[Proposal] YFI Governance Vault + yAcademy

Summary

Create a new YFI Governance Vault that deposits YFI into MakerDAO to mint DAI, and this DAI is used to yield farm. Depositors in this Vault receive governance fees and a portion of the yield-farming profits, with the other portion going to support protocol initiatives such as yAcademy and bug bounties. This Governance Vault replaces current governance staking.

Background

Merging the YFI Vault with Governance

The idea of a YFI yVault that utilizes MakerDAO and receives governance fees has previously been discussed extensively here. This proposal first bridged the idea of depositing YFI into a Maker vault, farming with the DAI, allowing this YFI to vote, and also asked whether all governance staking should instead move to this option.

On Maker’s side, we have already seen our YFI CDP debt limit extended once to $20 million, with over $15 million in DAI already drawn. A proposal from @banteg on Maker’s forums to whitelist Yearn on the YFIUSD oracle is moving forward and should be included in Maker’s Executive Vote on December 11th. Interestingly, on the forum post discussing increasing the YFI debt ceiling beyond $20 million, there is significant discussion (and support) for the idea of whitelisting Yearn with their own YFI Maker vault. Because Yearn is able to maintain our Maker vaults using keeper bots and OSM access, there is good reason for Maker to offer higher YFI debt limits or lower interest rates exclusive to Yearn.

Bug Bounties

Yearn currently has a process in place for reporting bug bounties and receiving rewards. Over the past three months, Yearn has paid out two 50,000 yUSD bounties for critical bugs. Given that Yearn’s ecosystem will continue to expand, and our contracts are likely to become more complicated, the chance of bugs will increase. Thus, having a system that reliably funds bug bounties is ideal.

yAcademy Funding

Furthermore, in YIP-53, we have the following estimated budget for yAcademy’s first year:

We expect a budget of ~150-200k in the first year out of the Multisig Council treasury, covering the funding of 1-2 founding members and including mentee rewards and kernel sponsorship. The second year’s budget will be decided when the time comes, but is expected to not exceed the first year’s significantly because the founding members may by then have reached a level where they can take on outside contracts for a premium, which then goes back to funding the yAcademy itself.

While we are able to direct more protocol fees from stakers to instead cover yAcademy’s seed funding, I believe it would be preferable if Yearn had a dedicated fund to handle new projects that improve the Yearn ecosystem such as this, as well as helping to fund bug bounties.

Motivation

Benefits of a MakerDAO Governance Vault

  • Higher Yield. With the addition of YFI as collateral for Maker vaults, DAI can be minted and used to yield-farm.
  • 1 YFI = 1 vote remains intact. Unlike YFI that is lent to Aave or CREAM, YFI on Maker cannot be borrowed to vote twice.
  • Snapshot simplifies voting. As Yearn has already moved to gasless voting with Snapshot, YFI deposited in this vault would be able to vote in governance (as already occurs with yYFI).

How can YFI holders benefit the Yearn protocol?

  • YFI staking provides no benefit to Yearn. In the current system, YFI holders are rewarded with protocol fees for staking their YFI and forgoing other yield opportunities. Previously voting was required to claim, but this is no longer the case.
  • Incentives drive actions. Instead of shaming YFI holders for not contributing, we should incentivize them to act in the best interest of the protocol. We can do this by combining protocol fees (current governance staking) with additional yield generated from farming with DAI as an incentive to fund protocol initiatives.
  • yAcademy requires seed funding. Since YFI holders are the ones benefitting from yAcademy (with 65% equity), it makes sense that they should be the ones who fund its development.
  • Bug bounties are not cheap. We have seen several major exploits on similar protocols in the past few months. Thankfully, Yearn has avoided these—in part due to reporting of bugs that were rewarded with up to 50k yUSD.
  • Staked YFI is capital waiting to be deployed. Instead of sitting idle, YFI can be used to yield-farm with DAI minted using Maker. A portion of the harvest can be used to fund yAcademy, bug bounties, and other protocol initiatives.

How much would YFI holders be earning?

  • Estimates
    • There is currently $100 million YFI staked in governance (green row)
    • A conservative estimate of even $20 million YFI locked in Maker (yellow row) with 5% yield would still generate $500,000 in yield over the course of one year.
    • From August-October, $3.7 million in protocol fees were generated for stakers. Extrapolating to one year, this is $14.8 million.
  • Assuming $100 million YFI AUM ($50 million DAI at 200% CR), with 5,000 YFI at $20k each (current state), this would yield a total APY (gov fees+yield farming) of between 15-20%.
  • Benefits
    • With protocol fees as an incentive, Yearn could entice YFI deposits, yield-farm with DAI and set aside a portion of the profits for protocol initiatives.
    • YFI holders would be receiving better yield than if they only staked (as in current governance) or if they farmed using Maker/Aave/CREAM themselves.

What other options were considered?

  • Utilize minted DAI as a credit line. YFI would be deposited in the vault, and DAI would be generated and used as a credit line for yAcademy expenses. This would function similarly to the previously discussed yDAO. Excess DAI not needed by yAcademy (or other initiatives) could be used to yield-farm.
    • Problem: Only the YFI that was directly used to fund yAcademy should benefit from its success. Tracking this could become cumbersome, especially once yAcademy is fully functioning. At what point would other YFI holders receive any of the yAcademy profits?
      • Potential Solution: yAcademy seed funders are guaranteed a set proportion of future profits. This could be tokenized, with a set supply and the token representing that person’s share of YFI deposited in this seed Vault.
    • Problem: If there were a run on YFI deposited in this Vault, then some users would be unable to withdraw based on current credit line utilization. Some type of time-lock would be necessary to prevent such an issue.
      • Potential Solution: Locking the YFI is one of the conditions of the vault. YFI is locked for one year, and users can re-lock after if the yAcademy is not self-sufficient for an additional lower percentage of profits—think Series A, Series B, funding.
    • This idea could be better explored in a later proposal, but the current proposal would require less work to implement.

Specification

  1. Create a Governance Vault utilizing Maker. Deposited YFI is staked to mint DAI, and depositors are issued a yToken (can be yYFI, or perhaps called ygYFI). Yearn’s governance fees (previously went to stakers) flow here and snapshot votes come from here as well.
  2. Minted DAI is used to yield farm.
    • Although this strategy would likely copy the yvDAI strategy, it would be much easier if it used its own strategy instead of delegating to yvDAI, otherwise we won’t be able to easily split out profits.
  3. Profits from harvest calls to be paid to depositors are converted to (see questions below, either YFI or yUSD).
    • Personally, I am leaning toward a yYFI situation, where the profits buy YFI and redeposit. This would increase credit line and also help for tax purposes
  4. At baseline, 25% of profits from each harvest goes to protocol improvement reserves, with 75% flowing to depositors. These percentages could later be adjusted if necessary.
  5. Protocol improvement reserves from the Governance Vault will be held in the form of yUSD.
  6. The Governance Vault protocol improvement reserves will maintain a target of 200k yUSD. Should reserves fall below 100k, profit percentages will invert. 75% of profits will flow to protocol improvement reserves, and 25% to depositors until the reserves are again above 200k yUSD.

Considerations/Open Questions

  1. What is the best mechanism for splitting the profits? Do we just do this on the back-end after everything flows to treasury? Or is there another way to directly split profits to depositors and the reserve?
  2. How should performance fee be handled? As mentioned above, I think this strategy should not delegate to another strategy, but it will essentially be copying existing strategies. Like all strategies, this one will need to be maintained, thus the strategist fee—but should we charge less for this one? And how should the strategist be compensated, since we are copying existing strategies? Open to suggestions on this one.
  3. Should we have a management fee? At first I was thinking no, but realistically, half of it is flowing to depositors in this vault anyway, so I would be fine leaving it as-is. Open to suggestions here as well.
  4. Should yield be paid to depositors into the pool as more YFI? Or should depositors be able to claim yUSD? Or perhaps we allow both as options? A major advantage to the yYFI model vs claiming is tax benefits, as well as a consistently increasing collateral pool.
  5. Should this be a separate product from yYFI? I imagine deprecating the v1 yYFI, launching the Governance Vault, and then revisiting the option of a separate yvYFI if significant yield opportunities arise not involving DAI.

For: Create a YFI Governance Vault with the specifications above.

Against: Keep things as they are.

Poll: Snapshot Poll

21 Likes

I support this proposal in general - additional yield from Maker using “un-utilized YFI”

My preference are

  • the protocol fees > this new vault (eliminate the current yYFI vault, can always revisit later) > convert into YFI > Maker vault > DAI > yield farming. Upon each harvest, split the profits to depositors (I assume this is back to the new vault) and reserve in whatever ratio. In this way, this is neater
  • yield should be YFI back into the pool so that more people have skin in the game. Anyone can still withdraw and convert to yUSD/stablecoin anytime if they want.

Personally, I have no problem delegating this into another strategy. In this way, we can always get the highest risk-adjusted DAI yield (with the strategist benefitting from this too) and minimize maintenance/copy-and-paste - not sure what is the concern here.

Also don’t think management fees is necessary here since this is already the governance vault - keep it simple.

“I love it when a plan come together” …all the puzzle pieces are now in play.

Very much in favour of this.
Will revert with a few additional comments over the weekend.

1 Like

“Locking the YFI is one of the conditions of the vault”

Not sure I like this bit

Is it a condition of the maker vault or yearn?

The “locking” bit is actually from an alternative option that I considered, where YFI is deposited at Maker to create a credit line in DAI that would be directly used to pay auditors and fund development of yAcademy. This would behave more like a loan, where the YFI was time-locked, a credit line was drawn to fund the project, and then eventually the DAI is repaid with profits from yAcademy and the investor gets their YFI back and their revenue stream from yAcademy.

The time-lock idea was just to prevent a “run” on the YFI; since the DAI in this case isn’t doing something normal like farming and likely was actually spent and couldn’t just be unwound the way Maker yVault strategies are.

This would be a hard no from me. I will probably never stake my yfi in a delegated vault that uses a cdp, too risky for me. Can you imagine if that vault ever got liquidated? Wouldn’t the liquidator get 5% of like all staked yfi /4 or around that if the vault was fully utilized. Just yesterday we saw an oracle attack on compound causing 80 to 100m to be liquidated. I agree with funding our initiatives, they yAcademy and bounties, but not by risking capital for such small gains, at most it would be around 20%. We had been getting 8% to 10% steadily with no risk of liquidation for a while. Imo the risk/return is too great. I would be all for non-debt based strategies. I would be ok with this being another vault and not replacing gov staking. We want to have a good safe non risky strategy for yfi stakers so they can feel comfortable staking.

7 Likes

That’s why @banteg is requesting for oracle whitelist. Able to look 1 hour ahead will make the vault safer than an automated self-served solution

2 Likes

So, YFI doesn’t even really need to skim protocol fees if a maker strategy provides higher returns.

Giving the previously agreed upon half of the fees for strategist writers to write better DAI strategies should provide better overall value for YFI holders.

I’m overall for. I’ll summarize my comments here since this is now posted:

whitelisting Yearn with their own YFI Maker vault . Because Yearn is able to maintain our Maker vaults using keeper bots and OSM access, there is good reason for Maker to offer higher YFI debt limits or lower interest rates exclusive to Yearn.

Love that this addresses the issue of uncertainty in YFI ceiling (governance doesn’t need to share debt ceiling with others)

reserves will maintain a target of 200k yUSD.

Will this be enough? If yAcademy is using 150k, we might not be able to sponsor other projects.
I would argue a target of $500-600k would be better since it’s close to what we have now, plus it represents around 25% of $2.5m (projected earning of $100m AUM @ 5%).

Or is there another way to directly split profits to depositors and the reserve?

I think we can tap directly into the harvest function. Using the DaiCrv strategy as an example: Instead of CRV->Dai in harvest(), do CRV->YFI directly before it goes back to treasury.

How should performance fee be handled?

I’m on the fence about letting strategists determine their own fees or strategist receiving gas cost + a defined budget + a lower premium based on performance (bonus).

I think the latter is easier for governance to budget but the structure might be a bit restrictive.

It really depends on if we want to squeeze as much profit out as possible, but I think we should let the first few strategists determine their own fees as a sign of good will.

Should we have a management fee?

This brings up a question, are contributors going to be compensated with the reserves?

I think it would be hard to keep track of how much is available for compensation if we’re paying it out of the merged vault.

A major advantage to the yYFI model vs claiming is tax benefits

I agree with this, I think adding YFI into a yYFI pool has more advantages than claiming yUSD. It would be simpler to implement as well (no variables tracking yUSD and YFI separately). I believe this out weighs the gas costs needed to convert yUSD to YFI.

Should this be a separate product from yYFI?

Would we need a new vault after depreciating V1 if we’re using V2? We can probably just rotate the strategies out.

2 Likes

Would it be a good thing to have a separate yYFI vault that focuses solely on funding yearn operations then? Perhaps we can direct part of the protocol earnings to it to incentivize staking in that vault.

IMO this proposal was brought up to address how market movements don’t impact the operations of yearn much. Dev’s have no resources atm to turn market movements into funds that can be used to hire more help.

I think this proposal merges several different topics that should be considered, voted for and implemented separately.

First of all. What is the role of governance? In most organisations and democracies that is delegation of executive power, and delegation of financial resources. These should be separate.

I don’t understand why the performance of yAcademy should be dependent on the performance of the governance vault? Either yAcademy needs funding more than alternative activities, or something else should be higher prioritised given that there are limited resources.

In mind mind the completely separate questions to discuss are:

  1. Should there be a new governance vault? If so, should it use the proposed MakerDAO/DAI strategy?
  2. Should there be budgetary approval to fund the yAcademy for one year? If so, what is a reasonable amount?

Connecting activities directly to different income streams makes no sense if there is no feedback loop, it only complicates and undermines the role of governance.

The only governance setup that makes sense at this point in my mind is that all treasury income is pooled. Then governance decides on how to distribute these funds to different activities in order to maximise value of the Yearn ecosystem. I would also suggest that these funding events are held at a few predefined occasions per year, so that it is clear what activities are competing for funds, and what funds are available.

As an example, let’s say there are four funding events per year (could be two, could be six). At each event, governance will discuss and vote on proposals for new activities as well as follow on funding for previously started activities. This would allow Yearn governance to perform the crucial role of evaluating how treasury funds are spent. This is a separate discussion, so I will stop here.

7 Likes

True, but safer doesn’t mean unliquidatable. Maybe I’m just risk adverse, but seems overly complex to force all of governance into a delegated vault. I hold yfi to vote and for price appreciation I see in yfi long term. I don’t hold yfi for yield, not even 20% apy, when it could easily move 100% in a month.

Basically I agree with @danielzak

One thing I have thought about though is sourcing the Dai for this yfi governance vault from the Dai vault as a strategy. Therefore if it were to get liquidated we be liquidating ourselves. Kinda like sourcing loans from ourself? Maybe this is stupid though.

Assuming the maker Oracle is in place, the risk could be quite negligible by doubling up the collateral by only borrowings half (or some other portion) of the limit.

I might have missed it in the reading, but I assume that the portion of ecosystem fees will also be added to the yield of this vault. If this is the case this vault does not need to work at maximum yield and can sacrifice some yield for safety.

Two vaults - current staking and proposed yVault would cater nicely to needs of different YFI holders

I’ve been thinking a bit about this and I’m very sympathetic to the goals of this proposal.

Yearn is supposed to be a collective of contributors and rewarded as such. In the new structure there is going to be funding for contributors with 1% of AUM and 5% promote going to ops fund. Any excess above budget will directly reward contributors by buying back and awarding YFI.

YFI stakers also earn 1% AUM and 5% promote but contribute far less to the protocol (governance only - whatever that really means). The ask here is so say in order to earn protocol fees YFI stakers should provide some of the opportunity cost of their YFI holdings currently doing nothing in governance.

I think this is a totally fair ask since yfi staker tokens are currently un-utilized from an opportunity cost perspective since they now need to be locked in governance.

The only question is what strategy will be employed and how much of the gains should go to the protocol (in this case y-academy).

From a strategy perspective I get the worry about using a CDP or taking on leverage. However yearn is offering these products out to the ‘public’. If we don’t feel confident to put our own token’s value in them why should yearns users?

From a split perspective 25/75 seems fair.

I think paying a performance fee is fine on the strategy

I think management fee is really just about the 1% that goes to the ops fund. Should the strategy pay mgt fee to ops fund. I would argue it’s a further ‘contribution’ so I’m fine with it.

I’m theory if this action was required to earn protocol fees it’s a slight negative on the valuation. Today yfi staked earns fees free and clear but if this passes YFI holders would be required to take on extra risk to earn those protocol rewards. However I see it as a same way bet with the idiosyncratic risk of the particular strategy. If yearns vaults do well YFI holders earn lots of protocol fees plus a boosted return from the use of their YFi capital in a strategy. If yearn vaults don’t do well yearn probably not worth much and not earning fees. It’s leveraged to success to a good bet. It would be ideal if we could spread the capital across multiple strategies to spread out the idiosyncratic risk of any particular strategy performing poorly for economic reasons.

In principle I’m for this. YFI holders should lend yearn the use of its YFI capital to help fund the protocol in exchange for protocol fees. Also sends a good signal about vaults to the public (they are good enough for us). It’s a win win which are the type of trade offs years strives for.

Thanks for the thoughtful response.

Yes, my main purpose in writing this proposal was finding ways that YFI holders/stakers could actively contribute and provide a stronger benefit to the protocol, as currently, holders only provide benefits by voting (which I would argue is a weak benefit), and by increasing the price of YFI, thus making it more difficult to buy/borrow votes.

More generally to some of the other great points raised on this thread, as someone who holds YFI, I do definitely see the viewpoint that it’s certainly less scary to stake YFI in governance and receive fees this way, but as someone actively working to better the protocol I see this as a huge weak point because YFI stakers don’t really have “skin in the game”.

And yes, we definitely don’t need to generate the extra yield on YFI, but again, it’s more about the tradeoff of providing extra yields for stakers, using their capital to help support the ecosystem, and using the governance fees as the carrot to guide them to this decision.

I’m also fully aware that there are flaws with this proposal, and at the very least, I hope it gets people thinking about ways to better align YFI stakers and get them more invested into the Yearn protocol.

1 Like

First, a very big thank you to @dudesahn for putting this together. It is not n easy task to track all the discussions and harder still to bring them all together in such a clear and concise nature. Masterfully done!

With that said, here are my thoughts:

  • From the qualitative testing I have done to date in relation to yearn projects, it is clear to me that if we hope to attract the greatest number of YFI to participate, we must ideally show a return as near to 20%pa or greater and we must be capable of maintaining this yield, even if ALL YFI were to return home. A lofty challenge to say the least.

  • The complication with respect to which YFI earns a share of yAcademy profits and which don’t, is only a complication because there still exists a separation of YFI pools with respect to governance.
    – Yes, putting YFI into MakerDao means that YFI undergo’s SC risk that is perhaps ‘less’ present in the governance contract, but as we move forward, it also signals a clear division between the community that needs to be addressed.
    – Speaking for myself, I believe this should be discouraged - yearn contributors have shown time and time again that yearn grows through cooperation. We are each one with DeFi or we are not. Those who are only here to collect fees are not aligned with the values of yearn or DeFi. Thus:
    – If governance options were to be consolidated then all YFI would have a right (as should be the case) to all profits made by the protocol and any subsequent yAcademy ventures. Why progress down a path that signals a clear division when we should remain united in risk and reward.

  • Assuming a united path can be achieved, I am not in favour of using DAI minted from staked YFI to fund yAcademy ventures directly. yAcademy ventures should be funded directly from a treasury set up for such activity. This treasury, should be funded in the same manner as our original treasury.
    – Where protocol fees are routed to it until a ceiling is hit and replenished on a periodic basis.
    – This allows staked YFI to yield farm as should be the case with any of our vaults. The only difference being that this vault also receives any remaining protocol fees - of who’s performance we can address on an on-going basis. (I personally see this as being the most optimal approach)

  • Leveraging the qualitative testing done, I can also attest to the fact, any change to yearns current behaviour with respect to vault yield would be detrimental to the brand and project. This is to say: IF a user deposits YFI, they are EXPECTING to receive more YFI in return. Not any other form of currency.
    – For those wanting yield in another currency, eg. yUSD, we should focus on producing a second layer to yearn which allows users to ‘harvest’ yield across one or more vaults and convert that to a currency of choice. This is again, the most optimal approach in my opinion as it provides the opportunity for other talent to build upon yearn itself. Which I believe IS one of our goals.

To recap:

  1. Unite governance into one vault to ensured a united future.
  2. Maintain existing yearn vault behaviour: apy in deposited asset.
  3. Reuse proven approaches to treasuries and simply create more of them to facilitate each sub-structure of the yearn ecosystem. (yAcademy)
  4. All treasuries to be seeded and replenished through protocol fees.
  5. Excess protocol fees are distributed as a bonus to staked YFI. (staked YFI then sees protocol fees as a bonus, not as the primary reason to participate)

One last note.
I believe in MakerDao. I am of the opinion that Maker started DeFi. This may be factually untrue, I concede don’t actually know. But it is true to me, because it was Maker that gave me the confidence to START using DeFi. Yes, YFI in Maker has added risk, but it also unites and binds the futures of both projects in ways few understand. Something to seriously ponder if you’ve not already realised the benefits…

5 Likes

This is a great point. Complete alignment between YFI governance and other Yearn vault users when it comes to the safety and UX of using vaults. If the general vault architecture is secure enough for YFI governance, then that confidence in security will spill over to other vaults.

If YFI governance does not trust the the vault enough, then we know where the focus the efforts of YFI governance until this is fixed :wink:

As a YFI holder where my YFI is sitting in governance staking not doing much, I personally love the idea of being a more active contributor to YFI via Maker or something else. My only ask is that the YFI be easy to deposit (e.g. not having to figure out much technical conditions), low risk (not no risk), and easy to withdraw if I need to liquidity.

1 Like