YIP-89: Using Profit to Buyback and Build

Buyback and Build

Update: this has been moved to active proposals and a new poll has been added at the end

The goal of YAM is to build a community who will use the treasury to build new DeFi and crypto products that will generate revenues. Beyond just generating these revenues, how they are allocated is a important consideration. With the passing of YIP-80, we have taken a big step creating a foundation on which we can build. Rebalancing and rationalizing the treasury is only the first step in building a strong foundation for YAM.

There have been numerous calls for a revenue/profit distribution mechanism that benefits YAM token holders, and with a solidified model for treasury management we can now reason about how a mechanism might work.

As we are still an early stage project, any distribution mechanism should only consider profit (revenues minus expenses and returns). YAM has quarterly report in which we enumerate the inflows and outflows from the DAO. The most recent one can be seen here:
Yam Treasury Quarterly Report - Q2 2021

Using this information we can develop a plan to create a sustainable model to use profits to fund further growth and development.

Methodology

Beyond just looking at profits and expenses for the quarter, we also need to adjust for the overall performance of the treasury between quarters. If the treasury is shrinking then there is no profit, even if our operating revenues are larger than our operating expenses. This is important because it should incentivize YAM holders to manage the treasury in a way that limits investment risk and still rewards investment growth. It also promotes revenue growth since that should be less influenced by market cycles.

There are a few metrics we can use to determine whether the DAO is profitable: Overall growth of the treasury or the difference between product revenues and DAO expenses. I believe treasury growth is the primary metric that we should use. This means that, in the context of this buyback, if the treasury did not grow in the most recent quarter then no profits were realized, even if product revenues outpaced expenses. This is the most holistic way to approach the mechanism.

We can combine a profit buyback mechanism with our need to fund the treasury with YAM to pay contributors. This would create a system where a percentage of profits are use to buy YAM off the open market, which are then used for contributor payments and incentive programs. This model, combined with the ability of the DAO to mint new YAM, provides a framework for which YamDAO can use profits generated to fund itself while also indirectly rewarding token holders, and provide a path to even eventually remove YAM from circulation.

How it would Work

Below is a proposed model for how to calculate profit and determine how much YAM is purchased quarterly.

Variables

treasuryNow - The dollar denominated value of the treasury at the current quarter snapshot, not including YAM reserves.

treasuryPrevious - The dollar denominated value of the treasury at the last quarterly snapshot, not including YAM reserves.

productProfit - Subtract quarterly expenses (payroll, operating expenses, etc) from quarterly product revenues (UMA rewards, Yam Synths fees, sushi farming, etc).

investmentProfit - subtract productProfit from treasuryNow and then subtract treasuryPrevious from this value.

productProfitReinvestmentRate - % of Product Profit that are reinvested into the treasury

investmentProfitReinvestmentRate - % of investmentProfit that is reinvested into the treasury.

Process

Step 1: Determine if the treasury has grown quarter over quarter by subtracting treasuryPrevious from treasuryNow. If it has grown, proceed to step 2. If not, stop (no profit).

Step 2: Determine what portion of the treasury growth is from product revenue growth vs. investment value growth.

find productProfit
find investmentProfit
If one of the values above is negative, subtract it from the positive value. If both numbers are negative or this resultant is negative, then you probably miscalculated step 1.

Step 3: For positive values from step 2, multiply each by their respective reinvestment percentages

productProfit * productProfitReinvestmentRate and

investementProfit * investmentProfitReinvestmentRate

Step 4: the output of step 3 is reinvested into the YAM treasury and can be used to re-balance. This step will involve manual adjustment of what funds move where to meet token targets. For example, this bucket contains 50% sushi and 50% UMA, and we are above our target of sushi and below our target for UMA, we would deposit the UMA directly into the treasury, but sell the sushi to ETH, DPI or stable-coins.

Step 5: For any funds left over from step 3, we would convert to ETH and use this ETH to buy YAM from the ETH/YAM sushiswap pool and use that YAM to pay contributors or fund incentives.

Notes

  • To limit overhead, I propose that we perform this process quarterly alongside our typical quarterly review.
  • There will be slippage buying for the YAM/ETH pool but this may not be an issue if we don’t have much revenue. If there is significant profit, we may want to split the buys into 3 monthly chunks. We may also want to think about trying to incentivize deeper liquidity in this pool.

Example

Let’s run through an example to see how it could play out. Snapshot numbers for Q2 are based on the treasury analysis done recently and seen here: https://medium.com/yam-finance/yam-treasury-quarterly-report-q2-2021-23f56a758c87. Treasury snapshot for Q3 is wholly speculative.

treasuryPrevious(Q2 treasury Snapshot) = $6,009,990 (not including YAM)

treasuryNow = $7,000,000.00

productProfitReinvestment = 90%

investmentProfitReinvestment = 95%

Q3 Revenues and expenses*

  • UMA = +$240,000
  • xSUSHI = +$110,000
  • INDEX = +$50,000

Total = +$300,000 in product revenues
Q3 Contributor Expenses from Treasury = $200,000 for Payroll

productProfit = $300,000 - $200,000 = $100,000

InvestmentProfit = $7,000,000 - $6,009,990 - $300,000 = $690,010

Amount reinvested into Treasury = ($100,000 * 0.9) + (690,010 * 0.95) = $745,509.50

Amount used to buy YAM = $790,010 - 745,509.50 = $44,500.50

In the above example, $44,500.50 would be used to buy YAM and deposit it into the Contributor Compensation Fund (may make sense to re-name this if we go this route).

YAM Issuance

YAM deposited into the Contributor Compensation Pool to be used for payroll or incentives. While it would be great if the DAO is profitable enough to rely on only this inflow of YAM to maintain payroll and incentive programs, it does not seem realistic at this point in time.

The typical approach in crypto projects is to mint a large amount of tokens initially and then use those over time. We had an initial mint of tokens for contributors and incentives last year, but these incentives will run out in the next year. At that point we will need to make a decision about whether to mint more and how to do it.

Minting a large amount of YAM one time and hoping it doesn’t run out is a bit of a guessing game. Instead of blindly picking a number that we hope will last for X years, I propose we create a model where we mint quarterly to meet payroll and incentive needs. We would continue using the existing pool of funds for the time being, but when they run out, new funds are minted based on the projected expenses of the DAO. If the DAO is profitable enough then we could conceivably only rely on the YAM purchased with profits. This is the long term goal of the system, but as it stands today, we are far from this being a reality.

This model creates a number of levers through which governance can influence the project treasury and monetary policy while still prioritizing treasury and project growth. Governance would need to:

  1. Determine reasonable payroll and runway figures for contributor compensation. Because YAM may be minted for payroll, this is a parameter that needs to be managed. This includes setting maximum total salaries and the maximum amount of stablecoins that contributors can earn as a portion of their pay.
  2. Determine how much YAM is needed for incentive programs.
  3. Set a max yearly or quarterly YAM issuance rate for the treasury to limit overall YAM issuance.
  4. Determine the appropriate risk level for the Treasury per YIP-80
  5. Determine the productProfitReinvestment and investmentProfitReinvestment variables to set how much profit is used to buy YAM.

Let’s build a sustainable and profitable YamDAO!

Should we implement this Buyback and Build Model with Profits?
  • Yes
  • No
  • I don’t care, just show me the results

0 voters

4 Likes

Finally something good

2 Likes

Excellent proposal and I support the methodology.

A well thought through and clearly articulated way to support the long term growth of the DAO and benefit all YAM holders.

2 Likes

Voting is open!

Snapshot vote has been created: Snapshot

Open until 2021.10.01 at 20:00 UTC