With Vaults v2 around the corner, it is a good time to analyze Yearn’s protocol-wide incentives and ensure they are aligned to produce the best possible outcome. This proposal reforms Yearn’s fee structure to keep it roughly at the same level, but charged differently, and distributed in a way meant to keep YFI stakers, strategists, and contributors better incentivized over the long term.
The Vault withdrawal fee is removed, and replaced by a 2% management fee. The performance fee is raised to 20%. This results in roughly the same total amount of fees charged.
Protocol earnings are used to market buy YFI through the YFI vault, which now becomes the centerpiece treasury vault where all earnings converge.
Note: The change only affects Vaults v2.
Yearn’s competitive edge lies in innovation. We want to attract the brightest minds to collaborate on strategies for us, and to do that we need to provide the best incentives to our contributors. Building a profitable and safe strategy is difficult, the strategist compensation needs to make it worthwhile to do so.
The withdrawal fee that was previously in place misaligns incentives as you are only charged for the service when you no longer want to use it. More money leaving the project would lead to more fees, when it should be the opposite.
Replacing it with a management fee on funds deposited in the system optimizes instead for retaining funds for as long as possible. The vault is providing a valuable service that people are willing to pay for, continuously. This also benefits composability with other protocols and opens Vaults up for more experimentation and integration as a “yield lego”.
The new model aligns incentives throughout the protocol and adds buying pressure on YFI.
The challenge with withdrawal fees
Tl;dr: a withdrawal fee is not aligned with actual protocol usage.
If Yearn does everything right, and there’s an influx of users joining vaults, depositing funds, and earning great yields, there would be no fees as users would leave their money in the system for as long as possible without withdrawing. At that point, perverse incentives would build to FUD the system in order to trigger withdrawals and earn fees. 
Comparing fee schedules
The old fee schedule is used as a benchmark for the new proposal – the new fee structure should not earn less than the model it is replacing. At the same time, it should align incentives better. We want Yearn to attact the best talent and pay developers the best rates.
To help the comparison, we’ve used the oldest and the largest Vault (yUSD), which has been live since 2020-07-30 and backtested the models against it:
5% performance fee: 466,822 (17% of total)
0.5% withdrawal fee: 2,243,078 (83% of total)
Total fees: 2,709,901
20% performance fee: 1,867,288 (73% of total)
2% management fee: 699,237 (27% of total)
Total fees: 2,566,525 (95% of target)
10,000,000 AUM, 10% APY, after 1 year
Previous fee model
- 5% performance fee
- 90% (4.5% of total) treasury vault
- 10% (0.5% of total) strategist reward
- 0 to 0.5% withdrawal fee
- 0% when pulling free funds from the Vault
- 0.5% when pulling funds from the Strategy
Proposed new fee model
- 0% withdrawal fee
- 2% annualized management fee to the treasury (accrued per block, collected on each harvest)
- 20% performance fee
- Half (10%) to the treasury
- Half (10%) to the strategist reward
The treasury would now be composed of yYFI in the YFI Vault.
Fees earned (the management fee and half of the performance fee) are split by the YFI Vault between stakers and the contributor reward pool:
- 80% to YFI stakers
- 20% contributor reward pool
Changes to operations budget
Currently yearns operations budget is 181,000 yUSD per month for 6 months as defined in YIP-41. Should this proposal pass the operations budget (listed as “contributors” in the diagrams above) would be replaced by YFI according to the above: 0.4% via management fee (20% of 2%) + 2% via performance fee (20% of 10%).
From the simulations this should be adequate though may need tuning in the future. Although details of treasury management are outside the scope of this proposal, we have some ideas for a mechanism to provide stablecoins or yUSD to pay grants which is preferable to payment in YFI, though we will have the ability to provide vesting YFI as compensation additionally. Provisionally, we would target treasury management to 20-25% YFI and the remainder in yUSD yield-generating stablecoin