Proposal: Rethinking Capital Allocation

[RyanWatkins]

Summary:

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:

1. Stop distributing yCrv/yUSD to stakers immediately
2. 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.

Abstract:

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)
• Developers
• 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

Motivation:

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.

Specification:

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.

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

Poll:

• 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

[AnthonyBertolino]

I think this is a great idea from a macro view, although I would like to see formal budgets outlined on how the capital plans to be allocated.

Capital used from treasury so far has been fairly willy nilly from my (outsider) view.

[WrongNebula]

As a contributor to Yearn (content creator, UI/UX, design etc…) and token holder, I approve this proposal.

Edit: and yes as @AnthonyBertolino mentioned I received a grant for my contributions in September. Note that I never asked for a grant, I wasn’t expecting one, I contributed to Yearn on my free will, on my own time.

Edit2: I didn’t received any YFI from anyone, I didn’t farmed YFI, I buyed early that’s all.

[AnthonyBertolino]

@WrongNebula and receiver of treasury funding previously, which is important to disclose for viewers who aren’t in tune

[Reeserj]

I’m in favor, but the for and against are the same right now… Can’t not pass!

You fixed it!

[ShadyFast]

Would these tokens be vested? I’m not sure I see the point in taking away contributor autonomy by forcing a buyback if the people receiving these tokens will then go on to sell/do whatever with them, it just seems like salary with extra steps.

I love the idea but I think it needs work in terms of vesting schedules/bonuses/exit penalties. I’m not familiar with early-stage startups but this seems like the best model to base these ideas from. I believe they wouldn’t just give straight unlocked equity, which YFI is.

Another question is; stock options typically pay off on some sort of liquidity event, like an exit or an IPO. Yearn is already trading and has liquidity. If YFI is no longer revenue-producing whilst in this growth stage, will we be handing over tokens that suffer in terms of the price until x point? When is the growth stage over? What would trigger a reversal of this YIP back into YFI generating revenue for stakeholders.

I think in summary I like the idea but its way too broad, which is fine at this stage I guess.

[WrongNebula]

Edited my post for transparency!

[mgreez]

I am FOR this proposal given that the distributions are regulated.

[RyanWatkins]

I agree with this. I think the first step is to first come to an agreement on what the community should do with the treasury (buy back and accumulate YFI or status quo), then the community can figure out how to best allocate the treasury. I provided some examples in the proposal that may provide a basis for those discussions. But yes agree agree there should be a clear plan and rules for distributions.

[tybolt]

No, I want my yield from staking YFI in GOV

[iTo]

As I have shared in other forums, I am for this proposal but would amend the proposal to ensure it is not an open ended agreement. No lawyer would agree to an open ended agreement. Thus, I’d propose the following addition:

• In the same way the current treasury is capped at 500k and replenished either by rewards or its own activities, I think this should be the same goal for this amendment.
• Before reverting rewards back to holders, a similar cap should be implemented. What that is, I don’t yet know. But perhaps we can consider it like this:

If we were to say:

1. The new treasury should convert all its assets to YFI and then
2. Redirect all rewards to market buy YFI until the treasury holds (eg.) 3,000 YFI and then
3. Deposit the treasury YFI into the existing yYFI vault and revert rewards back to YFI holders

Then:

The treasury YFI balance would grow at the yYFI vault rate, currently 10.73%
Well, 3,000 YFI at 14,000 USD x 10% = 4.2M USD per year
Note: yYFI denominates rewards in YFI, so the same goal as described in this proposal is achieved - without - taking rewards away from existing holders.

An important point is, we also don’t want contributors receiving YFI to be forced into selling to access liquidity for day to day living costs. We want the rewards to do that.

–

An additional thought:
At the current rate of profit generation, it would take ± 452 days to arrive at 3,000 YFI, so perhaps this should be done in phases. Eg. 500 YFI, 1,000, then 2,000 etc. And assess at each interval with a period of rewards going back to holders. This is all an experiment after all.

[iTo]

I know I’m repeating myself, but this is very important:

The ideal treasury is one that is of sufficient size that its own self-growth-activities is such that its returns exceed the needs of the core team and affiliated contributors.

What size the treasure must be to achieve this is the real question we need to experiment with.

[MFP]

1. A substantial amount of groundwork with respect to governance is needed prior to redirecting a large amount of funds to the project, such as establishing an executive committee with defined oversight authority and an established framework for the interplay between YFI holders and the EC.

2. I generally am in favor of prioritizing growth over maximizing income in the form of dividends/distributions to YFI holders, but in light of the current macro, micro, and YFI specific market conditions, I have serious reservations about eliminating what, up to this point, has been a big component of the YFI value proposition, i.e., a relative steady stream of income for YFI holders that is sizeable relative to the rest of crypto.

3. I find the topic of this proposal and the use of a one-person-one-vote poll rather than a snapshot poll peculiar.

[iTo]

I agree with you.
Though on the point of the above poll, this is simply how we have gaged interest in the past.
Assuming there was a reasonable level of interest and updates were made with respect to responses in these threads, it would go to a snapshot vote.

[MPTICK]

1000% agree. We for sure need a better, more robust way to reward contributors. IMHO yearn contributors should be the highest quality and most highly paid.

In order to have enough ‘left over’ for stakers, we should increase fees to a performance fee of 15% - 20%, which would leave a little more to play with to reward both contributors and stakers. For example, Harvest charges 30% of profits. 15%-20% is very reasonable.

[yncredible]

Yes.100%. Voting FOR. send it.

[Chevis]

I still don’t see any financial plan, nor do I see reason to shut off dividends entirely, nor do I see any business growth or reinvestment plan, nor do I see a target.

I don’t understand why the dividends wouldn’t be used to pay contributors, I don’t understand why there isn’t a more sensible and moderate approach to this, and I don’t understand why there’s not a single data point for capital allocation or current financials. How much money is needed for how long? What is it being spent towards? There’s no targets, there’s no elegance in this, I just don’t understand why anyone would vote yes to this when there’s not a single bit of data given.

[funcabbage]

Definitely for. I’d also be for a compromise where some % still goes back to stakers.

[marcfly7]

Really a great idea!!! Just need more details for realizing this.

[MFP]

LMAO at increasing “performance fees” to 20%. It’s like some of you intentionally want to kill this project.

Anyone with a modicum of common sense appreciates Harvest for what it is. If Yearn is aspiring to be a peer of Harvest, then I definitely invested in the wrong project.