Yearn proposes a “buy back and build” strategy for YFI owners

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The Yearn.finance community presents a proposal to reform the current YFI token economy. The proposal, popularly known as “buy back and build,” aims to strengthen the project’s treasury while creating value for everyone involved. The list of authors includes the Yearn core developers Banteg, Tracheopteryx and Lehnberg as well as Gabriel Shapiro, partner at BSV Law and occasional Yearn employee.

Currently, Yearn.finance uses a stake and dividend model. Holders must insert their tokens into the yGov contract and receive a portion of the income generated by the income strategies. This mechanism is similar to traditional dividends.

An alternative method of capturing value, used by some like Makers, is to display the log buyback tokens in the open market and then “burn” or shut down them. This mechanism creates buying pressure on the price of the token, which ideally leads to a tight link between the success of the protocol and the price of its token – and ultimately to the wealth of the stakeholders. This type of strategy has gained significant importance in the equity and crypto markets in recent years due to its flexibility and tax efficiency for holders.

The Yearn proposal suggests a slightly different mechanism, inspired by an essay by Joel Monegro of Placeholder VC. Rather than withdrawing the tokens repurchased in the market, they would be kept in balance with the Treasury Department to be redistributed for development and community initiatives. Future governance proposals could use the tokens in the state treasury for funding.

The proposal emphasizes that the purchasing process must be continuous and automated, avoiding the possibility of front-running or other usage mechanisms. From a financial point of view, the proposal seeks to let the YFI Treasury take advantage of inflation, for example by staking out or reducing liquidity, without expanding the YFI 30,000 supply.

However, the fact that the tokens are likely to come into circulation again at some point limits the effectiveness of this value creation strategy. This is largely by design – one of the rationale for enabling the mechanism is to focus all resources on growing the protocol. According to the authors, Yearn.finance is still too immature to be able to afford a dividend distribution to the owners.

Other, more practical benefits include the ability for all tokens to participate in governance and reap protocol rewards. The termination of the yGov stake out contract would also allow the construction of more traditional vaults to generate income with the YFI token.

The proposal is still in its infancy. An informal survey shows that more than 90% of the community members are supported. However, the decision would have to be formalized by voting in the chain.