Yearn Finance - An Appetizer
Yearn Finance is commonly categorized as a yield aggregator in the DeFi world. Strategist cook up methods to take deposits, deploy that capital across various protocols, and maximize the returned yield. The project has a fascinating history, and popularized the “fair launch” governance token distribution mechanism. It dominates the yield aggregator market, as of Q2 this year it commands nearly 70% of the market share.
What started out as a small project to earn yield on stablecoins has now emerged as one of the most complex systems in DeFi. Developers, strategists, and generally DeFi degens need to work together to understand the ever-changing landscape and develop new yield-earning strategies. Go have a look at their vaults page to see all the various assets that can be used within their strategies, it’s extremely impressive. Taking a step back, a natural question is how is all of this activity managed? Who gets to decide which new vaults and strategies are deployed? Who sets the budgets and distributes grants? What’s the process for bringing on new hires as the project scales? These are broad and complicated questions, and points to the balance needed between YFI holders and core team members who contribute directly to the protocol.
Let’s dig in further.
Yearn Finance - A Governance Entree
As noted above, the protocol started off with a small scale but now has reached over $30 million in revenue (and it ain’t juiced!).
This growth in revenue and general project scale brings along its own set of governance challenges. Early stage projects need to be able to move quickly without being hampered down by formal governance requirements. At the same time, YFI is a governance token, so holders rightfully are entitled to govern at least some aspects of the protocol.
As an aside, the initial YFI distribution mechanism, dubbed a “fair launch”, was unique in the sense that no YFI was allocated to any team members or founders. Instead, YFI was allocated to the platforms user base. The merits of this approach are well-worth debate, and the impact of this style of launch is still felt throughout the DeFi space.
And therein lies the rub; how can a protocol like Yearn give builders and contributors appropriate flexibility in decision making while also achieving sufficient decentralization? One place to start when looking for answers is YIP-41 (YIP = Yearn Improvement Proposal), which was created in August 2020. The proposal (which was approved) granted a range of operational powers to a 6-of-9 multisig which could be exercised without the typical “1 YFI = 1 Vote” voting process. Nonetheless, there was still an understanding within the community that a more robust system was needed.
An important theme within Yearn in particular (but also I think this could apply generally across the wider ecosystem) is the recognition of emergent work groups. The pace at which Yearn creates and innovates is incredible, they have cultivated a culture of doing. It’s a very talented collection of creators, builders, and doers. Patterns and groups form out of this type of environment, the members of these groups also naturally form a collective wisdom. The framework encapsulated in YIP-61, or Yearn’s Governance 2.0, is a means to refine the protocols governance shape moving forward based off the necessities developed in the early stages of Yearn. What this means is that the members within a specific work group are probably the best folks to make decisions within that realm, certain decision making power should be pushed out to those people.
The Governance 2.0 model establishes “yTeams” which have authority to make decisions in their respective domains. Yearn’s general approach of “constrained delegation”, where YFI holders delegate certain decision making power to these yTeams, is further defined with the 2.0 framework as these governance powers are made into discrete objects (at some point these could be NFT’s).
It’s important to understand how the relationship between core contributors and YFI holders works in this model. For example, YFI holders can create proposals to ratify a new yTeam but they can’t necessarily set the budget for that new yTeam. The idea is to empower YFI holders in a meaningful way while giving decision making authority (within these operational domains) to the people who have the best knowledge to make the decisions. It’s a natural next step in the design space of governance models, and I’m looking forward to see how the protocol implements and executes on Governance 2.0.
Yearn Finance - Lunch Line Leftovers
So we’ve seen the model Yearn has put out with Governance 2.0, but what are some of the tools they may use to execute on their strategy?
I mentioned above that a yTeams decision making authority could potentially be developed into an NFT. This is really innovative idea, and would serve to make the authorities extremely transparent.
Each yTeam could be associated with a particular multisig, allowing for a “nested multisig-style consensus mechanism”. A Gnosis Safe multisig setup would be an obvious candidate here.
Colony is building out tooling to help DAO’s organize themselves and also has a reputation system built into it.
Orca is also building out infrastructure tooling, allowing DAO’s to organize into functional groups or “pods”.
SafeSnap combines the well known (off-chain) voting app Snapshot with Gnosis Safes, which allows for “on-chain execution of off-chain votes”. Yearn could deploy this model relative to their current proxy voting setup.
Governor Alpha/Bravo, developed by Compound, could also serve as a potential foundation for Yearn’s governance moving forward. If implemented, this would also allow for an integration with Tally, a leader in the governance tooling space.
These are just a few of the options out there, there’s so many more ideas and protocols that I’ve left out above. It’s an area well worth exploring, so stay tuned for deep dives into some of these projects.