YIP-XX Redirect Existing Inflation Rewards to YAM products (Degenerative Finance, Umbrella)

YIP-XX Redirect Existing Inflation Rewards to YAM products (Degenerative Finance, Umbrella)

Proposal by @nonstoptheo and @rossgalloway

Basic Summary

We propose moving the incentives that are currently going to the ETH/YAM sushiswap LPs and using them to incentivize YAM’s core products, notably degenerative.finance. This will allow us to more effectively bootstrap TVL growth for degenerative.finance and Umbrella.

Abstract - What are we proposing?

This Proposal is part of a larger initiative to develop and realign YAM’s economics post-rebase. It is the first step to build out a cohesive ecosystem strategy for the YamDAO and the YAM token.

Currently 12,500 YAM per week are minted and given to users who stake ETH/YAM SLP tokens in our incentivizer. This proposal would redirect those rewards to future yield farming programs on degenerative finance (uGas, uStonks, uVolBTC, and other future synths) and Umbrella. These rewards will allow the Degenerative.finance platform to grow without relying solely on UMA rewards and bootstrapping by the YAM treasury.

There are roughly 1 MM YAM still left to be used as incentives. If the rewards continue to be distributed at their current rate, they will last roughly until the end of 2022. This gives the DAO time to build out products and services around our product ecosystem to create a self sustaining revenue model and become less reliant on inflation rewards for TVL.

The current SLP incentivizer can remain, but instead of claiming sushi rewards for the treasury, they could be passed on to stakers. This would allow SLP holders to continue using their tokens to vote while providing liquidity. Alternately, we could remove the incentivizer and use another method to count YAM in liquidity pools to allow voting.

We intend to start the redirection of the $YAM rewards at conclusion of the current uSTONKS/uGAS special rewards programme (expiring on 29 March). This will ensure we continue to incentivize the current liquidity miners in order to maintain TVL levels.

We suggest the rewards initially be split equally across the 3 Degenerative.finance products that will be live next month. These are:

  • uGas - ⅓ (4166 YAM/ week)
  • uStonks - ⅓ (4166 YAM/ week)
  • uVolBTC - ⅓ (4166 YAM/ week)

These reward amounts will be adjusted monthly per snapshot maintenance votes that are then bundled into the months on-chain votes to roll over treasury liquidity.

Motivation - Why are we proposing it?

The ETH/YAM liquidity pool is the main source of liquidity for the YAM token and we have been very active in making sure that it is deep enough to allow investors to buy YAM with as little slippage as possible. When the rebase was still active, this pool had a second, more important role. It was the pool that all rebase buys came from, and a deeper pool meant less negative price slippage when YAM was sold for ETH on positive rebases. Now that the rebasing mechanism has been removed, this is no longer an issue.

The incentivizer has been a strong source of revenue for the DAO. We have effectively been paying stakers YAM tokens in order to claim their sushi rewards. See the applicable forum vote here. This has allowed the treasury to accumulate over $1MM in sushi, with ⅔ of the rewards yet to be released. Once the vested sushi is released, the treasury will hold over $3MM in sushi tokens at current prices. That will amount to roughly 30% of our treasury size.

While we believe in the sushi token, this seems like a sufficiently large portion of the treasury to be held in any one token. With UMA’s Dapp mining program, we have an opportunity to pivot and earn UMA tokens for the treasury while also bootstrapping YAM’s core products.

Currently, the YAM treasury earns 18% of UMA rewards given out from users minting via our contracts. The more users who mint synths using our contracts, the more rewards we get. The proportion of UMA rewards that go to minters vs. the treasury can be adjusted in the future if we feel that we are giving away too much or not attracting enough liquidity.

Bootstrapping liquidity on Degenerative.finance is a complex issue, and the team is currently working on numerous products to both make the user experience easier and find product market fit. But at the core, synths need liquidity to be useful. The YAM treasury is not large enough to bootstrap on its own. We have a pool of YAM that is currently under-utilized that we can direct toward this problem and build both our treasury and our products.

As we consider this change, we should also keep in mind Umbrella and other future products may benefit from a portion of the YAM incentives. Some rewards that are being diverted to degenerative.finance may be better used to bootstrap Umbrella. This is outside the scope of this proposal and should be discussed as part of the monthly rewards allocation proposals.

Important Fact about the developer mining rewards for degenerative.finance

The total $UMA rewards that flow to degenerative.finance are a function of the degenFi share of all UMA synths (measured in market cap). The number of $UMA rewards is not fixed and starts at 0 $UMA/week.

The rewards structure works like a flywheel that can be put in motion by $YAM rewards:

  1. Award $YAM rewards to generate high APRs for low TVLs
  2. Attracts liquidity miners
  3. Pushes up degenFi share of UMA synth’s market cap. Increasing number of $UMA rewards
  4. APRs are boosted by $UMA rewards that kick in. Attracting more liquidity miners, increasing TVL
  5. Flywheel continues to spin

Important side effect: YAM price may benefit from the product adoption, thereby increasing the -value of the weekly rewards. Same for $UMA. APRs will continue to increase.

Specifications - How are we proposing it is accomplished?

  • Modify the incentivizer contract to direct YAM rewards to YAM products (degenerative finance & Umbrella).
  • Modify the incentivizer contract to pass sushi rewards to stakers. Determine how to deal with future vested sushi rewards for stakers.
  • Work with Devs to determine best way to distribute YAM rewards to degenerative.finance users

Poll to Measure Sentiment

Relocate SLP Rewards to Degenerative?
  • yes
  • no
  • other (comment below)

0 voters

Split rewards equally among degenerative products in first month?
  • yes
  • no
  • other (comment below)

0 voters

1 Like

Thanks for writing this up @rossgalloway.

Generally I am against changing something that is not broken or a significant improvement. UMA is currently providing incentives for Degenerative.Finance. There should be a specific goal that we are trying to achieve with additional rewards on top of UMA. Having more TVL is overall beneficial for Degenerative, but there are some other issues that make the increased liquidity pointless.

Two of the issues that we should figure out first:

  1. Sustainable revenue model along side UMA’s incentives. While the UMA incentives are nice especially when the treasury itself bootstraps the pools, they aren’t long term. Degenerative.Finance needs a usable and workable long term flywheel model.
  2. Liquidity incentives provide liquidity, but it does not provide volume, in order to achieve #1 there needs to be volume aka trading. We need to figure out what’s the best specifications for the synethic to achieve good risk/reward for minters (Liquidity) and at the same time good risk/reward for traders (Volume) and good risk/reward for $YAM tokenomics (our Inflation).

With these two issues in mind, providing incentives to clarify / solve these issues is a good idea, but we can do that without moving incentives from the farming incentives currently on going.


We are on the same page about what needs to be figured out with regards to degenerative.finance and I agree that moving our incentives does not, on its own, solve the underlying issues with bootstrapping our synth products.

But at the same time this doesn’t seem like it has to be an either/or question. The question that we have to answer is whether these incentives would be more useful if applied to our degenerative products instead of to the Sushiswap liquidity pool.

Pros for the liquidity pool incentives:

  • we are earning a fair amount of sushi for the treasury by incentivizing liquidity in our staking pool. Approximately 40% on the 3MM staked in the incentivizer based on today’s prices and rates.
  • Deep liquidity is good for buyers and sellers
  • Easy farming (you can set it and forget it).

Cons for LP incentives

  • Because this pool is already incentivized by sushiswap at a higher rate than our own, we would probably maintain a similar liquidity depth even if we don’t incentivize. This begs the question of whether our incentives add meaningfully to the liquidity pool depth or not.
  • we already have a lot of Sushi in our treasury (soon to be 30ish%), so continuing to farm sushi could skew our treasury profile. More sushi in the treasury does not help build a working degenerative product.
  • These incentives don’t help any of our current product lines. Without the rebase, the global value of deep liquidity is arguable.

Pros for Degenerative incentives

  • Focuses our incentives toward ecosystem products that need bootstrapping.
  • Earns UMA for the treasury via Dapp mining rewards, further diversifying the treasury and building our ties with UMA.

Cons for Degenerative Incentives

  • may not be enough to assure product success (not sure if this is a con, or just a reality)
  • Probably less profitable dollar for dollar than farming sushi. But both strategies are limited long term as we should not be relying on outside incentives to build our products over the long term.
  • Products will be harder for casual YAM holders to use.

We need to solve the issues around a sustainable revenue model, as well as figure out what the best model is for synths. As we have discussed, this is a chicken and egg question where liquidity and volume are reliant on each other. We have an opportunity here to help with one side of the equation by providing incentives to draw in liquidity. And at the same time we need to be iterating and building on top of our current products and infrastructure to try and figure out the other side.

Would you prefer if this proposal had more emphasis on what paths we may take to solve the questions you posed? I know we discuss them a lot, but we could attempt a roadmap of what we hope to build that will create a more sustainable degenerative.

Also, keep in mind that these incentives will only last for another year and a bit. So in no way can we rely on them long term. We will need to have a plan for a sustainable product model for degenerative finance before they run out.

What if Sushi stops offering rewards?

Well that would be bad either way. We have no reason to believe that they will change YAM’s status and we know that sushi rewards will continue along their emissions curve for another year or 2. And if they did do something unexpected then we would have to make a new proposal to address the new situation.

The $YAM rewards for the Sushi pool have no purpose. We need to incentivize YAM products as much as possible. That’s necessary to kick off the flywheel. UMA rewards only really start flowing once there’s TVL. Our treasury funds are limited and don’t scale with the number of synths we plan to launch.

The issue around trading volume is a totally separate conversation. This touches on product design to achieve max product-market fit. That should go into a separate thread.

Monetisation of degenFi products: There are various models like a creation/redemption fee and synth maintenance fees. These are all possibilities and can be switched on at a (much) later stage.