A proposal to update the fees distribution policy:
- Stakers from 50% → 25%
- Rebalancer from 30% → 15%
- DAO Treasury from 20% → 60%
and thus increase the current performance fee on PYTs (from 10% to 15%)
Before digging into the specs, it can be helpful to share some broader concepts about rewards distribution:
Point 1: The goal of a DAO is to maximise long-term token holder value.
Point 2: Point 1 suggests that each dollar a protocol owns or receives as revenue should be allocated to its most profitable use. Options typically include saving the money in the treasury, reinvesting it into growth or new products, or sharing it with token holders via token rewards.
We recommend to re-think the initial weights of the protocol fees distribution, decided more than 1 year ago. Buybacks and fee distribution do contribute to the value of the token, but we should remember that the main value creation is driven by the protocol cash flows. These cash flows are directly tied to the protocol’s user base, the TVL, and its product suite. Investing into Leagues then means funding future user base expansion, partnership creation, and product development that will ultimately increase cash flows for the DAO.
Capital allocation is the process of deploying a firm’s financial resources to maximize returns for stakeholders.
Organizations typically have five primary options to allocate capital: reinvesting in operations, issuing dividends, repurchasing stock, paying down debt, and acquiring other businesses.
While Idle DAO has always been debt-free, until today, we have explored mainly three of these opportunities: $IDLE buybacks, fees re-distribution and Leagues operations funding.
The approach used by Idle and by many other DeFi protocols goes against a rational capital allocation, though. Why rewarding token holders now when that capital can earn far higher returns being reinvested into the business? This is especially true for protocols in high-growth industries where the potential returns on capital can be enormous if a firm succeeds in its market.
That said, we suggest a change in the current Performance fee and in the Fee sharing distribution: the current fee distribution policy and the performance fee are a suboptimal solution given the Idle DAO’s stage. We would instead promote a more prominent use of fees toward internal investment in operations. Hence, the proposal will rely on two actions:
- Increase the performance fee on PYTs from 10% to 15%
- Update the fee share split increasing the share flowing to the DAO Treasury
Idle DAO is currently charging a 10% performance fee on its two strategies:
- Best Yield: 10% performance fees on gains at funds redeem
- Perpetual Yield Tranches: 10% performance fees on gains at funds redeem as well as at every harvest.
A simple summary analysis of the DeFi fees charged by projects similar to Idle shows that our protocol positions itself among the most economical in the market. Assuming an underlying APY of 10% we computed the net fees (as a sum of management, withdrawal and performance fees) charged by different DeFi protocols. Out of 15 DeFi protocols, the majority charge fees higher than 2%. While our Best Yield and Perpetual Yield Tranches currently ask for just 1%.
Idle DAO product suite isn’t charging any management fee or withdrawal fee at the current time. This decision was taken to limit the barriers to entry for new LPs, ease the integration and maintain the composability of our product suite. Idle’s approach hasn’t changed and we won’t propose adding any additional fee besides the performance one in place.
What has changed instead are the market conditions. Due to the current bear market, the present size of the performance fee and its distribution policy are no more able to sustain Idle DAO’s growth.
We have modelled three scenarios based on current metrics to better understand how a shift from 10% to 15% in the performance fee of PYTs could positively affect Idle’s returns. Ceteris paribus, we see that a 5% increase in the performance fee could easily lead to a 20% increase in the revenues generated.
It’s important to notice that the Future scenario has been thought of in a very conservative way. The TVL for example has been kept constant between the first two scenarios, while the main goal of Idle DAO is to grow it.
The third scenario shows a stunning increase in Idle DAO profit of more than 260%. This will be achievable when the Idle BY strategy will start deploying its liquidity in some of the senior PYTs pools. In this way, our product suite will be able to offer leading APYs to its users and at the same time increase its returns by leveraging fully its product suite. We do expect to see an increase in the average APY thanks to new integrations in the pipeline that will provide steady higher yields. The TVL should be affected accordingly.
- 50% to Idle’s stakers
- 30% to the Idle’s rebalancer
- 10% to the Fee Treasury
- 10% to the Smart Treasury
With IIP-18 of January 2022, Idle DAO voted to deprecate Idle Smart Treasury and increase the percentage of fees flowing to the Fee Treasury. The January 2022 split currently in place is
- 50% to Idle’s stakers
- 30% to Idle’s rebalancer
- 20% to the DAO Treasury
We suggest updating the current fee sharing to the following tiers
- Stakers from 50% to 25% - IDLE stakers will continue to be eligible to receive part of the fees generated by the protocol to reward their long-term commitment in supporting Idle DAO’s growth.
- Rebalancer from 30% to 15% - The rebalancer contract is responsible to cover for gas costs related to the harvests and the rebalances of our product suite. It has a minimum threshold of 1 ETH. Currently, it holds 5 ETH. Idle Leagues will set up a monitoring system and in the case that funds go below the minimum threshold they will promptly top up the balance.
- DAO Treasury from 20% to 60% - The DAO Treasury is the primary source of operational liquidity to sustain protocol scalability and fund growth. For this reason, it’s essential to guarantee a stable source of funding to it.
The summary table on the new tiers shows that stakers will be minimally affected by the change in the fees distribution policy. On the contrary, in the case of a future scenario where the Best Yield strategy will start deploying liquidity into Perpetual Yield Tranches, stakers will be able to increase their rewards vs the current situation.
We can see how an increase in the performance fee of Idle DAO and a change in its fees distribution policy could favourably affect the capacity of Leagues to self-sustain their operations. This event should be positively welcomed because it could let the DAO increase its treasury size, making it more resilient to market shocks, as well as attract more talented contributors that would help scale Idle DAO’s business.
- A New Mental Model for Defi Treasuries by Hasu and monetsupply
- Stop Burning Tokens – Buyback And Make Instead by Joel Monegro
- The DAO Treasury Issue by Jordan Statsny
We would like to gather the sentiment of Idle DAO toward the update of the fee distribution split. The aim of the updates is to create a more stable and successful protocol and DAO.
This post will be open for discussion and in about 3 days, if there are no objections, we will proceed with the Temperature Check.