Rebasing and how it applies to YAM

#1

After reading a lot of the comments that continually come up about rebasing, I want to do a rebasing thought experiment and apply it to YAM.

What would happen if we changed the rebase target of YAM to the price of (1) BTC?

Let’s imagine that right now we set the price target of the YAM rebaser contract to read from the ETH/WBTC pool and we adjusted the total supply of YAM accordingly. Let’s assume that nothing else about YAM is changing and this change doesn’t cause anyone to FOMO buy or panic sell.

  • The current price of BTC is $19,113 per coingecko
  • Assume price of YAM is 1.00 for ease of calculation
  • Current Supply is 11,086,295.6 (totalSupply in contract)
  • Current Scaling factor is 2.39 (yamsScalingFactor in contract)
  • YAM BoU supply is 4,647,291.7 (initSupply in contract) This number does not change other than when new YAM is minted or people migrate from V2. This is the “real” amount of YAM you own.

With the above numbers we can calculate the marketcap of YAM (price * current supply). That gives us $11,086,295.60 (higher than reality because we are assuming the price is $1.00). We want to now recalibrate this to target a price of 1 BTC instead of 1 Dollar. We can do this by changing the scaling factor, which in turn changes our current supply. Since the market cap should stay the same, we can divide the market cap by the price of BTC to get our new desired supply.

New supply = Marketcap * BTC Price
New supply = $11,086,295.60 / $19,113
New supply = 580.04

From here, we can calculate our new scaling factor.

BTC scaling factor = BTC supply target / BoU supply
BTC scaling factor = 580.04 / 4,647,291.7
BTC scaling factor = 0.0001248

Once this is done, everyone’s wallets would now show that they have less YAM but that individual YAMs are worth much more. The value of your underlying YAM holdings is unchanged as the quantity of the BoU YAM you hold is unchanged. All that is different is the price and the scaling factor.

Imagine Bob buys $100 worth of YAM right before the target change. The price of YAM is $1.00. At a 2.39 scaling factor, he is buying 41.84 BoU YAM, but his wallet reads that he owns 100 YAM. Now the target factor is changed to BTC. The scaling factor is changed from 2.39 to 0.0001248. He still owns 41.84 BoU YAMs but now his wallet tells him he owns 0.00522163 YAM. This amount of YAM is still worth $100.

As you can see, by changing the price target for YAM all we have really done is change a variable in the contract. But, in changing this variable, have we somehow changed the value proposition of YAM and what will this do for the price of YAM going forward?

Rebasing tokens are often advertised as being pegged to their price targets, but this is not really true. Via supply adjustments they will trend toward having a price that matches the target. The overall value of a wallet holding a rebasing token will move freely. Just like holding YAM today does not mean that you have invested in a stablecoin, changing the price target to something else does not mean you have invested in a derivative of that product.

The target price will impact how many rebases you have. Using a target price that is correlated to your asset will result in fewer rebases as the 2 prices will naturally track each other to a degree. If the price of the target asset increases faster than the price of the rebasing asset, then the underlying asset will rebase more to try and keep the 2 prices in line. But in doing this, the value of the rebasing asset is not being impacted by the target asset. The value of the rebasing asset is still only affected by the utility of the asset and the supply and demand dynamics of the market.

With YAM, because the rebasing mechanism is an integral part of treasury growth, setting the rebase target impacts how often positive rebases will occur and when the treasury will be funded. By setting the target price to USD, we are funding the treasury when the price of YAM increases faster than the price of USD. If we were to set our target rate to track BTC then we would fund the treasury when the price of YAM increased faster than the price of BTC.

So from a system standpoint, the price target that is used in YAM’s rebasing mechanism can be used as a variable to adjust how we fund the treasury, similar to how we can set the amount of YAM minted on positive rebases. It is a complex variable to predict though, so setting it to target the relatively stable dollar keeps the system more predictable.

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#2

Thank you good sir for this writeup. I’m really curious what would happen in the event the marketcap=treasury. Would we see YAM tethering that line of 1 USDC wherein it fluctuates about as much as DAI does and we see more frequent rebases (up and down) and smaller but more frequent contributions to the treasury?

#3

Rebase to btc price is NOT good, let’s keep to 1usdc. I believe the current design is better than the proposal. And we already get a stable rebase design and didn’t test it in positive rebase yet, this change will impact the existing system a lot and no one knows how much negative impact it could cause.
my 2 cents

#4

I don’t think this was a proposal. This was just a thought experiment.

#5

Good question. This is all speculation so feel free to tear into any of these ideas.

My first thought is that it doesn’t make any difference in terms of how it affects the rebase. This is something that I have been pondering a fair amount. What is the relationship between treasury size and YAM valuation? Given that our rebasing target is stable (1USD), increases in the price of YAM above $1 will grow the treasury and a big enough price increase could increase the treasury significantly. When this price increase is occurring, I doubt that the treasury will grow faster than the market cap. And given that this is crypto, this pump may not be sustainable and the price could then drop significantly. This drop is also fueled by the psychology of negative rebases. So with the drop then we could see the market cap approach the treasury value. At this point, if we have something like the Great YAM Wall (GYW) in place, then some of the treasury may be sold for YAM and slow down or stop the price decline.

In this situation, the Great YAM Wall serves as a buy back of sorts. The question that I haven’t been able to answer is whether this is the best way to do this buyback. It is a slight re-framing of the initial intent of the GYW from a mechanism to stop a death spiral to a mechanism that tries to set a new lower bound on the valuation of YAM based on the treasury value. This makes it very similar to a buyback reserve that you see in a number of bonding curve models where the price at which you can sell your tokens increases as a treasury grows.

There are so many questions to ask:

  • Do we want this to mainly happen when the price is falling or does it make sense to structure this in some other way?
  • Can we use the Great YAM Wall and another mechanism together to balance out the desires for a healthy treasury and YAM appreciation?
  • As the treasury grows, should the amount in the GYW increase proportionally with the treasury?
  • Is there a limit to the size that we need to keep in GYW and once we reach that amount, should a portion of the revenues be directed to buying YAM from the sushiswap pool?
  • Should we be sending some % of positive rebase buys into the GYW as a reserve that may benefit token holders, or is that an inefficient use of those funds? If these funds are just sitting around then are we just limiting our upside?

I realize I have barely answered your question. I could see something like what you describe playing out if once the treasury reaches marketcap value we start buying YAM with all new revenue. But im not convinced that this will ever be particularly stable. There will always be ebbs and flows and changes in sentiment that push people to get excited and buy or worried and sell.

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#6

We won’t know how the market would really react if the two, treasury and market cap meet until it happens. I can imagine it happening sooner than later if the majority of the treasury consisted of more volatile assets like ETH, DPI.

I am not arguing against the largely yUSD Treasury. I think it’s good to have a bit of cash/bond like assets.

Most people are emotional with investing. As long as prices swing, people are going to experience highs and lows and without discipline their behavior will be reflective of this.

Negative rebases are controlled burns. Although not intuitive, these are good for future growth. Positive rebases are good for the treasury, and indirectly to the holders; this is assuming that these funds are reinvested into R&D, marketing, staffing, etc. However, some of the positive rebases should be passed on (other than through inflation) to the more than passive holders. These are primarily the farmers and voters.

Realistically, I don’t see the treasury appreciating where it equals market cap, or market cap falling to the treasury. Maybe it’s my rose tinted glasses or my accurate intuition, but I think there are too many people like me that sees a good deal and will seize upon an opportunity were the perceived book value is too hard to pass up on.

#7

How do you feel about value capture for the YAM token? Are you comfortable with a large treasury that doesn’t directly pay rewards or revenues back to token holders? Is book value enough to drive adoption, or is that book value just a stand-in for some future stage in which cash flows do go directly to token holders?

#8

I’m all about having a large treasury. I also believe we can have that and distribute some of the treasury to token holders.

We first need to pay for those things that we can reasonably predict. We have incentive pool rewards. We will be compensating official members which we will be voting on soon. We are building and if a project is capital intensive we need to allocate funds to this. We should also have excess funds in case projects require additional funding, along with funds to pay for insurance if applicable.

We should have some safety net/capital cushioning. How we calculate an appropriate safety net is tbd. The crypto economy will still have its own version of recessions. We may have contributors/devs/etc whose full time gig will be this project. We’ll want to be able to support them. Even if part time, we will likely want to keep them on. We want to continue to fund projects even during times of diminished revenue. We want to be impervious to larger macro trends.

Once this safety net target is met, we should consider the excess as potential bonus to holders, LPs, voters and remaining contributors.

I think a book value gives holders a margin of safety. I won’t necessarily cause the price to go up, but it can limit the downside potential. However, a steadily rising book value accompanied with revenue will naturally attract potential holders.