[Proposal] Increase Strategist Rewards

Considering the current fee structure, and also other projects targeting 20-30% performance fees (and 20% being a traditional performance fee), I think we can easily bump this up. Obviously, these fees should scale based on difficultly and the work done, I would suggest 4 tiers as follows:

  1. 5% - simple copy-paste jobs, no effort
  2. 10% - remixed from another strategy with little change
  3. 15% - moderate work, including simulation and analysis
  4. 20% - very complex design, including simulation, analysis, and extensive on chain testing

We could also make the governance performance fee a flat 5% to account for gas costs for keeper solutions.

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If Yearn has the best strategies and a veCRV advantage (see my other thread) we can make the whole show %2 of AUM and 20% of profits and compete on excellence instead of price.

Or maybe 1 and 10 as probably few would agree with me we should go so far.

Benefits:

  1. Professional and in line with the world’s best hedge funds.
  2. That income if AUM are sustained will lead to massive $YFI appreciation - and that is important.
  3. Provide strategists with say 2% of profits. Or sliding scale with AUM (5% for small pools down to 1% for big pools). Remaining 8% to YFI holders.

If we have the best income for investors in vaults, paying 10% or 20% is no big deal at all. Time to compete on excellence instead of price.

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Note that governance still has to approve Strategies to the Vault, so it’s not like these fees are set in stone. But it is nice create a set of guidelines moving forwards.

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I am obviously for.

Just something crossed my mind : A vaults strategy market where users could simply choose they vault and anyone could publish a vault, setting their own fee.
Users would obviously choose whichever vault provide them the most value (return minus fee).
It would basically become an open market showcased by YFI where everyone is incentivized to build the best strategy and can set an higher fee if they think their strategy is the best.

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I said from get go should be at minimum 1% of the profits. I’m open to any percent that makes sense for both strategists and the users. I like the idea of earnings from profits as there’s incentive to make high profit generating strategies which is good for users, yfi holders, and the strat creators.

Charging a larger performance fee makes sense. Hedge funds, CTAs, and alternative investment professionals typically use a 2/20 fee; call the 2% a management or anything else you like but it still produces diminished return for end customer on a long enough timeline. I would recommend we do away with the management fee used traditionally and implement a performance fee.

Within the performance fee we could do a bit of innovating: sliding fee’s based on complexity, fee vesting, etc. The most important thing to get right is the flexibility to distribute the funds from the fee. If a strategy does markedly better than others, whether through pure AUM or higher Sharpe Ratio (risk-adjusted performance) we would want to incentivize strategists to bring that to Yearn through higher incentives. It would be possible in these cases to allocate a higher percentage of funds that would have gone to treasury towards strategists as the pie would be bigger while operational expenditures would likely not grow.

It strikes me that it will be important to map capital and operational expenses to their end result, this is one of the value adds of crypto, transparency, right?

If anyone has compiled books for Yearn or know of anyone who is working on something like that please let me know

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Perhaps an initial one off payment to repay gas fees spent during development for an approved strategy then an on going %?

The tier approach makes sense as not all strategies are created equals. We want to encourage high yield and high quality strategies. Though, I would modify the performance fee slightly.

  1. 1% - simple copy-paste jobs, no effort
  2. 5% - remixed from another strategy with little change
  3. 10% - moderate work, including simulation and analysis
  4. 20% - very complex design, including simulation, analysis, and extensive on chain testing
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As Klim suggested, any discussion about fees should start with data. I’m working on preparing a dataset so people can easily simulate different fee structures.

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I’ve modeled a new fee schedule trying to compensate for the removal of the withdrawal fee. I’ve backtested on yUSD vault since it is one of the largest and oldest product with more than 3 months of historical data. Surprisingly the traditional 2/20 from the traditional world matches almost perfectly.

Old model

  • 5% performance fee: 466,822 (17% of total)
  • 0.5% withdrawal fee: 2,243,078 (83% of total)
  • Total fees: 2,709,901, which will be our benchmark

Suggested model:

  • 20% performance fee: 1,867,288 (73% of total)
  • 2% management fee: 699,237 (27% of total)
  • Total fees: 2,566,525 (95% of target)

The split of performance fee between treasury and strategists is left as an exercise to the reader, but I suggest an equal split.

I’ve shared the full dataset here so you can play with other models.

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Another idea is to consider Warren Buffett style model where there is no management fee and only performance fee. I believe his structure early in the years were something like 0% management fee + 25/30% performance fee above 6% annualized return.

The reason to remove mgmt fee is to avoid rewarding managers who sit on large AUM earning mgmt fees yet don’t really generate alpha. So while managers are taking the “risk” of less compensation when performing below expectation, the reward/ compensation when alpha is generated is higher.

Perhaps reasonable annualized return hurdle can be thought of as median of stablecoin yields on yEarn products.

Separately, should there be a consideration of vesting of rewards to strategists?

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Management fee is a good option since AUM is less volatile than returns, it aligns well with the need to actually keep the system running, paying for harvesting and personnel.

I’ve modeled your suggestion and the matching parameters would be:

  • 0% management fee
  • 30% performance fee

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To be honest, I did not read this entire thread, but I’d like to simply suggest that the rewards be gradient. In that when yeilds are higher, the reward is higher.

I agree there should be tiers to rewards, and i also think is good to drive towards requiring a lot of testing from strategist as a pre requirement to strategy going live, even if the strategy is a “simple” copy paste.

I think is a good requirement to expect a lot of unit testing work to be presented before considering the strategy for live usage, so even if the strategy is low copy effort the testing should be extensive, so even low effort strategies will require this additional effort, so not sure what the minimum number could be, just pointing out that the complexity of the strategy is not the only factor for considering the effort.

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Thanks for the model. I think small mgmt fee can work, but no more than 2%.

In my view, vault users are looking for return and strategists should be compensated on return that they strategized rather than general mgmt fee. This seems to be a closer alignment of interest imho.

well… I don’t know how to model but I know how to use spreadsheets, I had this theory of modifying the withdrawal fee to a NAV premium (yield for previous depositors), would be better for the whole Yearn ecosystem as it will pump APY% for long-term investors on the strategies; I did some calcs previously on ParaFi Capital post (the one about pumping Yearn’s performance fee) and the results didn’t satisfy me tbh (Parafi’s data wasn’t there to analyze)

Now with this dataset, I did something that seems way more correct:

yearn model
yearn model1

bad thing: target on the fees is 80% compared to your model
good thing: APY pumps by about 50% (which would in my mind pump AUM number up and by so, pump fees for the protocol)

the last section of the “Current” line on the graph, its just withdrawal fees (and my analysis might be off by 10-20% as I don’t know how to model)

this one is the previous one I made from ParaFi Capital’s proposal, but its just simple af and based on a ton of assumptions

edit: with NAV = NAV premium

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What if we had it so the longer people locked capital in the vault the less they pay in fees? Or maybe they could get a discount for locking up funds for a month or more?

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If anyone wants to pull data for other vaults, here is my notebook.

This means positions are not fungible, which is suboptimal for composability with other protocols.

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I have the same thoughts. Gradient discount for time period lock in would be great motivation.