YFInflation - The Daily Gwei #163

Another day in crypto, another debate.

The YFI token was probably the biggest token launch during DeFi summer last year that generated a tonne of hype and insane price movement. The token distribution model was unique as there was no premine, no VC allocation, no team allocation or anything like that - everyone had the same opportunity to farm the token and once the farming was over no more tokens would be distributed. This method of token distribution came to be known as the “fair launch”.

Over the weekend, the YFI community has been discussing how to fairly compensate the core developers of the Yearn protocol. Up until recently, there was a governance vault that collected fees in yUSD and distributed the first $500,000 of this to the core developers with anything over that being paid out to YFI staked in the governance contract. A summary of the new proposals that have been floating around can be found here - one important thing to note is that the core team did not propose any of this as it was done by the community.

Essentially there were a couple of proposals flying around including a ‘buy back and build’ model where YFI would be bought on the market using fees generated by the Yearn platform and then used to fund operational expenses and there was another proposal that posited to print an additional 1000 YFI tokens (currently worth ~$38 million) to be allocated towards the core team. Obviously this proposal is extremely contentious and the poll on the forum post is currently sitting at 61% against and 39% for. There are a lot of great discussions on the post so I suggest that you go read it for more color on all of this.

As a YFI holder, I’m personally completely in favor of printing more tokens in order to fund development of the Yearn protocol. I don’t think it’s going to crash the price nor do I believe it breaks any kind of “scarcity memes” that have propagated around YFI - the wider market really doesn’t care that much. What I do believe is that the value generated by printing more YFI tokens and giving the core developers exposure to the upside of YFI will lead to better incentive alignment and a healthier product overall. The developers won’t have to worry about funding anymore and it will become easier to attract top talent to work on the Yearn protocol.

This whole thing also calls into question the notion of the “fair launch” and how tokens are distributed in these launches. Honestly, and in hindsight, a 0% team allocation is really dumb - how is a project going to attract and retain talent when they don’t have any upside if the token goes up in price? I think a better fair launch model is to retain 10-15% of the tokens for the core team and then just distribute the rest to the community via liquidity mining or some other mechanism. I would even say that bringing on some really strong and long-term aligned investors is a huge value add for a project.

Many lessons were learned during DeFi summer about how to do a proper token launch and how to actually incentivize people to join and stay within a community. There are still plenty more experiments to be run here but I think that at this point we can say one thing for sure - a “fair launch” of a token where the core team gets nothing is not a very sustainable model.

Have a great day everyone,
Anthony Sassano

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All information presented above is for educational purposes only and should not be taken as investment advice.