SIPS-060 [KPI Incentives] - Real Yield ETH KPI Proposal

The purpose of this forum post is to discuss the upcoming KPI proposal for Real Yield ETH which will go to vote on Wednesday, July 5th, 2023.

Status: Under discussion; To be put to vote Wednesday, July 5th, 2023 (Earliest)

Author: Define Logic Lab

Strategy: Real Yield ETH

Posted: Monday, July 3rd, 2023


RYETH has demonstrated how a decentralized vault can effectively implement a competitive and sophisticated strategy, thanks to the innovative execution infrastructure provided by Sommelier. The vault’s strategy maximizes yield on ETH and ETH Liquid Staking Tokens (LSTs) through leverage staking and liquidity provision on Uniswap V3. Since launch, the vault has shown the clear advantages of the Sommelier architecture through its dynamic pivoting between market leading strategies. At launch the vault was heavily exposed to cbETH due to a repeg thesis. When this position was successfully closed, the vault adjusted to primarily leverage staking wstETH on Aave V3. As the interest and staking rates shifted the vault then focused on LPing for wstETH/ETH on Uniswap V3. At all three stages, the RYE vault was able to significantly outperform the ETH staking rate.

Performance: Since launch RYE has generated 9.42% annualized organic yield (roughly 2 times the yield of stETH over the same time frame) and is sitting at $9.2M TVL making it the largest Sommelier vault. While this vault still receives Somm incentives, it is expected that these will taper off with the inclusion of the Morpho and Balancer adaptors which will give the vault additional optionality for yields. During the 30 day period from May 27 to June 27, 2023 the vault earned a 10.85% annualized organic yield. This is over 2.5 times higher than the staking yield of stETH (4.12%) during the same period.

Rationale: Post Shanghai-Capella Etherium hard fork, the staking rate for ETH is now considered by many as the risk free rate of decentralized finance. Since launch, the Real Yield ETH vault has consistently outperformed the ETH staking rate, as measured by the returns of the major ETH LSTs (stETH, rETH, and cbETH). This uniquely positions RYE as the base layer for future Sommelier vaults to tap into an index with a proven track record of outperforming “the risk free rate of DeFi.” This vault composability has already been seen with the Real Yield Governance vaults utilizing RYE as the primary source of yield. We expect future vaults, such as Real Yield BTC, to continue this trend.

This KPI proposal aims to internalize the ecosystem-level benefits brought about by the development and success of RYE.

Discrete incentives (Each entry is in Somm tokens):

Total length of incentive program: 6 months

Screenshot 2023-07-03 at 6.10.47 PM

Maximum incentive per quarter: 850,000 Somm tokens, corresponding to a performance of 10% on a TVL of $20M.

Additionally, if the KPIs are met, as determined by the KPI council, the tokens will be sent to a vesting contract to be locked for 2 years.

hey DeFine Logic team,

I wanted to provide some feedback on these KPI incentives for the RYUSD one but wasn’t able to in time before it went up for a vote, but I have the same feedback for RYETH.

Both KPI proposals should be based on how much better RYETH and RYUSD are than its largest competitor (stETH yield in this case) instead of wholesale APY returns.

For example: if we see a large uptick in onchain activity, we may very well see stETH native yield be 8%. If RYETH is also getting 8% yield, wouldn’t that show that RYETH is not beating the “market rate” despite getting incentives for doing a “good job”?

IMO, both RYUSD and RYETH APY KPIs need to be based on the additional yield they give above the baseline (stETH for RYETH and maybe an equal-weighted basket of USDC and USDT lending rates on AAVE and COMP) for a real apples-to-apples comparison.

Im not part of the KPI Council, but I think this should be discussed moving forward and would love to hear others’ opinions on this. @web3_analyst

1 Like

Thanks for your feedback!

Having a baseline “risk-free” yield assumption is a great idea. That’s sort of where we’re targeting the bottom tier. Our assumption is that the ETH staking ratio is going to increase from here as more institutions become more comfortable with staking their ETH now that it is withdraw-able and LST protocols and products ship, which will likely dilute the ETH staking yield across the board.

From this perspective, we’ve taken a somewhat aggressive approach to our KPI targets, but we believe that having high standards incentivizes strategists to produce industry leading results.

And while we do believe it is very unlikely ETH staking yields will significantly trend up over time, it is not logically impossible, so in the event that happens, we do believe another governance proposal to increase KPI targets would be warranted and would be something we would agree to. Further this proposal is for a relatively short period with the idea that the community and the KPI council can assess its success during the coming months.

The reason we hesitate to start with a dynamic model is because the stETH staking APY changes frequently, and we would need to track it consistently in order to use it as a meaningful benchmark. By having aggressive, fixed targets, we push ourselves while also maintaining laser-focus on specific outcomes for our users.