I believe that varying management fees based on the asset class is important for long-term competitive dynamics (this has been discussed before on this forum, i admittedly couldn’t find a recent core thread when searching). Specifically starting with stablecoin vaults or assets like ETH that are at market or below in terms of returns may be a good place to start.
Background
The 2 and 20 model of yearn is borne largely out of existing asset management frameworks within traditional finance. That said, increasingly in the TradFi world we’ve seen a reduction of management fees due to an index approach largely out-performing active management (which is due to passive deployment of assets, something that yearn should capitalize on if that behavior makes it’s way to DeFi).
The current userbase of protocols like Yearn is still moderately sophisticated and increasingly will have a better understanding of what “market level” returns are across various assets (for example, today the USDC vault barely outperforms pure lending on Compound (4.07% net vs. 3.74% and some may put a premium on earning COMP). Thus as we look at scaled deployment of assets like USDC, DAI, or ETH (or others), we should perhaps introduce more sophisticated fee structures in order to fend off competition while also acquire users that otherwise look at something like the ETH vault and ask why they should get 3.79% when they could yield higher elsewhere (of course there is an argument for set it and forget as well as structural diversification, less gas, etc.).
Motivation
I believe that yearn will see increased competition over the coming 12-24 months and likely it would be net dominant in order to change our fee structure ahead of the market to be viewed as pioneers in the space, instead of a project that blindly adopted the TradFi structure but hasn’t changed as the DeFi industry has matured.
Specification
There are a variety of levers to pull (of which I’m not smart enough to determine the right smart contract implementation) including:
Reducing management fees for assets that have a limited universe of strategies or have less complex yield strategies, thus less “active management” is required.
Reducing management fees when performance fees are below a certain watermark/APR.
Tiering performance fees across a variety of APRs (illustrative figures that likely would need to be thought through deeper: i.e. at 3% gross for USDC, performance fee is 5%, at 5% performance fee is 15%, etc.)
For:
This would position yearn as the leader in DeFI fee structures.
This could drive new users who previously felt underwhelmed by the returns, of which are weighed down by the performance and management fees.
This could allow yearn to increase revenue for strategists that materially outperform by even increasing performance fee when the vault reaches sustained outperformance (25%+ fees)
Against:
Could create short-term revenue downturn due to lower management fees
Might lead to a heavier risk-on approach versus a consistent yield approach by strategists…not entirely sure this is a bad thing.
Poll:
Would like to discuss more but the high level question I would poll would be “should we begin to re-think or re-structure our fee structure?”
interesting, perhaps there’s an elegant opportunity to adjust fees on vaults that live on ETH L1 in coordination with yearn (presumably) launching on L2’s/alt L1’s? for some reason it seems fair that fees on other layers might be a bit higher at the outset.
if this discussion get traction i think it’d also be pretty important to first understand the potential affect on affiliate partners.
Makes sense. Also perhaps it generates the need for a regular fee setting team or vote. Regular voting (like CRV weights, Mkr etc) improves community engagement and boosts the value of YFI. We haven’t had regular utility voting in quite some time.
Community can evaluate what “market rates” are and set competitive fees to ensure our leadership.
In general, I feel if our yields are low or have little advantage over market or underperforms, we should have zero performance fees until a threshold performance is achieved…
(As a separate discussion, we should explore YFI as an insurance backstop which can earn direct yield fees for vault users. This dynamic is related to risk adjustment and evaluation of fees, with more skin in the game YFI holders will promote more vaults, suggest more strategies, and be overall more invested.)
Yes, it’s inspired from TradiFi, but it’s not inherently wrong. Those fees are not too high neither too low, it’s simple to explain and (I think) simple to implement. Having dynamic fees or different fees for each vault might increase the complexity of implementation, investigation (in case of discrepancy issues), expected returns, reporting, branding, etc.
If the number (4.07%) is after deducting the management and performance fee, then I don’t see what’s wrong with it. And if the vaults yields were lower than other platforms, then people will leave those vaults, and this will create a natural pressure on yearn team to improve the strategy.
I’m worried that this might discourage strategists to implement low but safe yields. There is nothing wrong with low yield returns, as long as it shows to the users the expected yield %.
Everyone wants higher return vaults, including Yearn team. The team are incentivized to increase those returns after all. My point is that we do not need to pressure the team further.
I doubt competitors will compete Yearn just by having lower returns. Competitors need highly skilled people which Yearn already having a hard time looking/hiring them.
Very much agree with you @mhdempsey, I find the current 2/20% fee structure quite misaligned with the DeFi ethos and what other yield aggregators are doing. Given the current TVL, we could afford extracting less value from users and have the protocol and strategists still left with a very comfortable share of the revenue.
Performance fee: 30% of harvest rewards on Ethereum and 8% on BSC and Polygon (used to market buy FARM and 100% distributed to FARM holders)
It seems like such a high performance fee on Ethereum has resulted in non-competitive yields which may explain the continuous degradation of TVL which went down from $1.17bn back in October 2020 to $415m currently (source)
Performance fee: 4.5% of harvest rewards (o/w 3% distributed to BIFI stakers, 0.5% to treasury, 0.5% for the strategist and 0.5% for the harvest caller)
While I love the idea of a tiered performance fee structure, or the idea of charging performance fee only above a given benchmark, I agree with @Rockmanr on that point that it would introduce too much complexity.
I would personally favour a radical cut of both the management fee and the performance fee, let’s say by half (so 1/10%) and making a big marketing campaign around out.
An ideally, I would favour getting completely ride of the rent-extracting management fee (we can leave that to TradiFi) and go with a pure performance fee with a defined split (e.g. 15% of harvest rewards o/w X% to the treasury, Y% to the strategist and Z% to the token holders in the form of a distribution or buyback TBD).
Thanks @3.1415r for the comparison data. I agree on depending solely on performance fee. It feels more safe for users and fits well with “set it and forget it” motto.
To be honest, I’m not sure what introducing a tiered structure based off variables is actually something we shouldn’t do. This is inherently the promise of smart contracts and is something that should be able to be automated based off a figure (perhaps trailing 30 day APR or something of that nature). Showing this to the user would eventually be UI/UX problem, but one that is solvable based off of a projected yield figure or something similar.
Management fees IMO allow firms to think longer-term at times and also ride out volatility, so I’m not in favor of removing them entirely, however I do think they could be reduced on vaults that are perhaps less complex or market leading from a yield perspective (USDC would be one in this case) both for goodwill purposes as well as to reduce any churn.
Everyone wants higher return vaults, including Yearn team. The team are incentivized to increase those returns after all. My point is that we do not need to pressure the team further. I doubt competitors will compete Yearn just by having lower returns. Competitors need highly skilled people which Yearn already having a hard time looking/hiring them.
To @Rockmanr 's point - it will both increase incentives for strategists to deploy better vaults, but also allow us to remain competitive. I think the overall view that “yearn is the best team so why innovate” is exactly what we shouldn’t have in this moment in time. Instead we should utilize the head start and the warchest/economies of scale to widen moat and introduce better features that continue to differentiate yearn in a world in which there will only be more competitors and where a huge number of new users will not have the brand association with Yearn that other more early, crypto natives do today.
In terms of @Rockmanr point on TradFi fees being inherently wrong, I’d argue that actually they have been considered now to be inherently wrong. Hedge funds have been forced to cut management and performance fees as passive investing has taken hold and low-cost ETFs began to emerge. Unless you generate material alpha for a given user (which tbh Yearn does in some strategies and doesn’t in others) you often see more stable, hedged strategies that have market tracking or volatility compressing performance taking lower fees than the traditional 2 and 20…and often they have watermarks. It’s really not clear at all to me why we should adopt the TradFi model just out of simplicity of explanation.
Agreed, if the community and devs were open to explore this kind of more complex structure, that’s a conversation I would love to have. A tired structure seems to me like the best way to maximise incentive alignment between users, strategist and the protocol while being fairer than a flat fee to all parties.
I don’t see it this way. While that might be true for a PE or VC fund that invest in illiquid assets with an investment horizon of several years and need to pay salaries, rents, admin, etc. before getting any money back, it is different in crypto. All Yearn vaults are invested in highly liquid assets that generate yield (mostly in the form of governance tokens that are being very frequently collected and sold, or in the form of lending interest). Even in time of high volatility or in bear market, those yields continue to accrue every block (albeit at a lower $ value for governance tokens), there is no drawdown and no watermark that would temporarily stop the fee collection process.
And if for some reason people wanted to continue with a Management Fee, then I think this should be 100% offset from the performance fee (i.e. taking the current 2/20% structure, if invested capital at t=0 is 100, and one year letter at t = 1 investment value before fee is 120, and Management Fee is 2, then Performance fee should be (20 - 2) x 20%. Maybe that is already the case? I could not find any documentation describing in details the calculations). There is nothing worst than a flat fee charged on contributed capital no matter what, to misalign incentives between users on one side and strategist and the protocol on the other. This lead to the latter trying to maximise AUM growth over strategy performance (coming from the private equity world, I have seen that first hand…).
I agree management fees can definitely create incentives to scale AUM, however they exist in liquid asset managers as well like Hedge Funds for a reason. In this case, I’d say the main reason is it will allow yearn to generate revenue we can re-invest in growth via hiring or grants. (fwiw it’s also not clear to me that scaling AUM is a bad incentive mechanism right now for yearn…it would be a poor incentive mechanism perhaps in a year or two’s time).
As talent becomes higher and higher paid within DeFi we should take a longer look at how we can utilize the revenue generation (and cash flow more importantly) to continue to expand our moat either via grants to build adjacent projects, or to increase compensation + hire more, as well as holding excess $$ in the treasury for an eventual downturn.
Q2’21 EBITDA was $9.15M. If we assume a management fee reduction from 2% to 1% we’d likely see some impact to EBITDA that reduces that figure ~$1-3M on a quarterly basis (hard to know exactly how management fees drive revenue based off of vault stats today of $2.8B locked.) I think a reduction of that magnitude is worthwhile, however any further could be detrimental to the growth of yearn in the short-term until we are able to use these types of changes (as well as macro tailwinds) to grow userbase + TVL which in turn grows revenue to offset further management fee reductions.
Also as I’ve said before, it’s not clear why the management fee on each vault must be the same, just as different fund strategies, mutual funds, and ETFs all have different management and performance fees (theoretically) based off of alpha generation, investment complexity, or risk.
I generally think about all of these problems as ones of sequencing. We want the flywheel to spin at first by being innovative on performance fees and slightly better on management fees, to then be able to afford us to be even more aggressive in advancing the frontier of fee structures because the first step afforded us that ability.
It’s better to move first on these from a position of strength, than move when it feels “time” from a position of susceptibility.
The reason they exist with Hedge Funds is because they got a performance fee subject to high watermark and most of those funds (depending on strategy) can go through prolonged periods of drawdown where no performance fee is collected. Per my previous comment, this is not the case for Yearn “up only” strategies, though this might change soon as more strategies are being introduced.
Scaling up AUM is certainly a good thing for the protocol, my point is that it shouldn’t be the goal, but a consequence of a great experience for users with clearly communicated benefits. I would summarise those as follow:
Best-in-class APY: Best strategies across DeFi delivering some of the highest net APY to users
Fair fee: Fee structure [purely performance based] among the fairest in the industry
Top notch security
I think 2) is the weak spot as the moment when you benchmark against other protocols. Improving 2) would also help 1) and should drive further AUM growth while getting us closer to DeFi ethos of creating a fairer and more inclusive financial system.
In any case, I agree that whatever change made should not result in a drastic drop of EBITDA so the protocol can continue to self-fund growth. I just believe this can be achieved with a performance fee only construct where a higher share of revenue is directed to the protocol.
But I also agree that it might be to much of a change at this stage, so an overall drop from 2% to 1% combined with the ability to differentiate the management fee depending on strategy complexity might be good intermediary step.
I wonder if it’s possible to get any feedback from @banteg@andre.cronje or any other core yearn contributors on the lift required to introduce this complexity to performance fees from a technical perspective.
Nice topic to discuss about.
I think that innovating fee structures doesn’t necessarily mean cut on Yearn side to give it to users. We could get both (since both parties need incentives).
Why not give some value back to YFI holders instead?
I’ve shared your proposal on twitter, adding few comments:
reducing to 10% the performance fees
only addresses holding at least 1 YFI will benefit from the discount
YFI is locked in a staking contract, earning the extra 10% of fees paid by depositors with <1 YFI
Yearn will get less revenue at first, but the treasury will benefit from YFI appreciation.
For users with <1 YFI is neither beneficial nor harmful. Basically nothing changes for them.
Figures can be discussed, but basically my point is to make both parties happy. Yearn gives up some of the gains to those committing capital to the project.
Only figure I wouldn’t change is the eligibility amount. Wallets with 1 YFI should be able to get the same benefits of wallets with 100 YFI. We don’t want to create elites, right?
Hi @ama8999 . If that were to be implemented, I would rather make the discount available to anyone holding some YFI, and cap the invested amount on which the discount apply based on a formula (e.g. Value_of_YFI_staked (maybe using 30-Day TWAP) x Governance_Defined_multiplier, so if a user has only $1000 worth of YFI staked and multiplier is 10x, he can benefit of the discount on up to $10k invested). The implementation would be more complex, but that would avoid creating two different classes of citizens, particularly given the max supply of 36,666 is drastically capping the number of possible beneficiaries).
Strong agree with you and disagree with two points by @ama8999 -
We shouldn’t make it some minimum number of YFI held to accrue value to the token. The mechanism for value accruing to YFI holders is clearly the xYFI type models of interest bearing locked tokens. That is a proposal for another day though.
Related to increasing the treasury, the benefit will be far higher on performance fees than management fees. A broad-based reduction on performance fees is not that smart of an implementation. Performance fees are the best aligned incentive mechanism we have and thus if a strategist kills it and massively outperforms market…they should be rewarded in a meaningful way. This is why I’m so in favor of dynamic performance fees as it keeps incentive alignment across the board while optimizing for performance (you see this in many tradfi funds by the way when performance fees ratchet up if over a threshold).
That’s why I made it a single tier in my reply, you own 1 or 1000 YFI the benefits would be the same percentage wise.
Absolutely we don’t want to create two different classes of citizens, but I just thought that spreading the bonus on a limited number of wallets (those committing some capital to the project) would see:
a substantial yield increase for at least 36,666 individuals (it wouldn’t make much sense for an individual to use multiple wallets, because he would need to fill each one with 1 YFI)
a circular benefit platform/users through the appreciation of YFI
Since my purpose was to spread to YFI holders some of the benefits deriving from a fees restructuring event, I can agree with your view and if you feel that delivering the bonus only to those holding at least 1 YFI would result in a feeling of disaffection we could continue the discussion on the path you proposed. I’m okay with that.
One question, how would work out the multiplier system you described with YFI whales?
P.S. I believe the bonus should be delivered either in the form of enhanced yield on active vaults or in stablecoins, not distributed as YFI.
Regarding point 2 of @mhdempsey , I understand that reducing performance fees could take away some incentives from strategists, but that’s where most of the fees are. We could find secondary streams to incentivize strategists as much as they are today.
I don’t think there is much to be made on the 2% management fees.
If you have a simplified view on how a portion of the management fees can benefit every user, please share it with us.
My thoughts are more at the “idea” level, I’m open to any improvement. I’m already more than happy that we’re talking about bringing some value to YFI holders.
I see. Since you mentioned a “discount” in your previous post, I assumed you were taking about that, a discount (i.e. a lower level of fee for YFI holders). If you are actually talking about giving some economic utility to YFI, then we are conceptually on the same page. However, I think this can be achieved with a cleaner and fairer structure which I outlined in my first response.
And that for the flat-fee scenario, and ideally the performance fee would actually follow a tired structure with strategists capturing a higher share of the higher tier.
Fixed management fees in tradfi have the primary function to pay for fixed expenses of the business. Smart contracts don´t have fixed expenses so get rid of it.
It´s also a big weight on the low return strategies and makes them unattractive.
This is very short sighted. There are actually a lot of costs involved (salary, gas, deployments, operations, etc.) in maintaining Yearn’s vaults and strategies.
Very good insights here. Management fees are inherently more longer-term oriented. When considering a replacement, the changes to long-term incentives should be a consideration.
This number looks pretty small, but it’s really a sneaky trick, and I’d argue that withdrawal/deposit fees are much, much more un-aligned with DeFi ethos than management fees are, because they are essentially locking you in to a system with a larger cost to exit short-term, and conversely if depositors stay long term, there is no added incentive for Yearn to do a good job. Deposit/Withdrawal fees are also very scammy, because (if you adjust for time) they end up being a much more proportional amount of your deposit than you expected.
Quick example: which costs more, depositing for 1 month in a Vault that charges 2% annually, or depositing for 1 month in a Vault that charges 0.2% to deposit?
The answer is the 0.2% deposit fee, which is more expensive than the 2% / 12 = 0.1666% fee paid by the depositor over the 1 month period they were invested. During the DeFi farming craze, where people barely stayed a day in these Vaults, these fees were a huge source of revenue for forks, despite no one wanting to stay very long in them. In fact, we estimated that over 80% of our revenue on v1 was from these fees, compared to about 20% of our revenue for mgmt fees today.