YIP-90: yETH Optimistic Recovery Plan

Proposals
18

Thanks for the feedback provided by those in this thread. I’ve noticed that there is a stark absence of comments from Yearn Contributors aside from 0xPickles. If this proposal is to serve as a compromise from multiple perspectives it would be helpful for the community to hear the concerns of those with YFI voting power, rather than silence.

In my opinion this proposal is unacceptable as it is currently written. The current proposal intends to use the recovered pxETH as part of the repayment to depositors. According to this comment

Under YIP-72, yETH is a self-governed, permissionless product whose treasury and accounting are controlled by its depositors, not the Yearn DAO or YFI token holders. This means:

  • Contributors cannot unilaterally mint, reimburse, or modify user positions.

  • Any action beyond distributing recovered funds requires community governance and must take into account the scale of losses and the product’s design.

We are evaluating all possible paths within these governance constraints and will communicate openly as options become clearer.

this suggests that the action to be taken with recovered assets is determined by yETH governance, and the default action will be to distribute recovered funds. As this proposal is currently written, the recovered funds are kept by Yearn and the yield from those assets are used to repay depositors. This is wrong. These funds belong to the depositors, and any yield generated by them should not be credited to Yearn for its repayment efforts. I propose the following Amendment A:

5.0 Immediate Post-Approval Actions

To avoid unnecessary delays and begin recovery as early as possible, the following actions will occur immediately upon proposal approval:

  1. Recovered Asset Withdrawal: All recovered apxETH will be processed through the Beacon Chain withdrawal queue as soon as technically possible. The recovered apxETH will be immediately distributed pro-rata to the underlying economic beneficiaries.

  2. Treasury Earmarking: The Treasury’s ETH allocation for recovery will be explicitly earmarked at approval, even prior to Recovery Vault deployment.

  3. Early Yield Accrual: Once withdrawn, recovered ETH and Upon passage, Earmarked Treasury ETH may begin generating yield for the benefit of users under existing Treasury controls.

  4. Vault Migration: Once the yETH Recovery Vault is deployed, all earmarked assets will be migrated into the vault, preserving continuity of yield.

This should not be controversial. The recovered funds do not belong to Yearn and shouldn’t be used as a carrot to encourage victims of the exploit to exit early.

Secondly, as mentioned above by 0xPickles, this proposal centers around a particular ideal:

Any larger contribution necessarily requires one or more of the following: drawing down Treasury assets, issuing debt, inflating supply, or committing the protocol to open-ended guarantees. Each of these options introduces solvency risk or precedent and is therefore intentionally excluded.

The Treasury’s participation consists of two concrete actions:

  • A direct forfeiture of its own claim (~334 WETH), which boosts the users’ recovery immediately on day one.

  • The commitment of its ETH holdings to generate yield for users while retaining full governance control over that capital.

Taken together, this represents the maximum support possible within the chosen constraints. Proposals that go further are not disagreements about scale; they are disagreements about those constraints themselves.

The boundary is intentional.

Within the above constraints, I still think this proposal heavily favors Yearn. The repayment period for this loss is indefinite, and due to the escape hatch at any point that YFI holders feel like they no longer wish to fulfill this obligation they can simply vote to remove their contributions. I propose two amendments to address this:

Amendment B:

5.1 Treasury Allocation & Principal Protection

  1. Capital Match: The Treasury allocates its existing ETH holdings toward the recovery mechanism. At the time of proposal, this represents approximately ~1,600 ETH. No new ETH is purchased for this purpose. Any additional ETH earned by the treasury, unless earmarked for a specific and necessary budgetary purpose, should be allocated to the recovery vault, until users are made whole (SharePrice = 1.0), or Yearn governance closes the recovery vault.

Since Yearn will pay no interest on its debt to users, and this repayment period has no defined duration, this is intended to ensure that the Yearn treasury’s ETH is used to repay users, and encourages Yearn to fulfill its obligation before re-purposing its treasury for other ventures.

Amendment C:

5.1 Treasury Allocation & Principal Protection

  1. Liquidity Escape Hatch: This allocation remains callable. If the DAO faces a liquidity crisis an existential threat to the health of the protocol, a governance proposal may be passed to withdraw the Treasury’s principal. This is a temporary measure until the crisis event has passed. At a frequency of no less often than every 90 (ninety) days the DAO will reassess if a crisis remains present. When the crisis is deemed to have passed, the treasury will again be allocated to the recovery vault to generate yield for the repayment of affected users.

This measure is to emphasize that this obligation to users is not optional. If the protocol faces an existential threat, then yes the treasury should go to the YFI holders first. However, the protocol should not be able to just disregard its obligations permanently to address a temporary problem.

I encourage participants in this discussion to comment on the merits or issues with each amendment individually.

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