There are some assumptions here I’d like to address:
- Vaults aren’t delegating the funds, the connected Strategies are.
This seems like a subtle assumption, but I promise you it’s important. The authors of the Strategies, which are connected to Vaults your funds are deposited to, made a decision to architect the Strategy to delegate funds in some way. It is not a “Yearn decision” to choose that architecture. The Strategy author could just as easily cut out the “middle man” of depositing into another Vault (increasing the yield rate the strategy earns), but they are taking the shortcut of just leveraging the deposit so they have to write and maintain less code, and get access to a broader and more sustainable yield for the deposits they are sourcing with the Strategy (usually based on a leveraged or borrowed trade).
This takes me to my next point:
- Strategies take a lot of effort and maintenance to get working, they don’t come “for free”
As mentioned before, there is a lot of work that the Strategist has to do to build and maintain their Strategy. In compensation for their efforts, the Vault code rewards them 10% of the yield that the Strategy generates with capital from the Vault, which encourages them to build the safest and strongest Strategies possible. Now as these Strategies get larger, single authors tend to form “committees” that share the work and responsibilities, pooling rewards in the process. Yearn is not making the decision to do this, ergo the decision to change reward structure comes at the cost of less incentives to create and maintain Strategies, which negatively impacts your deposit’s yield in the long-term. I’m not saying that the fees can’t be changed, but it is important to understand why the fee works the way it currently does before suggesting a change.
But Strategist fees aren’t the only costs involved with a Strategy, which brings me to my next point:
- Yearn’s protocol operations (e.g. Keep3r harvesting, gas costs, etc.) cost money too
The Strategies need robust revenue flows to keep them running smoothly. Remember, the reason why Strategies are more capital-efficient and earn a higher yield by pooling together in a Vault with other depositors (rather than operating the Strategies yourself) is because the costs of execution are socialized across all the depositors in the Vault. You could think of the other 10% perf fee that the DAO earns as income as revenue to pay for these operations, as well as numerous other things such as recurring grants to pay for full-time work by very competent devs, Strategy reviews, etc.
Now again, we could potentially make a decision to reduce these fees, as the revenue generated by them might be larger than the expenses we have, but that comes at the cost of less surplus revenue stored for when these varying costs get really expensive. One just has to look to the recent past to find examples of when yields were down, but gas prices were up, and Strategies still need to harvested to stay effective. It’s important to plan ahead for these circumstances, which we do.
But Yearn earns revenue not just from 10% perf fee, but additionally from the 2% mgmt fee, which takes me to another point:
- We actually already give a discount on management fees for Strategies that delegate funds
This is done as a convenience to Strategy creators. It is very difficult to create Strategies that earn a consistently high yield, and we were constantly running into scenarios where management fees affect the yield of a delegating Strategy, so we introduced the concept of BaseStrategy.delegatedAssets to compensate for this scenario, and reduce the threshold below which a Strategy cannot be profitable. As this type of revenue is what the DAO takes in the long-term to keep itself growing, it was determined that there was enough slack in our revenue models to create a discount at the management fee, especially if it improves the number of Strategies that can be written for these Vaults, which tend to be some of our highest in terms of funds deposited.
And this takes me to my last point:
- $5.66b TVL is okay with paying these fees as is
Well, it’s very difficult to query all of the depositors in our Vaults, however we can leverage the fact that these users haven’t withdrawn as evidence that the fees are acceptable. Could we bring in more TVL if we dropped fees? Yes, that probably is the case, because everyone likes paying less to get more. But Yearn’s design doesn’t benefit from accepting more deposits (as it hurts yields), and it makes the job of incentivizing contributors to do the hard work of keeping Yearn running even harder because of the lower fees. As mentioned above, there’s a number of balancing incentives at play we need to keep in mind when suggesting fee changes, and I have yet to see a proposal to do just that take these into consideration.
But fear not, there’s another way to approach the problem that falls out of this proposal:
The TL;DR here is: what if instead of giving away our valuable revenue streams to make our product worse, we drive back some of the revenue the protocol generates to YFI holders that stake and do helpful things for the protocol? You could think of Phase 1 (xYFI) as being a way to get a “discount” on Vault fees by staking, because the revenue that is used to earn the kickback is actually generated by the same fees you are paying as a depositor. Phase 2 (veYFI) is a way to leverage up on that discount, by commiting to stake your YFI for a longer term. Phase 3 (Management Gauges) and 4 (Useful Work) is a way to get YFI stakers to reduce the workload of operating the protocol by taking some risk on themselves, which means the operational overhead of the protocol for contributors gets smaller, which means the amount of our revenue needed to support their activities also gets smaller and more revenue can be kicked back to stakers leading to even more “discounted fees” in a virtuous cycle.
I think this is a rather elegant and positive-sum solution to the problem of our fees being perceived as “too damn high”. This outcome will improve the scalability of our protocol, and make it easier for us to run even more Strategies in the protocol, incentvizing more yield generation via Strategies and making Yearn a very sticky money lego indeed.
I hope this makes sense to you, my apologies for the long-winded response, but I think it’s important that people understand the finely-balanced game that the fee model is, and how it will take a lot of work and a lot of data to improve upon that equilibrium for the benefit of all stakeholders of Yearn, not just favoring some parties at the expense of others.