title: Activate Intrinsic Productivity
author: Kiba Gateaux (@kiba)
This is a concrete and actionable plan to start earning yield on 2 assets within DPI - SUSHI and YFI.
The yield strategies proposed avoid all the issues discussed previously - namely liquidity issues from lending and potential loss of funds by using them as backstops.
Utilizing ~12% of our assets under management in two very simple, low risk strategies we can provide $1.7M in additional income to DPI holders.
A brief history on intrinsic productivity discussions for Coop newcomers:
- Initial explorations 1 + 2 + 3
- INDEX as staking backstop
- Community survey on intrinsic productivity
- First ‘real’ productivity proposal
The Coop hasn’t really made any progress in implementing intrinsic productivity since the first proposal by OA six months ago. I think the two main reasons are 1. We focus on putting the whole portfolio to work at once instead of picking the low hanging fruit 2. We only explored two yield options previously - lending and protocol level staking. Essentially we were trying to overfit acceptable yield strategies that worked for all assets at once instead of finding the best yield strategies possible for each individual asset.
The goal of this new intrinsic productivity strategy is to focus on as few assets as possible and earn as high yield as possible on them while living by the “boring” values of the Coop.
Also the main point of differentiation for all DPI competitors is that they earn yield on assets. By activating intrinsic productivity for DPI we solidify it as the premier index product in every possible aspect.
- SUSHI → xSUSHI → ~5% APY
- YFI → yvYFI → ~20% APY (actual vault says 30% but used number from official stats dashboard)
Both of these strategies have all the following properties:
- Not used as a backstop with risk of slashing
- Not lent out and 100% backed at all times for redemptions so no liquidity issues
- No loss strategy (e.g. LPing), always get back more tokens than notional amount in DPI
- Passive set-and-forget with auto-compounding rewards accrued to yield bearing asset directly
- No vesting schedule on rewards
- Long term farms that don’t require crop rotations
- Low smart contract risk with >$120M in yvYFI and >$1B in xSUSHI representing ~10% and ~45% of each tokens total supply respectively with no hacks or exploits to date.
- Retain full governance rights of tokens while earning yield on them
If you go back through all the intrinsic productivity posts, these two strategies completely avoid all of the issues we had with utilizing underlying assets. Even better than avoiding all the issues with old strategies, they earn higher yield than any proposed strategy so far.
90% of all assets in DPI will be staked. Funds will be pulled from staking strategies to replenish reserves if less than 5% of notional amount is liquid leaving 5-10% of all funds available to cover rebalances and redemptions. Brian from Set said redemptions aren’t an issue because users would just receive SUSHI/xSUSHI/YFI/yvYFI instead of just SUSHI/YFI. Most importantly, we can retrieve all 90% back at any time without any risk to our positions or profitability so we should maximize yield on these two strategies. As far as I can tell from this chart, there hasn’t been more than a 6% drop in a token over a 3 day time period so this leaves us a very safe margin for rebalances.
|Asset||DPI TVL||% of DPI||% Staked||% APY||DPI Productivity Revenue||% Earned on DPI TVL|
DPI productivity revenue = $134M TVL * 1.3% yield = $1,716,540~~
You can play around with these numbers here.
An important consideration for distributing revenue from DPI yield farming is making sure we do it in a way that doesn’t put DPI at risk of becoming a security. The original proposal avoided this risk by diverting excess profits to the Coop but after discussing, the community is mostly aligned on giving all value back to DPI holders and not overplaying the securities concern.
100% of farming proceeds will be returned back to DPI holders. Tokens earned from yield go into DPI’s vault, thereby increasing the value of each individual unit of DPI and increasing the allocation of SUSHI and YFI which then gets rebalanced out every month. This is how Set Protocol natively operates today.
“Returning all value to DPI holders is an obligation because passing as much value as possible back to the end user is a guiding principle of DeFi” (paraphrased from @BigSky7 and @trx314) and will help grow DPI unincentivized TVL. It also reduces complexity and smart contract risk of implementing IP versus the original proposal’s custom yield splitting scheme which lets us push IP to production much faster.
If we later receive guidance/warnings that DPI is a security because of IP we can always pause IP and evaluate new technical architectures based that are inline with this guidance.
- Use assets in current DPI vault
- Use WrapAdapter for xSUSHI that already has an open PR.
- Create WrapAdapter for Yearn v2 vaults to access yvYFI
- 90% of all SUSHI + YFI will be put into farms.
- With Yearn v2 vaults, if you try to withdraw more than what is in the unutilized vault reserves you incur a fee. I asked Set team and they said this will be implemented by manager not in the WrapAdapter contracts directly so the Coop will have to decide what our acceptable “slippage” fee is. As far as I can tell there is nearly $100M or 80% of YFI in the vault held in reserve at the moment which is 20x more than we would be staking so it seems unlikely this would happen but we should have a contingency plan anyway.
- Farming program will run indefinitely until Coop votes to end or change strategies
- Establishing working group for IC asset management
- Farming strategies for other assets besides xSUSHI and yvYFI
- Smart contracts to manage farming positions