PIP 11: Yield Farming++

PIP: 11 Yield Farming++

Rationale:

The current trend of the DeFi space has moved to incentivized liquidity, colloquially known as “Yield Farming”. PieDAO itself already leverages Yield Farming indirectly through the construction of Balancer smart pools, which are rewarded with BAL tokens. This initially lead to impressive growth numbers for Pies, with TVL going over $4m. However, Yield Farming was turned on its head with the introduction of yEarn.finance, which introduced the concept I like to call “yield-ception”, where it incentivizes liquidity in myriad ways, and as a result is delivering unbelievable returns. As a result, it has created a liquidity vortex and is drawing liquidity away from the protocols not utilized in its design. Aave and Curve have seen their liquidity balloon through the usage of the yCurve pool, which is an AMM for interest-earning stablecoins, using Aave primarily. Compound and PieDAO both have seen their TVL numbers decrease, and even the peg for sUSD is being impacted by this as Yield Farmers leave in droves to yEarn. In order to incentivize the creation and liquidity of Pies, we should introduce a novel Yield Farming technique of our own.

Mechanism:

Synthetix innovated tremendously with their UNIPOOL sETH/ETH staking program. In short, the contract they use is funded weekly with a token that people want (SNX), and in order to get it, they put in the specified token (UNIPOOL tokens and now others). The same contract is also used to farm YFI tokens in yEarn. It is easily configurable to support any two tokens in its design.

In balancer, we have a few PieDAO approved pools, which are eligible for BAL rewards for pooling Pies, for example, the BTC++/USD++ pool. These pools create a derivative, the balancer pool token (BPT). The BPT tokens for the eligible PieDAO Balancer pools will be the specified staking tokens, and the users who stake these tokens will receive a reward token for minting and supplying liquidity to the PieDAO ecosystem. Moreover, if we want to incentivize liquidity of a particular balancer pool, we can increase its rewards to attract more yield farmers.

The Problem with Reward Tokens:

The current trend of Yield Farming is that you supply a protocol {x} and you get their governance token in exchange. The thought is that naturally, the users would want to have a say in the governance. Some do, of course, but the majority of users dump their tokens as a part of their Yield Farming. It is unknown what dynamic this will have for the governance of these protocols, but it points to having perverse incentives in the decisions users make. For example, Balancer recently decided to slash the BAL rewards for tokens that are hard pegged (e.g. DAI/cDAI) and for tokens that are soft pegged (e.g. DAI/USDC), while boosting rewards for pools that contain BAL tokens. This was done under the guise of “incentivizing useful liquidity”, but in reality, it is a scheme to pump the price of BAL. Not only that, since BTC++ and USD++ are considered soft pegs, it hurts us directly.

The Solution to Yield Dumpers:

Currently, PieDAO is proposing a dual-token governance framework with DOUGH and FLOUR. I propose we add a third token into the recipe: WHEAT. WHEAT will be the reward token the liquidity incentive program rewards. When users receive their WHEAT, they will be unable to transfer their tokens until they have been processed (vested) – but it will act similarly to FLOUR for purposes of governance. Just like how wheat doesn’t magically become flour if you leave it alone, neither will WHEAT just magically become FLOUR. Holders of WHEAT must participate in governance via delegation or direct voting (or other possible governance actions FLOUR holders can participate in) in order to process their WHEAT into flour (the details of the rate for processing WHEAT to FLOUR is open for discussion).

The great part about this is that it will attract useful liquidity – people who actually want a say in governing PieDAO. Even better, people who might have been uninterested in governance might find that they like it if they are incentivized to do so. This will help to broaden and deepen our community, all while helping to scale PieDAO to deliver on the product vision.

5 Likes

I absolutely love this. It fits the meme structure very well, is easy to implement, and incentivizes people to stay involved. The only thing I’m not currently sure about is the governance mechanism of WHEAT. The usefulness of the UNISWAP ETH/sETH rewards was that it incentivized keeping the peg. Perhaps this is something that could also be worked into the function of WHEAT. Something like: You get WHEAT for providing liquidity, it unlocks over time allowing conversion to FLOUR, but having WHEAT and arbing a whitelisted pool could either unlock WHEAT early or provide more WHEAT as a reward.

3 Likes

I like WHEAT as a in-vesting flour, instead of using a vFLOUR nomenclature. We could run a trial fairly quickly if we don’t give WHEAT any governance mechanism. Am I right @mickdegraaf?

1 Like

You are right sir.

1 Like

Great idea and mechanism. I hope this system will be well understood. It’s not everyday that we will encounter a 3 tokens project. But Alex is the master of UX, so I am very confident in the execution. :grin:

I like the idea yet a bit concerned on the fact this creates a 3 token structure which may be to complex when we seek more adoption. Therefore I agree with @alexintosh that maybe running a trial first to see how it goes and works with current members/users.