Proposal
Accumulate $500k in Yearn Finance’s governance token YFI (approximately 50 YFI at current prices) with a combination of 100 ETH, 90k cvxCRV, and the balance from stables from our treasury positions to be able to participate in the soon-to-be-implemented veYFI gauge voting system.
Introduction
Yearn Finance is a critical Alchemix partner: Yearn yield-bearing vaults yvDAI, yvUSDT, yvUSDC, and yvWETH are major lego blocks for Alchemix functionality, with additional Yearn vaults to be added as Alchemix deposit options in the near future. On top of the standard yields of these vaults, Alchemix earns additional income via the Yearn Partner program, representing pure Alchemix revenue (1). Furthermore, Yearn has announced (and started rolling out) plans to revise the fee structure for its vaults to improve the competitiveness of these products (see this Medium post and YIP-66), likely raising desirability of these vaults for Alchemix depositors while also increasing Yearn TVL to drive higher total Yearn profit, relevant to the below.
Yearn currently generates substantial ongoing revenue without providing emissions incentives; it is a highly profitable DeFi protocol. Over the past year, Yearn’s net profit has been used to buy back YFI from the open market. But soon, Yearn’s profit (used to buy back YFI) will be distributed to yearn vault depositors and especially to those vault depositors who also lock their YFI to receive veYFI (up to 10x boosted rewards based on proportional participation; see below).
Given our substantial existing and anticipated future yv vault deposit balances and given the bear market depression in $YFI price, Alchemix has a major opportunity to capitalize on Yearn’s incoming veYFI system. Doing so would provide opportunities for Alchemix to i) boost our protocol revenue directly or ii) boost the yields on our vaults for depositors or iii) both, in perpetuity. We consider vault yield-increasing efforts to be highly strategically important given the ability to entice further deposits, use of the protocol, and scaled revenue.
veYFI summary
Yearn is revising the tokenomics of its $YFI governance token (see YIP-65). A $veYFI system will soon be implemented (veYFI Github) whereby users can lock their YFI to receive veYFI. As per other “ve” models, a user receives proportionally more veYFI for entering into a longer lock (up to 4 years). Yearn is adding a new twist such that early veYFI withdrawal is permitted, but subject to a penalty, with penalty fees distributed to the remaining veYFI holders. This system could both encourage more participation (i.e. knowing that an earlier than planned exit is possible in the event of liquidity emergency) and serve as a secondary source of income for those who maintain their veYFI stakes.
In the Yearn veYFI implementation, any user will be able to deposit their representative yearn vault tokens - e.g. yvDAI, yvWETH - into a gauge which would make them eligible to receive YFI rewards from the profit buyback program (we note that there is a solution for different addresses holding veYFI vs. for vault deposits (2)). However, the biggest benefits are available only to addresses holding both veYFI and vault deposits. Specifically, veYFI will be used to vote for user-specified gauge(s) on a bi-weekly basis, leading to up to 10x boosting of the YFI rewards over the baseline reward rate depending on the amount of user-directed veYFI matched with their position.
The inclusion of baseline YFI rewards for non-veYFI holders who stake their yv tokens in the gauges serves to generally incentivize yearn vault deposits (thus increasing Yearn revenue and profits, which disproportionately benefits veYFI + vault holders). This design also facilitates system onboarding; some users may lock (rather than sell) their earned YFI to veYFI to steadily boost their ongoing rewards, positively contributing to the flywheel effect on $YFI price.
In addition, only veYFI will be eligible for participation in Yearn governance voting.
Rationale
Participants in the veYFI system will be able to lock in a new and potentially substantial future revenue stream. With our substantial existing and anticipated future yv vault deposit balances, Alchemix is in prime position to benefit from this system by acquiring YFI, locking veYFI, realizing ongoing future revenue, and holding significant Yearn voting power.
Early adopters of the veYFI system are set to receive extra and compounding benefits. There will be at least two specific early participant benefits: i) Yearn’s profit will be distributed in boosted fashion among initially fewer veYFI lockers and yv vault depositors. ii) The large tranche of YFI that has been bought back under the previous system will also be distributed via the gauge and veYFI system to incentivize adoption and help induce a flywheel effect. At the time of writing, this advance tranche contained >1094 YFI (and growing) with USD value >$10m (3).
Early participants will also potentially benefit in a third way: iii) YFI acquisition cost may be substantially lower prior to the veYFI release announcement and/or actualization of flywheel effects.
Costs and benefits of action
In an over-simplified way, protocol treasury use decisions (aside from development and operational costs) might be considered tradeoffs among the following:
- Deploy funds to minimize current costs/ generate revenue while maintaining future flexibility with the treasury balance (e.g. AMO Elixir strategies)
- Investments to decrease future costs (e.g. acquiring CRV, CVX, TOKE, LP positions)
- Investments to increase future revenue
One reason that the above is an oversimplification stems from the fact that protocol-owned CRV, CVX, and TOKE could either be used to reduce costs (by incentivizing others to deposit to al asset or ALCX liquidity pools) or generate revenue (by accepting bribes to have incentives directed to other pools) or both (given AMO Elixer strategy operations). Still, the general heuristic is useful.
To date, Alchemix has structurally (i.e. aside from marketing) focused and made strong strides on #1 and #2 from the model above. In contrast, the passing and execution of this AIP to accumulate YFI for participation in the veYFI system would represent a novel foray into #3 as an expansion of ongoing future Alchemix revenue. These decisions should not be lightly made, but in this case the combination of the anticipated substantial early mover advantage (see above) plus the potential second-order benefits for Alchemix system (see below) lead us to recommend an investment in acquiring a tranche of $YFI at this time to fully timelock for veYFI.
The recommendation is to acquire approximately 50 YFI with a current USD value of $500k using 100 ETH, 90k cvxCRV, and stables from our current treasury. Following veYFI rollout and the realization of revenue, we could subsequently consider additional YFI purchases (requiring new AIPs).
We believe that this investment would put Alchemix in extremely strong position in both the near-term as an early participant in this system (i.e., banking substantial additional YFI for veYFI, depending on DAO direction, through Yearn’s plans for incentives) and over the long-term from an increased revenue perspective.
Though this investment is necessarily speculative given uncertainty concerning the level of participation in the veYFI system and future yearn revenue and income (including the extent to which this may be positively affected by veYFI implementation), we have modeled various scenarios. In one example that assumes a 25% effective veYFI locking rate (this estimate is likely too high, including because not all YFI in the system will be locked for 4 years for maximum veYFI; but it is conservative for our purposes), current Alchemix yearn vault TVL, and $10m annual income for yearn, Alchemix would be set to receive approximately $75k per year in perpetuity as direct revenue or to be used to increase vault yields (leading indirectly to increased revenue).
In addition, Alchemix would receive a non-recurring bonus of at least $100k at current YFI values from distribution of the tranche of previously bought back YFI; this amount would likely be >$100k since we would be set as a large initial adopter of the system and this pool will be distributed linearly. This bonus could become substantially more valuable in $USD terms if YFI price increases with the implementation of the veYFI system.
In addition, with only veYFI being eligible for voting in the Yearn governance process (and only a proportion of total YFI likely to ever be locked), Alchemix would have significant input into future Yearn developments to help shape developments and outcomes (e.g. related to product offerings and vault fee structures) that maximally benefit both Alchemix and Yearn.
Preliminary vision for ultimate maximum actualization of veYFI benefits
Any combinations of the following actions could be taken with the earned YFI revenue: i) increasing the locked veYFI balance to further expand future revenue streams, ii) banking revenue (selling the earned YFI), or iii) allowing the veYFI to be directed by veALCX holders as part of the future Alchemix vault returns boosting system (i.e. swapping the YFI for specified yv vault positions to further reduce outstanding balance and self-repayment times, on top of treasury fund deployments also for this purpose).
Until veALCX is launched, all earned YFI will in turn be re-locked for the max timeframe to build the baseline veYFI position (scenario i, above). Thereafter, the specific timings and allotments would be determined by governance forum discussions and AIP vote decisions. As merely an example path forward, the community could decide to lock 25% of earned YFI as veYFI for continued revenue expansion while using 75% of the earnings to boost Alchemix vault yields towards enticing deposit growth.
Footnotes:
1 We note that the yearn partner program revenue model is expected to evolve as yearn fee structure changes are implemented.
2 One note is that there will not be a native delegation mechanism for veYFI, meaning that a custom setup will be required for Alchemix to direct votes from its treasury holdings to yv vaults held in different contract addresses. This can be handled the same way that yearn handles its veCRV locking and sharing boost among its vaults via a proxy voter contract.
3 Yearn devs have confirmed that the distribution of this tranche of YFI will be linear, though the timeline of its distribution has not yet been determined.