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.
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.
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.
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.
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?
- 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%.
- 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.
- 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?
- 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.
- 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.
- Profits from
harvestcalls 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
- At baseline, 25% of profits from each
harvestgoes to protocol improvement reserves, with 75% flowing to depositors. These percentages could later be adjusted if necessary.
- Protocol improvement reserves from the Governance Vault will be held in the form of yUSD.
- 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.
- 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?
- 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.
- 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.
- 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.
- 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