[Working Proposal] Innovating on Fee Structures

I disagree with you and @Rockmanr in that management fees have anything to do with long term orientation. Tell me, what is more important long term - the devs of a certain vault receiving a fixed % on AUM or that the vaults produce yields above competition?
I sure as heck bet on the better yield since this is what appeals to users and brings the AUM in the first place.

Where did the user centric approach of yearn go? Did literally everything change to the worse after the treasury expansion?
Oh wait, right… there is a treasury of 210 million USD at current prices minted out of nowhere for the explicit use to finance further development. How about using that for gas costs instead of impairing the value of the product?

Is it naive to assume Yearn can continue to grow by producing the best yields, and that Yearn will continue to produce the best yields because there are funds in the treasury? 25 y/o devs interviewing college engineers tell me everyone wants to work in crypto. VC and private equity interest in defi is growing exponentially. We should at least challenge these assumptions.

I don´t argue against incentivizing hard working devs or financing some marketing. But I do think it´s naive to believe that yearn can maintain the first spot among yield farms if the fee structure is multiples higher than of competitors as @3.1415r listed above. Especially in an exponentially growing market as you point out. YFI exists for a little bit over 1 year and if we want it to be relevant in another 2 years from now, it must stay competetive - that includes fees.

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I’m starting to be more convinced that we need fixed management fees.

This does not take the full picture of a strategy. While SC strategies are safe and run automatically, they still need active monitoring by Yearn team 24/7. The team are on a stand-by mode all the time, ready to investigate, pause a strategy, and fix their issues ASAP. Actually, there is already one incident where the team got involved early enough to stop a strategy from being drained (correct me if I’m wrong).

It’s clearly that vaults needs management.

By removing the fixed management fees, the team will have to stop offering vaults with very low yields, due to high maintenance compared to its returns. Specially if the vaults have grown to hundreds or even thousands of vaults, in the future.

However, with fixed management fees:

  1. Easier to allocate a budget to manage/monitor a vault out of its owns fixed fee returns.
  2. Negative (or close to zero) yield vaults will discourage users from adding funds to them, therefore, those vaults won’t need much active monitoring, as the stakes are too low. This sounds a strange point but the beauty is that the team can keep a very long tail of ghost/dying vaults without the need to retire them. And who knows, some dying vaults can revive again based on market conditions. I think this is a very scalable approach.

Sadly this is not very aligned with “set it and forget it” approach, but it’s more scalable.

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I get your point here and thanks for the info because I wasn´t aware that yearn transmuted into an actively managed, unregulated investment fund. That´s what you´re describing here and it will bring a whole slew of other problems down the road.

“Set it and forget it” was exactly the original thought behind yearn when I joined back in 2020…

Calling harvest functions can be outsourced to keepers and financed by vaults but if active management and oversight of strategies is necessary all the time, it fundamentally changes literally everything - including risk for investors. Thanks for making me aware, I was not able to follow yearn closely the last few months.

I´ll think about it but probably I pull all my capital from vaults because for that level of risk the returns are just not worth it. As soon as humans are actively involved it´s practically guaranteed to have a major incident some day, lol.

Thought the discussion about staking / insurance pool in tokenomics proposal touched on these risks.

Kind of but not explicitely. At least I didn´t have this particular layer of risk on my radar. Obviously, the risk module should be responsible for such a failure, which - you´re right - actually makes staking more insecure than using the vaults.

However, I´m also standing by my earlier statement about regulatory risks because of the active nature of this type of management. I think it´s pretty obvious that a system that needs 24/7 of human supervision and frequent actions will never be recognized as digital infrastructure, instead more likely as unregulated financial product. I guess you´d agree, coming from TradFi?

Maybe that´s a risk the devs must be more concerned about than the users but I like to be ahead of the crowd.

@DeFiChad You seem to be throwing a lot of accusations for someone who admittedly doesn’t have a good understanding of what Yearn is.

It’s not an actively managed fund and never was. However, it’s a giant system which takes a lot of effort to maintain. You mention harvest functions, which are fully outsourced by the way, but fail to recognize someone needs to write robust enough strategies which can withstand the most adversarial environment.

While strategies work on their own once shipped, writing good strategies requires a lot of collaboration and can cost a lot. Yearn contributors have stepped up the code review game, formed strategy committees and developed a unique risk framework, a lot of things have been happening under the hood. For perspective, Yearn has shipped about 340 strategies this year alone.

In regard to your accusations, Yearn never lends money from its users, it’s a digital infrastructure for users to use automated strategies while maintaining self-custody. Everything about how it works is transparent and can be verified by anyone.

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Thanks for the lecture @banteg but yeah, I fail to see the need for 24/7 monitoring if you write robust code in the first place, plus the outsourcing of harvest. If strategies work on their own, it doesn´t add up that there is a lot of maintenance to do.

I´m not downplaying the work you guys do and the initial costs of creating strategies. Never did. Anyways, I just leave it at that because I have no intention of going back and forth with personal attacks.

Just wanted to weigh in after a fair amount of debate.

  • Management fees should reflect what the market is willing to pay for the complexity or rarity of a given product. Reduction on underperforming, less complex vaults, should probably happen as it also destroys yields.
  • @banteg I think this speaks perhaps to a broader question (and one that others are discussing in other proposals and on twitter) that transparency of strategy reasoning or thought process is fairly bad today. LPs generally have an understanding of the strategies being deployed in given vehicles and at least why/what the aim is. Perhaps a better contextualization is needed (outside of just “THIS IS WHAT THIS VAULT DOES”) that instead talks through why/how a given strategy was optimized and also when it was last updated (again, available but not easily found).
  • @DeFiChad I’d imagine like any good product, maintenance should be desired either to limit risk, or to allow teams to actively spend time observing the protocol. Management fees help solve for this.

My last ask would be - it’s clear that we have a need to innovate on a few of these things, and would love tangible suggestions and I’m happy to organize.

I’ll put together what I believe a good working proposal is, but again, @banteg or others, would be good to understand from core team complexity of dynamic fee implementation as well as any sort of revenue splits related to management fees vs. performance fees as I’ve asked this across discord and twitter now and gotten no feasible response.

I don’t see a compelling reason to alter the fees right now. One thing I didn’t see here is any analysis of how these proposals would affects yearn’s revenue and profitability. Those should be among the most important criteria in analyzing any fee change decision. IMO fees should be changed for 1 of 3 reasons:

  1. Value accretive. Fees should be changed so that the net effect is more revenue to yearn by perhaps driving more TVL/capturing market share due to lower fees. Ie: shifting the demand curve.
  2. Competition. There is competition and we need to lower fees to maintain market share.
  3. Better aligns yearn with its depositors at no cost to yearn.

Since there isn’t much in the way of competition I think #1/#2 are out. As for #3 I’m open to it, but yearn is basically providing a service of vaults infra+strategies. Strategists are paid in a promote which aligns them perfectly. Yearn is mostly mgt fee based with a 10% promote element. I think this is a good mix overall.

Could an argument be made that we should change the fee structure for certain asset classes. If it meets reason #1/#2/#3 I’m happy to see the analysis.

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good points and i probably agree for the most part.

but with respect to #1, if a vault has net returns near zero, the vault might attract & retain more capital and profits by lowering fees to generate positive returns for depositors. even if competition is negligible.

i’m not really sure how yearn could figure this out other than experimenting? perhaps its not worth it now if complexity is too high anyway.

If people feel strongly about keeping the 2%/20% fee structure that mirror TradeFi, we should at least also consider including a hurdle rate if is always part of this construct in TradeFi, i.e. at net APY to users (after management fee) below which no performance fee can be charged. This is typically 8% Net to Limited Partners (= users) for PE and VC funds. That would solve part of the issue with the lower performance strategies.

Happy to evaluate adjustments near the 0 yield bound, but I’m not sure how much incremental capital you are attracting by adjusting yields upwards sub 50-100 basis points. My sense is that the capital is relatively indifferent and in elastic around those levels as long as > 0 particularly given the alternative options out there in the market. Happy to experiment though

The issue with hurdle is it’s tough in a low yield environment. 8% hurdle would basically wipe out a significant portion of the promote income most of which goes to the strategists. Unless the strategists have an 8%-10%+ yielding strategy they have no incentive to create it. There are many lower yielding strategies that we can deploy.

Also the hurdle is meant to be outperformance relative to some benchmark (hurdle). Here we are creating the yield from scratch. You could argue aave/compound rates are the hurdle rate but those are much lower than 8% and vary by asset it would be a pain to constantly track and update. A flat rate would be punitive in low yielding environments and not useful for your purpose in high yielding environments. That means you need to maintain dynamic hurdles for each asset. I think just too complicated for what we are solving for.

All great discussion, don’t have a clear solution on management fees, but i would like to chime in an bring some color from the inside process. I helped implement some of the systems and process @banteg mentioned above.

As we know a strategy doesn’t appear out of thin air, apart from the author, it needs experienced code reviewers (strategists) first that need to be paid somehow (this is extra work, not performance yield), it needs security reviewers (also paid or incentivized somehow), audits most likely eventually (also not free) and then infrastructure for alerting/adjustements/management, yes is needed, users ask for yield estimates, harvests alerts,etc, all of this needs code that are not smart contracts and somebody needs to build and support also not part of strategy code and doesn’t drop from the sky.

Once the strategy is up on chain, it really depends on the nature of the strategy what level of monitoring or management it needs, but the discussion on 2% management fee assumes for a simple LP to curve type strategy where the emissions are farmed, i would say that’s fair to ask for adjustment if the strategy can be somewhat this simple, but this is not 2020 anymore, most newer and higher grossing strategies are not simple.

Strategies that have high yield usually are not simple LP/staking strats, most are either leveraged, debt based that are riskier by nature and 10x more complex to code, review, audit and manage. The code can work in several good and bad conditions and we code and test for that, but the code is limited to what happens on chain on its boundary, blacks swans can happen. Even a trusted system/protocol like compound had an issue that affected several of our bread and butter strategies.

No AI or automated bot would have been able to decide to reduce our exposure on its own, not saying it cant be done, but current protocol version doesn’t work like that yet, doesn’t mean we stop trying to move to more automated yearn, im for that actually, but fact of the matter we need to keep a float to be able to keep innovating and current iteration of the protocol works this way and needs a fair amount off chain work and infra apart from just smart contracts.

Even Curve LP strats that at this point can be called simpler, need an active off chain tracking of stats to be able to predict the optimal voting % for gauges that would give the vault holders the best yield going forward, this is currently unfeasible to do onchain. Somebody has to do this data analysis, also doesnt fall from the sky.

Hope that helps bring some color to the discussion, i do agree we need to explore options and be flexible with fees to benefit users and holders, but we need to have the complete picture to make a correct adjustment that would not hamper our current processes.

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+1 Great info and background from @storming0x. Yearn vaults are definitely not at a set and forget it point by any means as people might have assumed above.