Keeping Yearn Great - Funds, Incentives & Rewards

Thanks to @tracheopteryx for the excellent summary of the issue and main options discussed so far. I’m posting on behalf of Blockchain Capital here and wanted to share how we’re thinking about the issue.

To offer some quick context, if we we’re structuring the cap table of a company we were investing in, it would look very different from YFI’s current distribution for many of the reasons highlighted in Andre’s post. It’s clear that contributors to Yearn need to be fully aligned with investors/holders of YFI. Our thesis for Yearn centers around the ability to adequately incentivize the best builders and strategy writers to contribute rather than compete, so in our view this is an existential question and it’s critical that the solution thoroughly addresses core team concerns and also puts Yearn in a competitive position from a hiring and growth perspective.

The main arguments against minting seem to be that 1) it breaks the 30k meme (which drew BTC comparisons in early days) and 2) it undermines the governance process.

While these arguments are certainly worth consideration, if Yearn can’t retain talent and invest in growth, no meme is going to save it long-term. The meme may have been helpful in getting early people interested, but it’s not the reason contributors stay. As for the governance process, it’s more important that the governance mechanism improves over time than it is to honor an exploratory signaling vote (which was not formally ratified on-chain) from a time when we had a less complete collective understanding of Yearn. The most bullish outcome for governance here is arriving at a solution to the existential problems of talent retention and growth.

In our view, the most important questions to focus on are:

  1. Do we need to mint YFI?
  2. If yes, how should we go about it?

1. Do we need to mint more YFI?

This is a question about long-term alignment between contributors and holders as well as opportunity cost for contributors.

To address it qualitatively first, we can rephrase the question: Does the YFI community want the most critical piece of the Yearn ecosystem, its core contributors, to be employees or owners? As venture capitalists, we think it’s important for investors and the core team to have aligned incentives and we typically don’t get comfortable backing teams unless they have sufficient exposure and thus motivation to stick with the project long-term. This model has a lot of precedent and it is recognized as best practices to make sure that the core team has sufficient upside. We can safely conclude that the core team needs to be exposed to YFI somehow, but how much YFI? And can it be funded through Yearn fees?

How much 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.

To those arguing that V2 fees may achieve a level of income that could be in the range we’re discussing here – that will take an unclear amount of time to determine, and kicking the can down the road on this issue is extremely risky, as core contributors have noted that they’ve already lost talent to competitors. Other protocols don’t have to wait to see if fees are big enough in a year to pay their teams – to the contrary, most aren’t focused on fees today and are instead focused on growth and capturing market share so that fees in 10 years from now are maximized. That is the mentality we want to encourage here.

2. Assuming we mint, how much should be minted and how should it be done mechanically?

This is a bit harder of a question to answer, as there will likely be a variety of opinions and limited historical data to say what works best. I’ll briefly summarize our initial view but would note that ultimately it’s important to build consensus with other community members, and we would be supportive of a number of different flavors here as long as they directionally accomplish the goals outlined above.

High level thoughts:

  • Mint of somewhere between 5-15% of total supply is reasonable and puts YFI in an incentive-aligned and competitive position when viewed in the context of the talent market. If we don’t burn the minting key, this can be on the smaller end since there will be corrective power down the line. If the minting key is burned, it’s even more important that the amount of dilution is methodically chosen. A good middle ground might be putting the minting keys behind a high quorum wall (as Aave does) – this would make it harder to mint but also retain the capability in case we learn something new in 5 years that changes everyone’s mind.
  • We are initially in favor of capitalizing both the team and the treasury, as we think both are important and additive to Yearn. Thus we’re supportive of using some reasonable mint to capitalize the treasury, and doing so in tandem with a well-defined process including controls around how part of the treasury can be used to compensate contributors for past work and incentivize them + new hires for future work.
  • Vesting for minted tokens. There is a good argument that some amount should be initially unlocked, as the team has accomplished amazing things in bringing Yearn to what it is today and should get credit for that. But most of the mint should be earned over time – 4 years is standard and will likely have the strongest argument from an optical perspective.

There are many more questions and angles to look at this from, so would love to see the forum discussion narrow in on mechanics of a potential mint as this will ultimately best inform an eventual on-chain vote.