Yearn Finance Proposes Fee and Reward Restructure After TVL Decline

Yearn Finance works on the premise of seeking out the best yields through ever-shifting strategy management which saves the investor the time and expense of doing that research themselves. Following its launch it was wildly successful, offering massive four-figure yields for certain strategies that became unsustainable over time and needed to be changed. The yETH vault is a good example of this as it offered over 100% annual return on ETH deposits initially, but collapsed to less than 0.5% when the strategy came apart and liquidity exited the pool. In its latest proposal, Yearn has suggested that strategist rewards are too low, recommending an increase to attract the best developers to the platform.

1/ Our goal is to attract and retain the best developers in DeFi to work in the Yearn ecosystem.

Some developers have expressed concern that Strategist fees (0.5%) are not sufficient to align long-term incentives.

— yearn.finance (@iearnfinance) November 1, 2020

More Incentives For Yearn Strategists

Strategists currently receive 0.5% of the profit from their strategy but this may work out less than what they have spent, especially now that yields have plummeted from their frenzied levels a couple of months ago. The fee is derived from the 0.5% withdrawal charge for liquidity providers leaving the vaults. The proposal added that underpaying strategists could result in them seeking short term gains and skipping on security or testing. The V2 vaults, which are currently in development, will have multiple strategies per vault sharing the assets under management and offering more realistic returns. After testing some different fee models, developer ‘Banteg’ stated that a management fee would be better than the current withdrawal fee, “Today I learned that 2% management fee would 4x cheaper than 0.5% withdrawal fee.” However, it was suggested that a 2% management fee would be detrimental to liquidity providers should the strategy become no longer viable and the vault starts to underperform, similar to the situation that developed with the yETH vaults. Finding the balance between rewarding liquidity providers and strategists at the same time is clearly proving to be a challenge.

Total Value Locked Update

Total value locked in Yearn Finance has declined around 60% since early September and is currently around $390 million according to DeFi Pulse.

Dwindling earnings have resulted in DeFi farmers seeking yields in fairer pastures, or even moving back into Bitcoin which is outperforming nearly all other digital assets at the moment. Yearn’s native token, YFI, has taken a similar hit dumping around 75% since its all-time high in mid-September. Today, YFI is trading at just under $10,700, down 25% since this time last week.