A few weeks ago, we (ParaFi Capital, SRS) opened up a discussion in the forum to optimize fees (here). We continue to believe that there is confusion on how fees work among most. Moreover, we believe that the current fee structure of vaults is suboptimal.
Since August 1st, 2020, yearn has generated $2.03M in total fees (withdrawal + harvest). If we were to enact this proposed YIP retroactively, yearn would have generated an estimated $9.66M in total fees ($8.06M in withdrawal fees + $1.6M in harvest fees), or 4.75x more fees than realized. Calculating realized harvest fees is not straightforward. However, for simplicity, we assumed $500M in vault funds, 30% APY, and 5% profit to arrive at $1.6M in harvest fees between 8/1/20 and 10/16/20.
With v2 upon us, the community has the opportunity to streamline fees in a meaningful way, which would multiply the fee potential of the yearn system and stand to benefit all stakeholders. We propose the following:
Withdrawal fee: charge 0.5% on all withdrawals (not just idle funds) (or consider moving to a time-weighted management fee)
Harvest fee: rename this to performance fee and charge a minimum of 5%, with the option to increase/decrease depending on the complexity of the strategy
yearn continues to be among the highest quality robo-advisors for depositors in DeFi. As proposed by this YIP, streamlining fees will introduce more predictability and make it easier for all stakeholders (developers, depositors, and governance members) to understand the yearn system’s earnings potential. More importantly, we believe the majority’s current understanding is that yearn charges 0.5% on all withdrawals and 5% on all vault profits. Therefore, the impact of this YIP is largely uncontroversial and positively asymmetric - we expect a limited impact on withdrawals/AUM growth and considerable upside as it would multiply fees.
In essence, this YIP clarifies the fee mechanics and considerably increases the earnings generation of yearn by potentially more than 5x (retroactively based on our estimates) on withdrawal fees alone.
As it stands, idle funds in vaults are not subject to withdrawal fees - only deployed funds are. We estimate only 0.1% of withdrawal volume is subject to the withdrawal fee. The harvest fee charges 5% only on “yield-generating” aspects on the strategy (a subset of total strategy profits). While conceptually these two make sense, we believe that this can be optimized/simplified to bring more predictability and resources to support yearn’s development (strategy creators earn 10% of harvest fees) and reward active governance YFI holders.
We understand that the harvest fee on profits will likely take more time to implement. Still, as the core devs finalize v2 specs, they should make an effort to allow for more modularity on the % performance (aka harvest) fee that is set per strategy/vault.
As a first step, we propose making an adjustment to the withdrawal fee.
Streamlining fees will multiply the fees accruing to the yearn protocol and bring more clarity and predictability. Removing the ongoing confusion on fees is essential to incentivize strategy developers, depositors, and active YFI governance members. We believe that the changes proposed in this YIP reflect how most of yearn’s users understand fees to work and, therefore, will not compromise the competitiveness of yearn to continue to attract more AUM across vaults.
- Modify withdrawal fees to apply to all withdrawals (not just idle funds). Alternatively, remove withdrawal fee and move to time-weighted management fee
- Rename “harvest fee” to “performance fee” and set a minimum of 5% on all vault profits, with the option to increase/decrease based on the complexity of the strategy
- If possible, overhaul existing vaults. If not, modify future vaults and v2 specs
- In favor of change
- Against change