These are good points and it is important to keep our options open while the monetary policy is further developed. I worry that voting on, and accepting, a monetary policy will shift the narrative and it will become significantly harder to make changes to it.
Instead of picking a monetary policy now, could we not publicly signal that even though new issuance of $YFI will pause, yCRV minters and governance participants will be back-paid a pro-rated yield in $YFI tokens once a monetary policy is chosen? This model is conceptually similar to the assumed distribution of Curve.fi’s governance tokens, which will be paid out to liquidity providers who have been active since the project’s inception. Signalling this publicly would help prevent a a feared mass exodus of liquidity from the y.curve pool while the community continues to discuss monetary policy and emission schedules.
With that said, I have been writing up my thoughts about fairness and the potential benefits of higher inflation that I think should at least be considered when deciding upon a monetary policy.
On Fairness and the Potential Benefits of a High Issuance Rate
In light of all the competing proposals for Emissions schedules and monetary policies, I wanted to write a bit about the idea of fairness. Namely, how should we approach fairness when determining a monetary policy? This is a big question but should be considered as it could define how the project is viewed to outsiders.
Many in the crypto space have taken notice of YFI because of the way that it was released. It has a working product, no pre-mine or pre-sale, no VC money, and everything was announced publicly. I agree with these sentiments, but do want to highlight the now privileged position that this puts everyone who had the opportunity to farm for the last week. Even if this distribution method was fair by most standards, if we now drastically lower the rewards for new entrants into the space we should be aware that it could be viewed as a set of privileged actors skewing the playing field in their favor.
It could be argued that continuing the rewards at their current emission speed is the “fairest” method for everyone but those who recently bought YFI with the expectation that there would only be 30k or 50k total supply. Continuing with high inflation may have a long term negative effect on the price of the YFI token, but community members and farmers who are committed to the project can continue to provide liquidity and participate in governance and be minimally diluted.
On the flip side, a high emission rate is not strictly needed to provide security so there is a strong argument against overpaying for security. This point is made here by @nightmayoralty: Request for Comment : Proposal for YFI Inflation and Supply Mechanics. And also in this thread by @yfi_whale: Yfi_whale Proposals List.
These are compelling arguments, but I would like to make a 2 counterarguments that I have not yet seen brought up.
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One way to think about these issues is to frame them in terms of the total value or marketcap of the YFI token in the long term. If one determines a valuation for the YFI token based on the rights to future cash flows from the yEarn ecosystem, then the value of all YFI tokens combined should be the same independent of the total supply.
If the yEarn ecosystem earn $1,000,000 in revenues a year that is returned to token holders, it doesn’t matter if there are 50k tokens, 50million, or 50. The rewards are split between all of them. A lower emission rate privileges those who got in early. A higher rate benefits later entrants as all stakeholders need to continue contributing to the ecosystem in order to keep up with issuance. I would argue that a higher emission rate is inherently incentive aligning. -
Higher issuance could also prevent governance capture, especially if mechanisms are put in place to incentivize governance participation. In a high inflation model, early token holders who stop being active in the ecosystem will eventually get their voting power diluted. I recommend looking into the model that the dxDAO has implemented as a case study for how this has been done before. I am not implying that their model be adopted as it works quite differently, but they have made a commitment to be generous in giving out REP (their pure governance token) to active members so that non active members are quickly diluted.
It is important that we take into consideration the future views of people who are not so deep in DeFi and didn’t have the opportunity to get in “at the ground floor.” Even if early entrants have taken significant risks to acquire YFI, getting our piece of the pie and then turning around and telling everyone else that we are now only giving away the crumbs is not a good look and it could sour public sentiment of the project.
Interested in hearing other people’s thoughts on this. happy to break it out into a separate thread if that will keep this conversation more focused.
footnote:
If anyone is interested in some recent essays that touch on fairness in crypto distribution I recommend this one by Chris Burniske: https://unchainedpodcast.com/chris-burniske-a-blank-slate-of-state/ and the rebuttal by Matti https://wrongalot.substack.com/p/progress-as-a-myth-the-thielian-moment