YIP-56: Buyback and Build

Proposals YIPs
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Authors

@banteg, @lex_node, @lehnberg, @milkyklim, @RyanWatkins, @tracheopteryx

Summary

Use YFI staking rewards to buy back YFI on the open market. Use bought back YFI for contributor rewards and other Yearn initiatives. Retire the YFI governance vault as it no longer has a use, opening up for it to be replaced in the future with a regular vault. Make it possible to participate in Governance even if one’s YFI is being used elsewhere.

Abstract

If adopted, this proposal seeks to:

  1. Replace YFI staking rewards with YFI buybacks, until further notice.
  2. Enable YFI that’s actively being used in ways that bring benefit to Yearn to participate in Governance.
  3. Retire the YFI governance vault (yGov).

This benefits Yearn as a whole by:

  • Simplifying Treasury design and operation.
  • Simplifying YFI token mechanics to equally align interests across Yearn stakeholders.
  • Builds up a treasury of YFI that can be deployed through Governance for various uses.

This benefits YFI holders in particular by:

  • Removing the need to stake YFI to enjoy rewards; in contrast to staking (which only benefits stakers), buybacks should benefit every YFI holder.
  • Potentially making gains more tax efficient as capital appreciation through buybacks could be taxed less than dividend income through staking rewards.
  • Allowing participation in YFI Governance even whilst the YFI tokens are utilized elsewhere, for example providing liquidity in SushiSwap.

Motivation

Previous proposals

This proposal comes on the back of previously made proposals and YIPs:

  • The adoption of YIP-54[1] formalized an Operations Fund and allowed for discretionary YFI buybacks.
  • @RyanWatkins proposed a rethink of Yearn’s capital allocation strategy.[2] Arguing for protocol rewards to be used to buy back YFI rather than to reward YFI stakers, distributing protocol income as dividends would be a suboptimal capital allocation strategy given Yearn’s stage of maturity. Instead, the proposal claimed it would be more optimal to use income to drive growth and asset appreciation instead.
  • @dudesahn called for the existing Governance vault and strategy to be replaced with more conventional investment strategy.[3] Utilizing MakerDAO to mint DAI, this would be used for liquidity mining. One part of the returns would be rewarded to stakers, and the other would be used to fund Yearn’s Bug Bounty program and yAcademy.
  • Joel Monegro (Placeholder VC) recently published the essay “Stop Burning Tokens – Buyback And Make Instead”[4] 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. This buyback strategy could be especially well suited for Yearn as the YFI supply is capped at 30,000, meaning that the initial conditions for Yearn’s wealth distribution have been set, and no YFI can be further issued to incentivize growth. Such a “Buyback and Make” strategy could allow Yearn to receive the benefits of YFI inflation without any inflation.

Rationale

Figure 1. Staking rewards earned over time (USD).[5]

Replace staking rewards with buybacks

  • More suitable at this stage in the lifecycle. It is unconventional to pay out returns in the form of staking rewards this early in a project’s lifecycle. Typically this would happen at a stage where funds no longer can be allocated efficiently.
  • Better aligns with YFI’s use case. YFI is primarily intended to be used for the governance of Yearn. Token mechanics should cater to those who take interest in the protocol and wish to actively participate in its improvement, over those looking to passively collect staking income.
  • Potentially more tax-efficient for YFI holders. The gains on YFI staking may be treated as ordinary income. In contrast, a buyback program enables growth in YFI while YFI holders should only be taxed on a capital gains basis for a sale. Results may vary by jurisdiction and this does not constitute tax advice; consult your own tax advisor.
  • Recycles YFI that can be spent through Governance. The resulting accumulation of YFI in the Treasury could enable future governance proposals on the use of this YFI for the further benefit of Yearn.

Widen YFI accepted for Governance voting

  • Acknowledge more uses of YFI for the benefit of Yearn. There are other ways than holding YFI in your wallet that can benefit Yearn, for example by providing liquity to a YFI pair on SushiSwap. These YFI are not allowed to vote in Governance today, but they should be.
  • Remove capital efficiency and governance trade-offs. Similarly, there shouldn’t need to be a trade-off between participating in Governance or utilizing YFI efficiently.

Retire the yGov vault

  • Vault no longer needed. Without staking rewards, there is no need for a yGov staking vault that’s tied to Governance.
  • Staking returns are aenemic. At the time of this writing, the APY estimate is 0.9% annually [6]. This is not competitive, and may even dissuade YFI holders from participating in governance. In comparison, Binance recently announced up to 4.49% APY for staking YFI.[7].

Future possibilities

  • Introduce contributor retention program, with vesting YFI rewards to create long term skin-in-the-game for existing and new contributors.
  • Re-introduce dividends once Yearn has matured and protocol income no longer can be re-invested as efficiently into growth.
  • Introduce a conventional vault for YFI, using the v2 vault design. Such a vault would not be related to governance or staking rewards, and would be free to pursue other, to-be-determined strategies.

Specification

Replace staking rewards with buybacks

Buy back YFI

  • All funds that are used for YFI staking rewards are to be used to buy back YFI. Staking rewards cease until further governance action.
  • Buybacks should be handled in a continuous and automated way, and not be discretionary or requiring any sign-offs.
  • Care should be taken to avoid creating arbitrage or front-running opportunities. Detailed specification of design is left to the developers implementing.

Use of bought YFI

  • There are no changes in how funds are spent.
  • The YFI bought back flows into the Operations Fund established by YIP-54 and can be spent accordingly.
  • Example of current spends include: Security audits, Bug bounties, Contributor funding, Grants, Gas reimbursment, Development overhead. See the recently published quarterly financial report[8] for a detailed breakdown.

Widen YFI accepted for Governance voting

  • Link snapshot to use guest-list[9] to determine which YFI is eligible for voting.
  • This functionality is already supported and excludes protocols such as Aave which could be utilized in governance attacks. The list of supported protocols is configurable and is being reviewed continuously, improvements and suggestions can be submitted to the repo.
  • Any YFI in the Yearn Treasury / Operations Fund is not eligible to vote.

Retire YFI Governance vault

  • Retire the ygov.finance[10] staking vault and the YFI yVault YFIGovernance strategy that relies on it.

Update Jan 16: Snapshot voting is live and can be found here.

Vote

  • Yes, I support this proposal.
  • No, I am against this proposal.
0 voters

Non-binding Poll

Changelog

  • Jan 13: Clarified voting specification to explicitly state that YFI in the treasury cannot be used to vote. [DL]
  • Jan 16: Snapshot poll link added.

References

  1. http://gov.yearn.fi/t/yip-54-formalize-operations-funding/
  2. http://gov.yearn.fi/t/proposal-rethinking-capital-allocation/
  3. http://gov.yearn.fi/t/proposal-yfi-governance-vault-yacademy/
  4. Stop Burning Tokens – Buyback and Make Instead — Placeholder
  5. Data available upon request.
  6. https://stats.finance/yearn
  7. Binance Staking Launches YFI Staking with Up to 4.49% APY | Binance Support
  8. https://github.com/iearn-finance/yearn-pm/blob/master/financials/reports/2020Q3-yearn-quarterly-report.pdf
  9. GitHub - yearn/snapshot-strategy
  10. https://ygov.finance/
21 Likes
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The APY for yGov has been sitting at around 1.5%, there are multiple better opportunities for YFI now.

ryan-ygov-apy-2
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17 Likes
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Fully support.

It will also allow people see beyond YFI just as a vaults protocol.

9 Likes
4

I may be missing something here, but beyond providing adequate funding for development activities (which I definitely support), how does this create financial value for YFI holders without the preservation of some income mechanism or the addition of a burning mechanism?

It sounds like we are just talking about YFI buyback with all income + ALL of that YFI goes into a operations fund which I believe is administered by the devs. (Also, is there any check and balance / formal processes on how decision-making is made around the allocation of these funds?)

What is the remaining value proposition for someone to buy and hold YFI as a long-term investment under this model? The hope that one day income is turned back on or that burning is added?

20 Likes
5

I’m not sure I’m fully understanding here.

We know that a lot of funds are stucked in the treasury and are not distributed properly. And this is why the APY is very low.

So are you proposing to use those funds to buyback YFI. Or are you proposing to : first distribute those fund to YFI sktakers , and THEN use new founds to buyback YFI.

If it’s the first solution, I don’t find it very fair. Some people probably kept their YFI in the vault, waiting for the situation to be unlocked and received their part. Especially as APY was very low, people who stayed on the Vault did it for a good reason.

ps: Sorry @cryptoyieldinfo, it’s not a reply to your post specifically.

4 Likes
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I’m not sure if this was fully explained, but this proposal is only for future protocol fees, correct? Therefore, all accumulated rewards that should have gone to stakers but couldn’t due to a contract flaw, will still be given to them via a historical distribution, or is this up for vote/debate? Would these be used to buy YFI instead?

Having asked that, I would be for this proposal, not sure how much it will directly affect the price, but I am for yearn treasury accumulating YFI, and for a more tax friendly solution than dividends. Also, I like the idea of being able to vote while lp-ing at bancor, uni/sushi, or elsewhere and think it will benefit the governance process.

3 Likes
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Thanks for sharing this chart. Could you explain briefly what caused the staking APY to drop so suddenly and by so much at some point in November? If we’re using the low APY as one justification for removing staking rewards it would be helpful to compare against a best-case-scenario staking APY rather than a worse case.

1 Like
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If this makes Andres life easier. For it.

13 Likes
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Good point, and yours @cryptouf – yes I think this should be for funds moving forward, not retroactive. It doesn’t address the issue of how to distribute the backed up rewards. They should still go to the people that earned them and that still needs to get fixed.

edit: tbh I don’t have a clear picture of the backed up rewards issue so would love if someone could eventually fully ELI5 that. I know there are a lot of unclaimed rewards in the staking contract, like 800k, but there is no issue there (aside from having to use ygov.rocks not the main site), people just haven’t claimed them,

4 Likes
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Best option I know is 35% for staking in Secret Network Bridge. It would definitely be helpful if someone makes a chart with all the places where your can put your YFI to work.

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4 Likes
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@DCinvestor made me think here:

  • Funds get bought, brings up price. YAY
  • Dev and Ops staff sell to pay themselves and expenses. oh… OH :frowning:

Where is the value-accrual funneled to YFI-holders when there is a token-sink issue?

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YFI holders should work to make the yearn ecosystem maximize its revenue (via fees), therefore the protocol is buying up way more YFI than it’s paying out to contributors.

5 Likes
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Ok thanks for this clarification. In that case I’m in favour of this proposal. But i’d really like this to happen

Otherwise, I don’t really understand why people will want to keep YFI, if you can’t earn fees generated by the protocol. If you only expect YFI to increase it value thanks to buyback, I’m not sure it’s enough. Especially if we are expecting an increase in TVL when the V2 is released, distribution of fees to YFI holder is probably a better option.

Or is it a way to encourage people to burn YFI and generate wYFI ? If you have nothing on one side and 50%/fees on the other side. Most people will probably go for wYFI.

2 Likes
14

Grants are paid in yUSD for exactly this reason. YFI compensation packages should vest over time and be a skin-in-the-game addition to yUSD grants.

8 Likes
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Bitcoin doesn’t have dividends. UNI doesn’t have dividends. They still appreciate. YFI is currently appreciating with <1% APY dividends.

3 Likes
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hum , don’t really agree with that. Bitcoin is Bitcoin.

I’m sure most people keep and buy UNI just because they are expecting to receive fees generated by the protocol in the future.

And concerning YFI, I’m sure most people are also waiting for the V2, and see an increase of TVL, so an increase of fees and an increase of rewards. And it was the point of this proposal: Restructure fees and align incentives

So if we start changing rules every 2 months. A lot of holders will probably sell everything and buy CRV (for example) because they know they will generate profit.

Until V2 is out, I think it’s a good idea. But then, I’m not sure holders will be happy. Or they will just generate wYFI. And then if in 2months rules change again, it will be too much…

3 Likes
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Makes a ton of sense, no matter what the market says.

Any exciting 1-year old project should have much better internal uses of funds than paying out dividends. Yearn 10x so.

One small question, will YFI in the treasury have a vote?

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I agree that we shouldn’t change the rules frequently, but look at Ethereum versus Bitcoin. Ethereum is nimble and responsive to its community’s needs; Bitcoin is not. Ethereum is going to be the dominant blockchain because of it; Bitcoin is going to be our space’s MySpace.

Let’s be the Ethereum of Layer-Two products.

2 Likes
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I think this is a great attempt to give our devs the support they need without additional issuance.

If we cannot pass this, I will lose complete faith in our ability to properly take care of our devs.

We cannot be greedy holders. I’d sell my coins and leave the ecosystem if the greed continues. Smaller piece of a much bigger pie = bigger piece than you would have already had.

Our devs have little to no skin in the game compared to us. Let’s fix that.

3 Likes
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Hi, I am quite new so sorry if I make some poor assumption.

I am struggling to understand the implications of this proposal from a governance perspective. This proposal has several motivations and I am concerned a new governance model is not being directly specified around its primary function, which I presume is the quality of decision-making it might entail.

Is there a new minimum YFI needed to participate in governance?

What is the impact on the quality of governance of these changes? for example: is there not some value to a separate governance vault for people who actually want to participate in governance and are not solely driven by expected returns. Could opening it up anybody holding yfi, have an adverse effect on quality of governance decisions?

1 Like