A Roadmap for YAM (Part 3 - Tokenomics)

This is the 3rd Part of my vision for YAM. Click to read Part 1 and Part 2

TL:DR - Allowing YAM governance participants to earn the yield that the treasury earns incentivizes them to steward and grow the treasury for their own self interest without directly rewarding those who choose not to participate in the DAO.

What is the role and value of the YAM token?

This is a question that has often been asked but rarely answered satisfactorily. The original answer for this was in the original blog post announcing YAM:

YAM holds zero inherent value; any value which might accrue would be an entirely emergent property of the community that takes control.

From: YAM: An Experiment in Fair Farming, Governance, and Elasticity | by Yam Finance | Yam Finance | Medium

This is a profoundly unsatisfying answer to many, and an equally silly answer for others who will look at the protocol and see actual value there. We can all agree that there is value to the YAM token, and that is borne out by a market for the token. The value is an emergent property of everyone buying and selling YAM.

What is clear is the primary utility for the YAM token: governance. The YAM token is the key to the DAO treasury and is the most basic way it is controlled and managed. A plurality of token holders (any collection of those holding 500k YAM tokens between them) are capable of unlocking the treasury. I find this to be the most accurate description of the utility of YAM as it stands today.

The obvious next question to ask is: “what is the value of a key to the YAM treasury?”

This is a difficult question to answer, and the beautiful thing about open markets is that they answer this question for us. The problem for us is that we may not like the answer1. So what can we do to make that answer into one that we want to hear? To an extent, nothing we can do will be certain to make a difference, but we have options!

The first attempt to create an “answer we liked” was the Great YAM Wall. This would hypothetically set a lower bound for the YAM market cap at the size of the treasury (Book Value). While an interesting idea, this mechanism is flawed because all it does is slow down the process to find the true market price of YAM, while simultaneously draining the treasury and giving it to those who are the least committed to the project. If you want to read more about why I oppose it and why it was removed, here you go.

Another proposal to get an “answer we liked” was that of buyback and build with profits, which I still think is a good first step and can be used in the short term. But the more that I have thought about it and the way that I framed it in the above post, the less incentive aligned it feels. The reason for this is that most token holders have minimal input on the DAO’s ability to earn a profit, even if they vote on every proposal2. If we go back to the original mandate of YAM, token holders hold the keys to the treasury and are therefore the stewards of the treasury. But the treasury in itself has limited ability to earn revenues.

Leveraged Yield Farming

The other dynamic to consider is that of book value (treasury size) to marketcap. When the book value is higher than the market cap, one could consider the project token undervalued because 1 YAM token controls more than 1 YAM token’s worth of treasury value. The key caveat here is the term “controls.” If the value of the treasury cannot be realized with that token, then this control doesn’t add additional value to the YAM token. This, as I argued to remove the Great YAM Wall, is a good thing for the long term health of YAM. But this only applies to the extraction of the principal and not to revenues earned by investing that principal.

If the book value is higher than the market cap then there is a way to realize value for token holders without naively giving them the ability to pillage the treasury. If the yields from investing the treasury go to token holders then the YAM token becomes a claim on leveraged yield farming up to the point at which the funds available to farm are less than the value of the tokens that are receiving these rewards.

If the token holders who are responsible for directing the funds to earn rewards are the ones earning the returns there is incentive alignment. If this revenue is only paid out to those who participate in governance (managing this fund) then this puts the risk and reward directly into their hands. YAM gains value when the market cap is low compared to the treasury size, but requires some work to realize that value (via governance).

Revenue earned by the DAO would not be claimable by token holders, but would add the treasury and available funds with which the DAO could invest. Building products that produce profits adds directly to the future extract-able value of the YAM token.

Combined with an improved governance model that also incentivized long term decision making and streamlines quorum and overhead requirements, this model could re-invigorate a userbase to care about the decisions being made around the protocol.

Possible Concerns:

  1. This model removes compound interest from accruing to the treasury and therefore limits treasury growth.

This is true. Treasury growth becomes limited to product revenues. This is a trade-off to be made.

  1. This model is less effective if the market cap increases above the treasury value.

There is a break even point at which the interest earned per YAM token is less than could have been earned making the same investment on one’s own. But this is not simply at the point that the marketcap and treasury size meet. It is also impacted by how many other people are participating in governance and what percentage of the treasury is farming/earning.

A few notes to consider:

  • Other projects that have similar models (PieDAO3 specifically) only have ~44% of their token supply participating. This means that those who do participate get an even larger cut of the farming yields.
  • If we assume a generous 50% of our tokens are staked ($2M worth), and $5M of our $7M treasury is used for farming, that a 2.5x rewards boost. Even at parity (3.5M staked), it is a 1.4x multiplier.
  • As an organization, the DAO may be able to participate in programs that the average farmer can’t. One example of this is earning rewards from YAM Synths without having to go through the process of deploying every month.
  1. Participating in yield farming and other good opportunities is difficult to do in a fully decentralized way

This is a real concern, but new tools are becoming available that may make this easier, including Gnosis Zodiac, which allows a multi-sig to be controlled by a full snapshot vote.

  1. This sound like a lot of work.

You’ve gotta spend money to make money, baby!

  1. Isn’t this risky?

No more risky than what we are currently doing. The DAO has been active in using its treasury to earn a return. This maintains the status quo, but distributes the risk and reward differently. If token holders mismanage the treasury then they are the first to suffer. If they manage it well, then they benefit.

Conclusion

Allowing YAM governance participants to earn the yield that the treasury earns incentivizes them to steward and grow the treasury for their own self interest without directly rewarding those who choose not to participate in the DAO. Good stewardship will entail a balance between treasury growth via investment in new revenue and profit sources, and the direct investment into yield bearing opportunities. Combined with an improved governance model, this can go a long way toward building an aligned community who share similar values and are interested in building a better YAM and web3/Ethereum ecosystem.

The next installment is Part 4 on Protocol Owned Liquidity. You can do it Anon!


Notes

1. This is also a security question. The value could be calculated at the cost to perform a governance attack and steal the funds in the treasury. This price increases significantly if there are deterrence measures like a guardian multi-sig and required locks for voting tokens.

2. This dynamic is mirrored by the contributors not being able to directly impact the token price, even if they do their job well.

3. Read about PieDAO’s implementation here: https://medium.com/piedao/announcing-dough-staking-6dab2561626a and a typical report from their treasury farming program: Treasury Farming Committee Recap / First 100 Days - Governance - PieDAO

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here are some really interesting and deep thoughts…but they may come too late, US Federal Reserve is reducing balance sheet and the increasing of interests rate may come. The market is turning bearish. the liquidity of the entire crypto market will shrink. I think make sure YAM can survive the incoming bearish market is important.

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Never too late to try to implement improvements and good ideas! Especially when there is clear value on the table.

The goal of my posts in this series are to work through what YAM needs to do so that we can survive a bear market and come out the other side stronger and thriving. I strongly believe that bear markets are where the real money is made, building a foundation that can then be used to reap the rewards of the bull markets. We have never really built that foundation, and so we aren’t reaping the full rewards of the current bull market.