YFI and the Evolution of the Token Offering.
The last week has been pretty crazy in the DeFi space, and as we all know, the release of YFI was by far the largest and craziest part. After having participated in some of the governance discussions in the last few days (here and here), I would like to share my thoughts on YFI and yEarn, propose a different way of thinking about the token release, and a new way to move forward.
To start, let’s talk about what YFI is and what it is not:
Yfi is not a cryptocurrency in the sense of Bitcoin or Ethereum. It is not needed to make the key parts of the yEarn ecosystem work at a structural or mechanical level. It does not provide security to the ecosystem.
Yfi is not money or currency. We are not going to be buying coffee with YFI. And if we are, then we can probably also buy that coffee with Tesla stock. This is important because it means that we shouldn’t think about the economics of YFI in terms of money, inflation, etc. The emission schedule is not monetary policy and issuance should not be referred to as inflation.
It is not a pyramid scheme or ponzi. There are real products (yEarn) that are being created that give value to YFI. It derives its value from those products. Similarly, YFI is not a claim on future YFI.
The value of YFI is not tied to some arbitrary notion of scarcity, stock to flow, or other memes.
So, what is YFI?
Yfi is a mechanism to claim reward and yield-farmed tokens that are earned with the funds in yEarn’s various (and upcoming) products. It may also capture some revenues of upcoming or current products, as decided upon by the community through the governance process. At its core, YFI is the token of a collective yield farm that leverages unique elements of DeFi and Ethereum to capture yield for users of its products.
The Last Week
A week ago, Andre dropped this bomb on the community and we have been frantically trying to understand what it is that just hit us as we all scrambled to farm as much of it as possible. A week later, it is starting to become clear: The distribution of YFI via yield farming the Y.curve pool is first and foremost just that, a distribution mechanism. We have just experienced the birth of a brand new, better, token distribution model for crypto projects.
(I know, I know, compound really started it, but they have VCs and token allocations, and a company. We have Andre and a bunch of people arguing on the internet)
This last week has been a proof of concept for this new token distribution mechanism. Can you do a totally organic token distribution that only leverages the existing infrastructure of a previously released product (in this case the y.curve.fi pool and y tokens)? It has been the beta test and it has been an unequivocal success. The mechanism works beautifully.
Everyone who participated in the farming of last week should be considered a beta tester of the system. Let’s be clear: We are not the new majority shareholders who are going to dump on the plebs in the next year because we got here first. We are reckless, idealistic fools and we just “tested this in Prod.”
We just participated in the beta of the first Continuous Farmed Offering (CFO). The newest, fairest crowd sale.
If you can accept this framing of the last week then I think it serves to clarify what the next steps for the yEarn token distribution should be. The crowd sale should go on! We should be figuring out the best way to restart and run the full version of the yEarn token distribution.
Important questions to ask are:
How long should the farming of tokens last?
I recommend at least a year. This gives a large window for people to learn about and understand the project and participate. Of course, us experienced farmers can participate as well!
How much Yfi should be released to be farmed?
This is a tricky question but if we frame it as a crowd sale then I think it makes the question easier to reason about without preconceived notions of monetary policies or other cryptocurrencies. I would propose that we aim for an APR that is attractive but not unreasonable. And if we consider the last week to be a beta test, then it should be lower than what we just experienced. But the total amount released should be significantly greater than what is being proposed in current models. Those who participated in the last week should be rewarded for their risk with a higher rate than the next phase, but not 20-60 percent of the whole system!
We can still direct a small percentage of the funds released in the farming toward Andre, a governance fund, audits, etc.
Traditional Token Sale
I would also propose that at the end of the farmed distribution period of YFI that we have a token sale (% TBD) for people who want to buy instead of farm. The mechanism should be considered, but we should keep in mind that the whole period of farming will essentially be price discovery, which should make the sale very fair in terms of price. Some Funds from the token sale can be split and directed into a governance fund, but the vast majority could be put back into the yEarn ecosystem to earn interest that goes to users, similar to how Pool Together has additional funds earning interest for prizes. This gives us a way to incentivize pool use without needing to continue minting YFI. But I am not opposed to a small tail emission (1%ish) for participants of the system.
Caveats and final thoughts
I understand that because the YFI token currently has a market price, changes like the one above will have an impact on the price. In my mind this is unavoidable and anything we do will affect it in one way or another. In the end, when thinking about these problems, I think we should be considering the longest possible time frame and prioritize the health of yEarn over the next 1-10-100 years and not focus on shorter term price targets.
Furthermore, we should explore mechanisms for which people who have entered the system can leave once a decision is made on a policy to move forward. My thoughts are that any YFI committed to voting for the winning side be locked up for at least the full duration of any CFO/crowd sale. The winning side therefore commits to not sell while the losing side can exit.
After the sale we can burn any minting keys.
Thanks for reading. Please let me know what you think. I look forward to building a crazy new world with all of you.