Since August 1st Yearn has generated over $2 million in fees. Currently those fees accrue to Yearn’s treasury with YFI stakers having the ability to claim those rewards on a periodic basis. However, while Yearn has proven its ability to provide real value to YFI holders, distributing protocol revenue as dividends is a suboptimal capital allocation strategy given Yearn’s stage of maturity.
If the community were to enact this proposed YIP, we would use system income to buy back YFI to then use to reward different stakeholders for providing value to the Yearn ecosystem, instead of just distributing income to YFI stakers. The idea here is two fold:
- Stop distributing yCrv/yUSD to stakers immediately
- Use Yearn’s system income to reinvest in growth
YFI is ultimately valued based on its future cash flows discounted to the present. Thus, the goal of Yearn’s capital allocation strategy should be to allocate its capital in ways that maximizes its future cash flow. Reinvesting in growth is the best way to achieve this rather than distributing income to YFI stakers now.
Having the flexibility to redistribute YFI to those providing value to the Yearn ecosystem, could meaningfully improve the attractiveness of contributing to Yearn, by providing them with upside exposure to YFI. If we find we don’t need as much YFI to distribute to contributors, we can always just distribute it as dividends later anyways. Remember YFI stakers will always govern the treasury now and into the future, so just because we pause distributions to YFI stakers now does not mean we will pause them forever.
Yearn is DeFi’s leading yield aggregator and continues to be one of the most exciting community-run projects in DeFi. It only took two months for this project to grow from relative obscurity into a $450 million DeFi powerhouse. Still, Yearn is in its infancy and there’s still a lot of work to be done. This YIP could meaningfully improve the attractiveness of contributing to Yearn, by providing contributors with upside exposure to YFI.
This proposal will use system income to buy back YFI, which will accumulate in the Yearn treasury. Once implemented the community can then decide how to distribute this accumulated YFI to different contributors in the Yearn ecosystem. Some contributors that we may decide to reward are:
- Strategy Writers
- Protocol Politicians (Proposal Writers)
- Content Creators
- Liquidity Providers (Vault Depositors)
This is a very similar concept to providing startup employees stock options. It will not only allow Yearn to attract more contributors, but also retain more contributors in the face of competition.
Some concrete examples of how such rewards could look are:
- Incentivizing strategy writers with a predetermined amount of YFI for writing strategies that get implemented (in addition to a share of the strategy’s profits)
- Rewarding protocol politicians a predetermined amount of YFI for creating proposals that pass
- Incentivizing new vaults with YFI rewards to drive growth
- Providing YFI for developers and content creators in addition to what they may already receive in income from the treasury
Yearn has the opportunity to be a leader in rethinking capital allocation in DeFi protocols.
Capital allocation is the process of deploying a firm’s financial resources to maximize returns for stakeholders. Firms typically have five primary options for allocating capital: reinvesting in operations, issuing dividends, repurchasing stock, paying down debt, and acquiring other businesses. For the most part DeFi protocols today have only explored two of these options: issuing dividends and repurchasing stock (tokens). Yet, both of these options are inappropriate for DeFi protocols given their stage of maturity.
Early stage firms rarely ever use their financial resources to buyback stock or issue dividends to shareholders. The reason why is simple. Why reward shareholders now when that capital can earn far higher returns being reinvested into the business? This is especially true for startups in high growth industries where the potential returns on capital can be enormous if a firm succeeds in its market. Investors in early stage startups don’t want dividends and stock buybacks. They want growth and future profits. Yet DeFi protocols today do exactly the opposite of this.
Instead of distributing fee income to token holders, DeFi protocols could take a more thoughtful approach to capital allocation.
Joel Monegro of Placeholder touched on this idea in a recent paper where he suggested that protocols should buy back and reissue tokens to incentivize growth rather than buying back and burning tokens to return value to token holders. More generally, protocols may be better off just letting whatever income they do generate accumulate in a treasury, then being more proactive about how to allocate it.
It’s a positive sign that DeFi protocols have proven that they can generate value for token holders, but now that they’ve proven themselves it’s time to be more thoughtful about capital allocation.
The Yearn community has opted to cap the YFI supply at 30,000 YFI, which means that the initial conditions for Yearn’s wealth distribution have been set. However, there are many community members that are creating enormous value for Yearn that may’ve not participated in the initial YFI distribution through yield farming or bought YFI early. It would be beneficial to all YFI stakeholders in the long-run if these community members may also participate in the financial upside of YFI.
The specification is simple. Buy back and accumulate YFI in the Yearn treasury. The community can decide on how that YFI is distributed in future votes.
Using system income to buy back YFI, which will accumulate in the Yearn treasury, instead of distributed system income to YFI stakers
Keep things as they are
- For: Using system income to buy back YFI, which will accumulate in the Yearn treasury, instead of distributed system income to YFI stakers
- Against: Keep things as they are