YIP-57: Funding Yearn's Future

Authors

@aleks-blockchaincap @banteg @dudesahn @ekrenzke @lehnberg @ryanwatkins @srs-parafi @tracheopteryx @vooncer @yfi-cent @milkyklim

Summary

Safeguard Yearn’s future development. Mint 6,666 YFI. Use ~1/3 of minted YFI to reward key contributors and put ~2/3 of minted YFI in the Treasury under the control of the community through future proposals.

Abstract

If adopted, this proposal seeks to:

  1. Mint 6,666 YFI.
  2. Allocate ~1/3 of the minted YFI to key contributors as vesting retention packages.
  3. Allocate the remaining ~2/3 to the Treasury, which will be deployed through existing Governance for various uses, for example:
    • Future contributor incentives
    • Liquidity mining programs
    • Staking rewards
    • Protocol mergers & talent acquisitions
    • Cross-protocol incentives to tighten co-operation across the ecosystem family of projects

This benefits Yearn as a whole by:

  • Retaining existing contributors
  • Incentivizing new contributors
  • Capitalizing the Treasury to a scale comparable to industry peers in order to better support growth

This benefits YFI holders in particular by:

  • Creating a strategic reserve to advance Yearn as one of the world’s leading DeFi protocols
  • Aligning incentives across stakeholders
  • Providing for Yearn’s future

Motivation

Evolve the fair launch

  • Yearn’s launch was exceptional at creating a decentralized and engaged community, but it did not provide adequate incentives to retain existing and future contributors on an ongoing basis, nor did it provide the protocol with a war chest to fund future activities.
  • Viewing the fair launch as a living concept rather than a single event, this proposal seeks to remedy this
  • It does so with an emphasis on funding the Treasury for the benefit of all active protocol participants over the existing contributors at a ratio of rougly 2:1 in terms of allocated YFI

Remove Yearn’s Competitive Disadvantage

Excerpt from [1]:

Team token allocations
Projects such as Uniswap, Aave, Synthetix, Compound, 1inch, Curve, and Balancer hold anywhere from $300 million-$2.13 billion in tokens aside for [contributors], with the average being between $500-600 million. This is generally 20-30% of the total token allocation. Newer projects such as SushiSwap, Badger, CREAM, Harvest, and Cover vary more between teams, but allocate between 10-25% of token supply to their teams and early contributors.

Treasury/operations token allocations
While the numbers vary here more widely, most of the major projects still have significant token amounts set aside for operations. Uniswap is on the high end with $4 billion, Aave, Synthetix, Balancer, and 1inch all have between $200-$570 million, and likely other projects without any tokens set aside for operations have ample funding from investors (Curve and Compound).

Why mint?

Excerpt from [2]:

[The decision] comes down to the market for talent and the opportunity cost for YFI contributors. We looked at other successful DeFi projects to see what the market says top-tier talent is worth:

The UNI team has 21.3% of tokens (which includes tokens for future employees) and UNI holders collectively control a treasury with 43% of the supply. At current market prices of $9.2 (which reflects a fully diluted valuation of $9.2B), each bucket has several billion dollars worth of UNI – team ~$2B and treasury ~$4B – giving the Uniswap team significant fire power for hiring and enabling a lot of future growth spend from the treasury (both buckets are subject to 4-year vesting).

The COMP team has 26% of tokens and a smaller but still significant treasury with 7.8%. At the current market price of $226 per COMP, the team allocation is ~$580M and treasury ~$176M.

You can quickly see that a treasury of $500K and a team allocation of 0% is way off market. The reality is that for Yearn to allocate even 5% (which would be well below the examples above), at current market prices (~$37K) Yearn would need to either earn $56M or mint $56M worth of YFI. Given that a conservative figure is presently an order of magnitude higher than annualized YFI holder income, the only reasonable way to bridge the gap in the near-term is through a mint.

Why 6,666 YFI?

  • 6,666 is 22% of the current total supply of 30,000 YFI.
  • After gathering feedback, modeling a number of mint scenarios and various retention package estimates, a ~20% increase was determined to be the minimum viable amount to provide competitive retention plan, using only roughly 1/3 of the total mint amount.
  • 22% is in line with yearn’s peers, for example Aave minted 23% when they migrated from LEND to AAVE.[3]

Improve Talent Retention & Acquisition

  • Contributors have recently been poached by other projects.
  • With the current operational treasury size of $500,000 and 0% token allocation to the team, Yearn struggles to compete with the compensation packages offered in the current market. These are becoming increasingly competitive.

BABY is a great first step, but not enough on its own

Buyback and Build Yearn (BABY)[4] establishes a moving target for YFI buybacks in USD terms. As Yearn earns more revenue in USD terms, it’s possible that the YFI price in USD adjusts upwards to reflect those increased earnings. So it would be like trying to catch your own tail. Modeling shows that using 50% of Treasury earnings for buybacks would purchase 100-300 YFI per year (see sensitivities below). Even with the assumption that V2 vaults end up being very successful, earnings will likely not be enough to accumulate a sufficient amount of YFI for the Treasury.

Below are two different BABY scenarios. One sensitizing aggregate yields on V2 vaults and their effect on YFI buybacks. The other sensitizing operating expenses and their effect on YFI buybacks. The other with 100% of net income.

Aggregate Yields Sensitivity

Operating Expenses Sensitivity

Previous Proposals

There have been a number of previous proposals relating to the YFI supply.[5]

Title Comment Outcome Ref.
Proposal 0: YFI Supply For: Allow future YFI to be minted. This will be superseded by a new proposal to discuss (and then vote) on weekly YFI allocations. Passed [6]
Proposal 5: Reducing YFI weekly supply At the time of this proposal a weekly emission was planned, this proposal sought to introduce a weekly halving over 25 weeks Did not pass [7]
Proposal 8: Halving YFI weekly supply the same as bitcoin Another attempt to introduce a halving Majority for, but did not meet quorum [8]
YIP 30: YFI Inflation Schedule FOR : Implement an inflation schedule of 20,000 YFI over the next 8 years, with 12,802 distributed in the first 3 years, ending with a trailing tail of 1% inflation. Did not pass [9]
Burn YFI minting ability permanently Signaling poll to burn the minting keys after on-chain governance is deployed Majority for, but was not followed up with a binding proposal or on-chain governance [10]

Specification

1. Mint 6666 YFI

A proof of concept for minting has been produced [11]. If accepted, Yearn Governance would need to do these things:

  1. Deploy the vesting contract (deployed at 0x0C97B9E8bdEc88fe683DD11607f66F351cEc6110)
  2. Call TimelockGovernance.setTargetGovernance(YearnPact)
  3. Wait 3 days
  4. Call TimelockGovernance.updateTargetGovernance()
  5. Call YearnPact.brrr(), which will mint and then revert the YFI token governance back to TimelockGovernance immediately thereafter.

2. Allocate ~1/3rd to vested retention packages

  • Out of the 6,666 minted YFI, allocate roughly 1/3rd (5% margin on either side) to retention packages in order to provide the sufficient face melt required for effective contributor stickiness.
  • All YFI allocated to retention packages will be subject to vesting.
  • Retention package details, including eligibility, amounts, and overall terms, will be prepared and presented by a Compensation Working Group:
    • Working group members are recommended by the Operations team and should include a variety of project contributors.
    • The Multi-sig approves the proposed members of the working group.
    • The working group can gather feedback and input from existing community groups or form new ones as required.
  • Once appointed, the working group’s tasks will be to:
    1. Finalize compensation packages
    2. Finalize vesting terms
    3. Identify eligible recipients
    4. Prepare a Compensation plan for the Multi-sig to review
  • After review, the Multi-sig approves the Compensation plan, or requests changes.
  • Separately, the working group is also tasked with formalizing the qualification process and retention packages for future contributors. Funding for this comes from the portion allocated to Treasury (see below).

3. Allocate ~2/3rds to Treasury

  • Allocate the remainder of the minted YFI, i.e. roughly 2/3rds (5% margin on either side) to Treasury.
  • This allocation flows into the Operations Fund established by YIP-54 [12] and can be spent accordingly, which includes through ad-hoc Governance proposals brought forward as YIPs.
  • The Operations Fund remains under the supervision of the Multi-sig.
  • As YIP-56 [4] makes clear, YFI in the Treasury, including those in the Operations Fund, cannot be used to vote.

Changelog

  • Jan 28: Clarified in the Specification that YFI in the treasury cannot be used to vote.
  • Jan 28: Clarified in the Specification that all YFI retention packages will be subject to vesting.
  • Jan 28: Changed title to YIP-57 and added binding snapshot vote link.

Vote

Snapshot Binding Vote

Vote Here

Non-Binding Signalling Poll

  • Yes, I support this proposal.
  • No, I am against this proposal.

0 voters

Non-binding Poll

References

  1. https://gov.yearn.finance/t/token-allocations-at-peer-projects
  2. Keeping Yearn Great - Funds, Incentives & Rewards - #19 by aleks-blockchaincap
  3. Flashpaper - Aavenomics
  4. YIP-56: Buyback and Build
  5. h/t to Nick Almond for his tweetstorm that informed this section: https://twitter.com/DrNickA/status/1350792604754075649
  6. https://gov.yearn.finance/t/proposal-0-yfi-supply
  7. https://gov.yearn.finance/t/proposal-5-reducing-yfi-weekly-supply
  8. https://gov.yearn.finance/t/proposal-8-halving-yfi-weekly-supply-the-same-as-bitcoin/
  9. https://gov.yearn.finance/t/yip-30-yfi-inflation-schedule
  10. https://gov.yearn.finance/t/burn-yfi-minting-ability-permanently
  11. GitHub - banteg/yfi-pact: our pact with the devil
  12. https://gov.yearn.finance/t/yip-54-formalize-operations-funding/
  13. YIP-55: Formalize the YIP Process
16 Likes

33,333 was a better meme tho…

31 Likes

Thanks for pulling this together. I think it’s important to look at any supply increase as part of a holistic proposal, and this offers more clarity around that.

Could you clarify if the intent is to distribute all of the 2222 YFI upfront to existing contributors? Or would any of this be held in reserve for any period of time?

12 Likes

I would just say one thing 1/3 is a lot.

6 Likes

I’d prefer a full 33.33333333% minted partially for the meme but also because I thought 27-30% seemed like a more optimal long term number and the extra 3.33% was just for meme marketablity, but I understand that as a community that minting wasn’t exactly welcomed so I’m not going to push for much more minting above what is workable for bootstrapping.

3 Likes

The intent is to distribute roughly 2,222 YFI to existing contributors in vesting packages. Details to be determined by the working group outlined in the Specification, section 2. We may not need to distribute all of it, and can keep the remainder for future hires.

12 Likes

Also a thought on market-competitive compensation here: I do think key contributors (especially earlier ones) should get a healthy chunk of YFI for previous contributions, but this should be normalized to some extent for more recent contributors (and of course, also based on their contributions).

Early contributors in any project often get a huge chunk of tokens because they are taking a lot of risk upfront in making the project a success. Often the token starts off at zero and their early efforts give it value. Newer contributors don’t have to take that risk and are already entering a mature project with a token that is very valuable.

21 Likes

I would say that one third is not a lot for a holistic and competitive retention package to promote both fairness and again incentivize the best and brightest to stay with Yearn for the long term.

22% dilution and we still don’t get the minter burned? Come on now.

19 Likes

It’s not necessarily.

I have no idea what the Compensation Committee will decide, but think about it this way: I could imagine someone like Andre be given 500 or even up to 1000 YFI for his early contributions, and I’d like to see him have real skin in the game.

28 Likes

I am in favor of this proposal.

The alternative would be to risk losing key contributors as well as an empty treasury, neither of which stands to benefit YFI tokenholders.

Having said that, as with all incentive structures, the devil is in the details. Ill-conceived retention packages may have the opposite of the intended effect: they may dilute tokenholders and reduce the motivation of key contributors. It will be important to make sure we structure pay packages in such a way that they’re aligned with the long-term interests of tokenholders.

6 Likes

proposal sounds great. it will be even better if the minter is also burned

3 Likes

Anyone is able to suggest a proposal to burn the minting keys, place them behind a quorum, add additional time lock, or suggest alternative protections at any time. The coauthors discussed this at length and decided to keep this YIP focused, allowing others to follow this course if they so chose.

For what it’s worth, all of yearn’s peers that we reviewed have available minting permissions.

8 Likes

One group wants a mint and the other wants the minter burned. That’s pretty much the two ends of the spectrum. Passing a proposal with both ensures both actually happen, and would likely have the most collective support than either one individually.

14 Likes

I thought the vote passed to burn the mint. I really don’t care if the minting keys aren’t burned if there was no vote passed. it just leaves a bad taste in my mouth if there was a vote for a burn and the burn does not happen.

2 Likes

22% is quite a lot. ~11% sounds more reasonable (please don’t compare YFI to other projects!). Also the minter has to be burned.

2 Likes

The vote did pass, but not with enough votes for it to be actionable if I recall

That was a signaling poll, non-binding. Many have been confused by this, here are some resources for you:

YIP-55: Formalize the YIP Process is our formal proposal process.

This proposal doesn’t change the status quo of the minting keys, it instantly transfers them back to the timelock. What we really need is some better system which requires a large quorum and differential for any further actions with the token and probably for managing treasury too.

@external
def brrr():
    assert not self.minted  # dev: already minted
    assert self.yfi.governance() == self  # dev: not governance
    self.yfi.addMinter(self)
    self.yfi.mint(treasury, total)
    self.yfi.removeMinter(self)
    self.yfi.setGovernance(timelock)
    self.minted = True
7 Likes

i hope this proposal and vote passes, i think it’s essential to reciprocate the sacrifice that the people building this have made, ensuring the health of Yearn thriving into the future.

3 Likes