Proposal: Rethinking Capital Allocation

That’s literally the purpose of the yVault.

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You’re not wrong but the withdraw fee on YFI yVault makes it unfeasible

Okay. If that is your real gripe with the yVault, why wouldn’t you propose eliminating the withdrawal fee rather than the wholesale elimination of a characteristic of YFI that has been present since its founding?

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I’m interested in hearing your vision of what yearn is. (This is an honest question)

@RyanWatkins I agree on the need to reinvest into the Protocol to allow it to grow in a more agile and sustainable way. We submitted this proposal, which is in line with this: Proposal to make YFI more agile and provide better incentives for talent

But I am not in favor in using all funds for buyback. A portion should be used to develop the Protocol in a way agreed to by the community and a portion should be given to YFI holders.

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I am not against some portion of the Treasury being used as rewards, but frankly, the distribution process for grants from the Treasury to contributors has been fairly immature. These processes would need to be substantially upgraded, with far better oversight.

But I am against the idea of all Yearn income going to YFI buy-backs which then sit somewhere and require governance to intervene. IMO, income is a core part of the Yearn/YFI token value proposition. And having on-chain governance fight monthly, quarterly, etc. over how that money will be distributed may not be conducive to a good outcome or healthy community, IMO.

I’m not against reinvesting some additional portion of that of that money into growth (e.g., paying all core team members a 10% to 20% bonus in time-locked YFI, plus some additional amount going to grants), but IMO, the expected value gleaned from such a reinvestment strategy is not worth killing all of the income of the token.

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To clarify, I’d offer the following proposal as a modified version of what Ryan proposed:

  1. Institute ~2 year-long time-locked $YFI bonuses for “core devs”- say 25% of the current salaries. (parameters here could change based on feedback from others, and commensurate to the value of the team members’ contributions)

  2. If it is needed, create an operating reserve (governed by yGov) which banks some amount of funds to ensure operating expenses can be paid in the event of a shortfall. I don’t know what the right amount is here, but maybe 6x to 12x monthly operating expenses.

  3. Add some additional money to grants with better oversight, in the form of YFI if desired

  4. Possibly pay stakers gov rewards in $YFI

These could be four separate governance votes. Overall, I don’t see much value emerging from the creation of an additional, open-ended pool of funds beyond the existing Treasury process. If more money is needed to support effective development through a larger Treasury, I believe this should be discussed, along with how those funds would be used.

But in general, having a new, very large open-ended fund pool administered by the potential recipients of those funds is not a good idea in general, IMO- unless it is married with a very detailed plan for how the funds will be used. It can lead to potential capture over time.

Sure, governance can always vote to “pull the plug,” but that would be a costly action in such a situation (potentially alienating the devs). Please note that this is not an admonishment of any current participant in Yearn, but I believe in designing systems which are resilient to individual personalities.

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This is exactly my line of process.

I want to see hard data on how capital plans to be allocated each month, over the course of say ~6 months.

Capital needs shouldn’t change month over month if we have a proper plan in the first place.

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Thanks for the feedback. I agree with the three steps you laid out on

  1. Converting existing treasury assets into YFI
  2. Redirecting all rewards to market buy YFI until the treasury holds a set amount (some % of the total supply)
  3. Depositing the treasury YFI into the yYFI vault and reverting rewards back to YFI holders

Additionally, we can think about adding lockups on YFI distributed from the treasury to ensure there is long-term alignment.

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For this proposal. I think focusing on growth right now is key and analogous to how non crypto startups would use capital to scale so why wouldn’t we want to do the same here?

Appreciate the feedback.

That YFI holders current earn income for staking is nice, but let’s be honest. The primary reason investors hold YFI is not because of the annual yield they get, rather because of the potential for massive capital (price) appreciation. Getting a 10% yield over the course of this next year means very little compared to the potential to see an order of magnitude price appreciation in YFI.

I agree with you on wanting to keep the treasury allocation process as governance minimized as possible. The more systematic it can be designed the better. Set YFI rewards for certain types of contributions, spending limits per time periods, and target sizes for the treasury are great ideas for how to achieve this.

Core team members are not the only important contributors to the community. I think we need to take a more holistic view of what contributing to Yearn means. I provided some examples in the proposal for whom those other contributors are. Although I agree with you on wanting to time lock YFI rewards to ensure alignment.

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I don’t disagree here; however, I am not sure I see a direct connection between making the funding available for the growth of Yearn in the form of YFI grants and appreciation of Yearn or YFI.

IMO, operating as a loosely defined confederation of grant executors trying to create value is not likely to be effective versus more centralized competition. Efforts should be reasonably coordinated. Is this occurring now? If so, it is opaque to me.

I’d be happy to contribute more from income to reinvesting in the protocol, but this needs to be done in a way where there is some reasonable expectation that it will actually create durable value for Yearn and for YFI. The current grants administration process is not sufficient. It rewards executors only after the fact, and their activities are not really coordinated in the achievement of any well-articulated objective.

I’d rather assign a “CEO” type figure who has a discretionary budget (reviewed by token-holders), and give him/her the flexibility to make strategic investments in accordance with a Yearn strategy / roadmap.

Also, here are my thoughts on each of the stakeholder groups you’ve identified:

  • Strategy Writers - are these folks not paid already based on utilization of strategies?
  • Protocol Politicians (Proposal Writers) - is there not a bounty modest bounty for proposing successful proposals already?
  • Developers - these folks are already paid a salary. I would support improving this with a defined and timel-locked YFI bonus.
  • Content Creators - I could see some value in expanding grants to this group, but it must be done with real purpose, and should be things the comms folks on the payroll are not already being paid to do
  • Liquidity Providers (Vault Depositors) - Depositors already earn a return for depositing into Yearn products. This doesn’t need to be in YFI, and if it were, it would be a trivial, pro-rated amount from the governance fees
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To me the connection between making funding available for contributors and price appreciation for YFI is clear. Making it more attractive to contribute to Yearn attracts higher quality contributions and contributors.

Here are my thoughts on each of the stakeholder groups you’ve identified:

  • Strategy Writers - Yes they are paid already based on utilization of strategies, but I think it would also be beneficial to provide upside to YFI for essentially making vaults useful in the first place
  • Protocol Politicians (Proposal Writers) - This group currently doesn’t receive anything. Having some set amount of YFI set aside to reward this group per passed proposal would greatly encourage people to write quality proposals
  • Developers - We completely agree here
  • Content Creators - Also agree here
  • Liquidity Providers (Vault Depositors) - Yes depositors already earn a return for depositing into Yearn products. The idea with providing rewards for this group would be if the community wanted to incentivize a new vault with YFI rewards.
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@RyanWatkins I have 2 comments on your proposal.

First you are saying best use for capital allocation is to invest free cash flow into YFI which can then be held out as an incentive to future contributors. There are 2 problem I see on this.

  1. The current setup is designed to reward those that participate in governance. By buying back YFI value accrues equally to all YFI vs. those that stake in governance. A YFI holder who has YFI locked in Aave earn the same value through the buyback as those staked in governance. There becomes no incentive to stake in governance. If that incentive shift is the goal then that’s fine I just don’t agree with it as that was yearn token’s stated purpose.
  2. Holding treasury funds in YFI levers yearn’s ability to implement based on the price of YFI. It’s wonderful to the upside, but in a downside scenario it creates problems. Think about this hypothetical. We hold $2.5mm of YFI in the treasury at today’s prices and there is some negative news that drops the price 50%. We’ve just lost $1.25mm of current value we could use to pay contributors or we would have to give up more YFI to achieve the same purposes. Also its reflexive. Our treasury will grow the most when yearn earns a lot and thus buy YFI when it’s priced high due to solid performance, but when yearn treasury inflows slow would be buying less at lower prices at time of poor performance. Its a bad default methodology (MKR has the same problem btw) Stables seem to be a better treasury asset assuming there is no plan in place to spend the treasury funds. We can always market buy YFI at the time of grant/payment to provide that YFI incentive exposure. I wouldn’t be opposed to accumulating in stables pending my next point

Second issue revolves around specifics of fund usage:
I don’t disagree with you that accumulating the funds in treasury would be more beneficial for long term growth since it could be used to rewards contributors (all the things you state etc.), but in the absence of a specific plan on how to spend it, what is the purpose of accumulation? You’ve proposed we change the capital allocation without a plan for the use of that capital. I agree with you there has to be a better use of capital, but I would prefer the proposal be on the use of the funds rather than an academic change in the capital allocation strategy. If you came back and said I think we should increase the buffer to $1.3mm from the current $500k and fund the hire of 2 new devs at $X each who are going to work on Y I think people could get on board with that. This comes to the issue of strategic direction. How do we as an organization decide what our priorities are and what our needs are? The core devs have done a great job so far and if they could use additional resources and want to spend treasury dollars to do so I think they would find governance extremely receptive. We are going to get a much better ROI on investing in contributors than just distributing funds. They are also in the best position to determine how best to use those funds as they have a more complete understanding of the yearn ecosystem and potential.

So bottom line is I am against your proposal as-is, but from an academic perspective I understand where you are coming from and if we could find specific uses to spend those treasury dollars that are value accretive I am happy to vote for that (all day long!). Further I think the core devs are in the best position to understand how spending those dollars could be value accretive. I also think we should be incentivizing them further (but that’s for another post).

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we should just create new pots of money for each of these goals and fill them up…and the rest should keep flowing back to the stakers…no point in blindly ending the revenue for stakers…redirect to other goals on a needed basis…would be great to see yearn do some aquisitions in the space…

I agree with strategic acquisitions. Perhaps PERP & BOND? Tokens that have a solid team that is a key part of the DeFi infrastructure should be held for the long-term sustainability and interoperability between protocols.

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Yes definitely holding tokens that have long-term viability. But also earmarking money to acquire upstarts with small market caps that can be folded into the yearn ecosystem.

If you pay governance holders in yfi what will they do with it afterwards? You can’t pay rent with yfi. They’ll dump it (at least some)

It’ll be like curve or uni. Rewards paid in governance tokens get dumped. Just look around defi for evidence.

We want yfi to appreciate.

And yes I do understand profits get turned into yfi initially before they are handed out but most people need actual money to survive and yfi ain’t it

You’re also removing their choice of income. Right now we have a choice. if you want yfi as rewards you put your yfi in the yfi vault. If you want stablecoin, rewards you put your yfi in governance. This change would remove the ability to get yUSD rewards from yfi holders. If they wanted yUSD they would have to sell yfi immediately and spend gas in the process.

Not in favour.

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I am not a developer but an investor in projects that I believe create value and innovation to people who are not typically recognized or forgotten by traditional financing platforms. I purchased YFI because I believe in the space. I can forgo accumulation of yCrv if it meant preserving the space and YFI token that governs it. I think the DeFi space has taken a big step backwards with everything that has happened with Uni, Yam, Harvest and I think there needs to be some changes and positive commitment to the Defi space. I only hold a couple of tokens but I am willing to vote in favor of this given that full Transparency and Accountability is defined upfront for the allocation of income and the buyback of YFI tokens to expand the platform that benefits the community rather than a select few.

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So I have pondered this thread and would like to pivot my position slightly.
I am still in favour, but I no longer think we should stop rewards.

The primary reason for this is simply that by stopping rewards, we violate the intention of this very proposal… That is to say that there are community members that ARE contributing both directly and indirectly AND who are NOT recognised AND therefore not compensated. And may never be…

Now, I happen to have talked to a few and in some ways I count myself amongst them. Yes, I have received a grant, but the grant was never my motivation and at the risk of sounding ungrateful, the grants don’t go very far. (I am very grateful and thankful btw) So why then am I here?

Besides the fact that I have great admiration for Andrea and team and I see great value in the future of the project, the selfish reason I am here and continue to contribute without the expectation of any further or future formal remuneration IS because of the rewards.

Sure, right now the rewards don’t go very far either, but the fact they continue makes them FAR more valuable than the ‘hope’ of a grant of any kind.

At the end of the day, I believe we are al here because we value the automation. We do NOT want any other human to have the power to decide IF a contribution was good enough to be rewarded or not. I want the system we are building to be Trustless.

Edit: Or as trustless as is possible.


Now, I know there are flaws in the above, hence my ‘slight’ pivot.

This conversation: Proposal: Revamping Fees calls out that Yearn is currently undervaluing itself by undervaluing its ability to charge higher performance fees.

In the above linked thread, I shared the following:

I also stated that I thought a 10% performance fee would be reasonable.
A proposed breakdown as follows:

  • 10% of performance fee (1%) to go to recover gas and other day to day expenses.*
  • 90% of performance fee (9%) to go to the treasure, where these funds will be split:
    – 45% of treasury share to go to YFI holders,
    – 45% of treasury share to go to Purchase of YFI on open market**
    – 10% of treasury share to go to Strategists***

*It is know that the existing 0.5% fee does not cover all expenses, the above doubles this amount in an attempt to amend this problem.
**YFI purchased on open market may then be used as suggested in this proposal.
***This is in line with the voted 90:10 share between YFI holders and Strategists.

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