Proposal and Ideation for a YAM Driven Elastic Finance Protocol

There are four aspects of YAM that really excite me:

  1. The elastic tokenomics
  2. The governance/DAO structure
  3. The DAO controlled treasury
  4. The community involvement

To that effect, I’ve really enjoyed contributing in what little ways I can during this V2 season as we look forward to migrating to V3. My hope is that at least some small thing I’ve offered is helpful or at least doesn’t come across too amateurish.

With regard to the elastic tokenomics, I think this has the potential to inspire some really unique and interesting DeFi applications as communities and developers begin to think creatively about how these elastic tokens might engage with a market comprised of fiat, pegged stablecoins, deflationary PoW and PoS coins with fixed supply, and even PoS coins with fixed inflationary distributions.

The one thing I believe is an absolute imperative for elastic tokens for long-term viability is utility. Utility is what causes scarcity to drive demand. It is what imbues real value, not perceived value. Utility is the friend of HoDLrs and Speculators alike.

YAM has the initial advantage over other elastic protocols in that it’s governance capability creates utility beyond mere speculation. But that won’t be sufficient forever, especially as other eFi projects eventually find ways to integrate into the existing DeFi ecosystem.

With the need for continued experimentation, creativity, and a solid foundation from which to iterate, I would like to initiate conversations around the development and execution of a “minimal-viable-product” style elastic DeFi protocol powered by YAM.

I’m going to say this right off the bat so there is no confusion or misunderstanding: This proposal is intended for consideration after the migration to V3. It requires some development heavy lifting, and I agree with the general sentiment that safely migrating to V3 in the most efficient way possible is the priority at this time. However, I do want to get the conversation started and set the stage for future brainstorming around this idea.

What makes YAM different from the majority of tokens traded through DeFi protocols up to this point is its elastic supply mechanic. If the price of the token is too high above its target, someone can call the rebase function and the protocol increases the supply of tokens in their wallet in proportion to their percentage ownership of the underlying base supply. This prevents dilution while also encouraging selling behavior to drive down the price of the token. The same is true if the price of the token is too low below the target, although in this case the supply of tokens in each wallet gets reduced in an attempt to drive buying behavior through increased scarcity.

Many of you already know the above, but I feel that it’s important to reiterate it since I’ve noticed a lot of confusion on behalf of newcomers to elastic coins.

In my opinion, this rebasing mechanism and the importance of one’s percentage ownership of the underlying base supply uniquely allows YAM and other elastic tokens the ability to experiment with new market capabilities not currently executed by other protocols who have already been doing it longer and better than YAM could out the gate.

Because of this, I believe that our “Yam Elastic Exchange” as I am referring to it, should orient and build itself around the lending and borrowing of percentage ownership of the total underlying base supply (aka percentage share of the marketcap) rather than the lending and borrowing of a fixed number of tokens the way every other DeFi protocol operates. This is something that YAM and other elastic protocols are uniquely qualified to do.

Note: From this point on, when I say “YAM”, I am referring to YAMv3.

I have created and uploaded a simplified diagram of how I propose that the Yam Elastic Exchange could work in terms of its basic processes and flow. It is essentially a clone of DeFi protocols such as Aave and Compound because the mechanics of those models are already very familiar to experienced crypto traders, except I propose the following changes:

1) Interest

Currently, most DeFi protocols reward liquidity providers with accrued interest paid out as additional tokens of the same type that was initially provided. In contrast, interest on the Yam Elastic Exchange would accrue in the form of additional percentage share of the underlying total supply. For example, if I deposit my wallet of YAM which consists of 1% of the underlying supply at an interest rate of 2% APY, after 1 year, my claimable YAM would consist of 1.02% of the total underlying supply. This allows for a concrete means of calculating interest irrespective of rebasing as the total number of tokens used for repayment must always equate to the percentage of total underlying supply owed. This means that liquidity providers may earn more or less individual YAM depending on the current supply and marketcap, but their profits will never be diluted in the same way as their principal.

From a market behavior perspective, this has some potentially interesting implications. Since the total underlying supply will never exceed 100%, there’s the possibility that excessive debt utilization would increase buying pressure as borrowers seek to repay their debt, thus increasing the price of YAM, triggering positive rebases, and fueling cycles of accruing treasury and speculative buying and selling to take advantage of those positive rebases.

It would also allow speculators to mitigate their risk by borrowing YAM during positive rebase cycles while also requiring them to continue engaging with the protocol by repurchasing the same percentage of the total underlying supply plus interest in order to repay the debt, similar in a way to margin trading. The aggregate result of this is that it would encourage the flow of YAM through the crypto ecosystem.

Finally, there’s the possibility that the demand for “percentage share of underlying supply” bottlenecks somewhat as the intersection of the market makers and takers dynamically adjusts based on market conditions. It’s possible that borrowers may not find sufficient sellers to immediately satisfy their percentage owed, essentially creating a decentralized virtual “order book” of sorts. I would posit this could be a very interesting positive for the elastic token mechanic as a whole as it was original built with exchange-based order books in mind in the first place. The use of automatic market makers like Uniswap, etc. has had unique effects on post-rebasing market behavior, and this interest mechanism could theoretically help regulate that.

2) Liquidity

I would propose that to begin, lender liquidity should consist of just two elastic tokens: YAM and AMPL. In this way, DeFi traders can get exposure to either a non-governed elastic token or a governed elastic token. If the two variations begin to exhibit different market behavior characteristics in the future, this could prove valuable. As other elastic tokens gain utility and increase their marketcap, they could be added to the exchange protocol through governance.

3) Governance Token

I would propose that like other DeFi protocols, the Yam Elastic Exchange should be governed in a decentralized way through the use of governance tokens. This governance would have the ability to propose changes to interest rates and other aspects of the exchange protocol. However, rather than farm the governance tokens like COMP or BAL, I propose that the tokens, which I will refer to here as “YEX” for “Yam Elastic Exchange”, be minted by staking YAM in a secure contract.

There are multiple reasons for this:

First, it intrinsically ties the Yam Elastic Exchange to the YAM protocol in order to encourage the two protocols to seek long-term health for one another.

Second, it creates additional utility for YAM in addition to being a governance token for the YAM protocol and an interest generating asset for the Yam Elastic Exchange. This should also create additional demand for YAM, contributing to its overall value.

Third, by locking up YAM to participate in exchange governance, it theoretically helps to reduce the correlation of power between YAM and the Yam Elastic Exchange because YAM which has been staked in exchange for YEX would not be available for voting on YAM governance unless they were unstaked. The idea here is to force whales to choose and prioritize how they will distribute their voting power, allowing a greater voice for the YAM community at large.

4) Interest Bearing Governance

I also propose that the exchange’s governance token YEX have a profit sharing interest accrual mechanism. For all interest repaid on debt, 90% would accrue to the pool of liquidity providers and 10% would accrue to the secure staking contract used to stake YAM and mint YEX.

As with #3, this has multiple purposes:

First, it provides incentive for users to participate in the exchange governance and work for the overall long-term health of the exchange. This in turn, I believe, will also benefit the long-term health of the YAM protocol which powers it.

Second, it creates demand for YEX as a derivative of YAM. This too could create additional demand for YAM.

Third, it introduces a fourth strategy for YAM holders to accumulate a larger share of the total underlying supply, the first being spot trading, the second being automatic market maker liquidity pool farming, and the third consisting of providing liquidity to the Yam Elastic Exchange. This increased diversity of trading strategies provides the YAM community more options and flexibility when responding to dynamically shifting market conditions. And since the mechanics of these elastic tokens are still relatively experimental, the more flexibility the community has, the more likely they will be able to withstand unforeseen market events, and the greater chance that these tokens will survive in the long-term.

It’s late here, so I’m sure I’m forgetting some other element that probably needs explaining. But the idea is to expand on the unique features of YAM and other tokens like it while maintaining a DeFi architecture similar to current working models. This way, we’re not reinventing the whole wheel while still being able to experiment and provide utility value for the YAM protocol. I’m sure this isn’t perfect, but it’s a starting point for discussions on what we could do to create new utility for YAM, which will ultimately lead to more value for the YAM community as a whole in the long-term.

I’m excited for the launch of V3 and excited to continue having these kinds of conversations afterward.

TLDR: Proposal to create a DeFi exchange built around elastic protocols for liquidity and staked YAM for governance. Debt repayment and accrued interest would be calculated in terms of percentage share of the total underlying supply, not in terms of the fiat value or number of tokens. Governance participants would be rewarded with a percentage of accrued interest paid by borrowers.


Nicely presented! That will create more utility to Yam


Building an exchange for elastic assets is a great idea, but my concerns are, that it will put us into direct competition with Ampleforth. Right now they are building this kind of infrastructure for the elastic token economy.

This is why I would like to suggest a different approach to add value and utility to the token:
How about experimenting with different kinds of wrappers?

  • DeFi Wrapper
    Wrapper, that keeps Yam-balances inside the token and can be used with current DeFi Protocols.
  • Collateral Wrapper
    Combine Yam with another coin/token to get a more stable Collateral. (e.g. Ampl/Eth UniV2 is a much metter collateral than Ampl itself)
  • NFT Wrapper
    Here comes the fun part: Wouldn’t it be cool to have Yam collectibles backed with Yam? Those NFT’s could still be part of the gouvernment process. They would be very unique, because the amount of Yams inside would change constantly. Maybe this feature could have an impact on the visuals of the NFT (The image changes with the growing/declining amount of Yam). Yam could also be locked in a vault to receive a special Yam-Community token (POAP-Prove of Attendance Token). Owners of this token are eligible to participate in special airdrops and games etc.

Yam already is a money game and a fun experiment. Using Yam should be fun and entertaining. What I envision is a meme-collectible ecosystem that could lead to all kinds of new social-money-games. It also would be great to have a Yam-portfolio-tracker, that visualizes the growth and decline of Yams. Maybe this will help people to understand the mechanics of elastic money.


Good idea, we can have a more detailed explorer

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I don’t think our approaches are mutually exclusive. However, I’m not concerned with competing with AMPL in the DeFi space, only because I think we’re already in competition with AMPL whether we like it or not. The question (among others) will be whether a non-governed or governed elastic token will provide the most value to the DeFi community at large.

I do find your wrapper ideas interesting. In particular, they could be used as a way to expose rigid assets to elastic tokenomics without changing the underlying code of the rigid asset. So if eFi eventually proves really useful to traders, it makes it possible for other protocols to get in on the action. Also, I could see us implementing elastic wrappers built on the Yam Elastic exchange. It’s another way for us provide a unique value offering.

My one thing is that although Yam is a money game and fun experiment, it also has the potential to be more in the DeFi space. So I’m reticent to delegate it to meme-coin status like Dogecoin out the gate.