YIP-64: Adjust fees on non-stablecoin yVaults

This post was drafted with help from @philbert and @saltyfacu :blue_heart:

Summary

Experiment with introducing a new fee structure for non-stablecoin* yVaults:

  • 25% performance (25% increase)
  • 1% management (50% decrease)

Some of the expected implications are:

  • Improved profitability for yVaults with lower yields
  • Reduced treasury income
  • Unchanged incentive alignment for strategists

*Stablecoin = fiat-pegged tokens

Motivation

In DeFi, stablecoins are often able to generate higher yields than crypto native assets. Since the heights of “DeFi Summer” yield has slowed down on the Ethereum mainnet, and it has become common for non-stablecoin crypto assets to return in the lower single-digit APRs.

Opportunity Cost of High Fees

The current 2% management fee is a flat rate taken from invested assets over the course of a year. Therefore, if a strategy is earning 2.5% APR or less (after combined mgmt + performance fees), users stand to realize no profit on harvest. Yearn tries to avoid deploying funds in these situations which are unprofitable to users. The downsides to this are:

  • all farms which earn between 0% - 2.5% APR become non-viable strategies
  • in these situations, treasury earns no fee income
  • creates additional management burden on Yearn operations to actively monitor strategy APR and react when it dips too low.

Finding 2.5%+ APR farms for crypto assets like ETH and BTC is difficult, especially for the scale Yearn operates at. Lowering the management fees on these tokens will help improve APR while also creating access to new farms.

Maintain Protocol Revenue by Shifting to Performance fee

For lower performing vaults, performance fees are a more attractive option because . to anything below 100% will not result in users earning 0% (or less) on a harvest as fees are charged from profits rather than the initial deposit. This is a straight forward way to balance the reduction of the management fee.

More to come…

This proposal is viewed as a temporary measure to take action and collect data while further ideas for fee revisions are discussed by the community.

Data for claims

The image below shows sample data for 2/20 versus the proposed 1/25 fee structure across a range of yield scenarios.


Source: Fee Adjustment Calculator

Increasing profitability for yVaults with lower yield:

The proposed fee structure change provides a very tangible benefit for low earning vaults, with diminishing results as APY increases. This is why it makes sense for the adjustment to be isolated to crypto native asset yVaults rather than all yVaults in general. When a vault is earning above 30% APY, this fee change actually reduces profit for users.

Reduce treasury income:

Adversely, the proposed fee change would have a greater impact on the treasury when applied to lower earning vaults. Still, percentage wise, the benefit to token holders greatly outweighs the loss of the treasury.

Additionally, since the lower earning vaults aren’t bringing in as many fees as an equivalent TVL higher earning vault, the relative loss of treasury revenue will be negligable when compared to the benefits.

Specification

Adjustments to vault management and performance fees require transactions from the governance multisig (ychad.eth). If passed, the following should take effect.

Non-stablecoin yVaults

  • 1% annualized management
    • Full amount allocated to Treasury
    • Applied only to invested funds
    • Collected on each harvest
  • 25% performance fee
    • 15% allocated to Treasury
    • 10% allocated to the Strategist

Stablecoin yVaults: (unchanged)


For: Introduce 1% mgmt and 25% performance fee structure on non-stablecoin yVaults, leaving fees on stablecoin yVaults unchanged.
Against: Do nothing

Poll:

  • For
  • Against

0 voters

3 Likes

If there are strategies that yield sub 3% that are good but not viable with the current structure I would propose the pricing be adjusted for those on a one off basis.

Your table IMO actually supports the conclusion we should not change the fees. The lower yielding effect on treasury income is 55-65% which is what you are solving for. That means we would need to 2-3x More non stable TVL just to maintain the same level of treasury income we have now. That is a massive drop. I assume a strategy yielding 15-20% you have no or minimal issue with the current fee structure?

1 Like

This is definitely the right way of looking at it. The decrease in fees is being down with the hopes of attracting even more deposits to make up for it.

2 Likes

The counter argument is that we currently have nearly 50% of the ETH vault unallocated and therefore earning 0 fees and 0 profit for users. WBTC is in a similar situation. Lowering the barrier to entry for new strategies/farms allows us to put more money to work.

Though, offhand I don’t have a list of potential strategies that would become available after this change takes effect. Would be an interesting data point to add here.

Edit: For context on my comment, there is an effort to avoid putting user funds at risk into strategies which earn net 0 profit for them.

2 Likes

Couple of questions.

  1. Are we able to charge fees by strategy or is that exclusively by vault. For example could you charge lower fees on those increments strategies or does it have to be vault-wide?

  2. What is your best estimate of the income/yields on the idle eth that would be unlocked by allowing lower earning strats? 50% is a big number and would 2x TVL. If #1 above isn’t applicable (which would actually be the best of both worlds) then it would be trade off between the funds sitting idle vs earning less on putting them all to work.

For 1, it is my understanding that fee are set at the vault level as can be seen on yvDAI at yearn.watch.

If you could alter fees by strategy that would solve the problem and better optimize fees. Maybe a note for future iterations.

I don’t know. My gut is the loss of fees on the current fee producing portion of vault assets is greater than the reduced fees by trying to generate sub 3% yields on a larger utilization. The 25% promote is meaningless on a sub 3% yielding strat. It’s 75bps with only 45bps going to treasury in exchange for a 1% mgt fee cut on everything. And that is 3%. It’s even smaller at the yield decreases. At 3% you would need to 3x utilization to just break even. I just don’t think the math works. If the strategy yields 10+% then the 2/20 doesn’t really matter since the yield is so high anyway.

1 Like

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The proposal was defeated with 64.84% voting against.

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