but from ~6 days of yUSDC activity we can assume a 3-4x velocity per week of LP tokens (~$20M volume in 6 days = $50K fee potential or ~$2.5M annualized).
Model 2 - Ultimately, we will need a sustainable fee model to drive YFI value. We propose implementing a fee upon unstaking either governance or LP tokens from their respective staking contracts. This fee could be modeled using a decay function using tenure in the pool (higher with shorter time in pool and lower over time) leading to the ability for no fees after some time.
Using a basic example, we could use the function Y = -(0.02/12)x + 0.02 where the x axis is months in the pool and y axis is the fee %. This example features a 2% fee at the start of the pool, which decreases linearly over 12 months. The purpose here is to incentivize long term participation in the pool. Any YFI fees collected would go back to the governance staking contract pooled incentive as an additional reward with the inflation.
Furthermore, if the other fees are deemed to be sustainable in a competitive market, we suggest also using the buy and pool model for distributing them back to governance stakers using YFI purchases on the open market.
- % fees for enter and exit
- New fee sources added to “buy and pool” model