Author: Stake DAO Association

Summary

Due to Yearn team’s behaviour and actions, Stake DAO must determine whether it should be able to still receive normal fee and keep the responsibility of Stake DAO’s contracts, or allow sdYFI holders to take part in the Yearn redemption facility which allows them to lose 10% of their locked YFI balance in exchange for immediate liquidity.

Context

In its recent YIP-88, Yearn asked governance for approval regarding a phase out from veYFI and the launch of stYFI. They did so notably because instead of forking the veCRV contract, they chose to develop their own the veYFI contract and introduced an unwanted behaviour, which today forces them to move away from veYFI and launch stYFI.

As the veYFI contract is not upgradable, the locked YFI cannot be unlocked, and therefore veYFI holders are put in a painful situation. To partially compensate for it and receive favorable votes in the YIP-88 proposal, while finding an additional way to make money, the Yearn team committed to putting in place a “redemption facility” for holders of liquid staking wrappers like sdYFI allowing them to exchange 1 veYFI wrapper for 0.9 YFI.

However, now that YIP-88 passed, notably thanks to sdYFI voters’ votes, the Yearn team is conditioning the access to this redemption facility for sdYFI holders to always more conditions from Stake DAO, like for example the transfer of the governance of Stake DAO’s sdYFI contracts to Yearn’s team. Those ever-evolving conditions (which seem to have as main goal to prevent sdYFI holders to access the redemption facility) are also putting sdYFI holders at risk, should they finally be met. For example, there is no guarantee that the current Yearn team will properly manage the unlocking of YFI tokens in four years, especially considering recent treasury restructuring and vesting mechanisms implemented within Yearn, as well as prior security-related incidents.

On top of that, they decided to directly distribute the yield of veYFI to sdYFI holders, changing the historical flow where Stake DAO claims the veYFI yield and distributes it to sdYFI holders. This means that Stake DAO cannot perceive its fee anymore, and for an unknown reason, the Yearn team refuses to distribute the fee to Stake DAO. The answer from Yearn team to this topic is the following: “Stake DAO should mint sdYFI and stake them in the recently deployed sdYFI gauge to perceive its fair share of the locker’s veYFI yield. However, doing so would prevent sdYFI from being eligible for the redemption facility.”

Proposal

Following this exchange, the proposal suggests that Stake DAO shall keep the responsibility of its contracts and therefore not take part in the redemption facility.

Stake DAO shall mint 41.78973 sdYFI, which would correspond to 15% of the total sdYFI supply. Those sdYFI will be staked in the Yearn gauge and allow Stake DAO to receive its 15% fee on Locker yield. Those sdYFI will not be eligible to be redeemed against YFI after the locker’s locked YFI will be unlocked, and will be burnt instead.

Burn mechanism

As described, the 41.78973 sdYFI minted under this proposal shall:

– Be staked exclusively in the designated Yearn gauge – Not be transferable except by governance vote – Be permanently burned upon unlock of the underlying YFI

The burn shall be executed via a publicly verifiable on-chain transaction and confirmed in a post-execution report.

Any deviation from this mechanism would require a separate governance proposal.

Rationale

The redemption facility offers users to lose 10% of their YFI balance, while staking sdYFI currently offers >100% yield and is planned to offer a solid APR throughout the unlock period. Therefore, it is unlikely that a majority of sdYFI holders would want to take part in this early redemption and suffer from the redemption penalty, especially at this time, where YFI nears ATL. A possibility would have been that Stake DAO transfers to Yearn the control of Stake DAO’s YFI locker when Yearn becomes the majority holder of sdYFI, but that was not accepted by the Yearn team who wants to control the sdYFI locker now, even though they do not currently hold a material portion of the sdYFI supply.

Since it is unlikely that Yearn would ever reach majority holding of sdYFI, giving the Yearn team the key to the locker would put Stake DAO users at a great risk, especially seeing Yearn team’s recent history of implementing treasury restructuring, contributor compensation and token vesting mechanisms, and their history of being hacked several times.

We therefore believe that it would be better to keep maintaining sdYFI’s liquidity and allow users to exit through it.

Furthermore, in order to be able to keep perceiving its fee, the only solution Yearn has left Stake DAO with is to mint 15% of the sdYFI supply and stake it in the Yearn gauge, therefore perceiving 15% of the stYFI yield distributed to sdYFI stakers.

Economic Impact & Supply Disclosure

The proposed minting of 41.78973 sdYFI would represent 15% of the total sdYFI circulating supply at the time of execution.

This minting would:

• Increase total supply by 41.78973 sdYFI
• Allocate such minted tokens exclusively to Stake DAO’s treasury address 0x5DA07af8913A4EAf09E5F569c20138b658906c17
• Be staked solely in the Yearn gauge for yield recapture purposes
• Not be eligible for redemption via Yearn’s redemption facility
• Be permanently burned upon unlock of the underlying YFI position
• After the minting, no fee would be charged on the sdYFI product by Stake DAO other than the yield claimable of the sdYFI minted.

These actions would constitute a governance-approved protocol parameter adjustment and shall not create additional governance rights beyond proportional supply mechanics already embedded in sdYFI.

No discretionary treasury management is introduced beyond the scope explicitly described herein.

Legal and Compliance Framework

To ensure regulatory and operational compliance, the following safeguards apply:

Non-Custodial Structure: The sdYFI locker and associated smart contracts are non-upgradeable and operate autonomously on-chain. Governance decisions may influence parameter settings and token issuance mechanics but do not involve discretionary custody of user assets. Stake DAO governance participants do not individually or collectively assume fiduciary duties toward token holders. All interactions occur via smart contracts executed at user initiative.

No Financial Product Offering: This proposal constitutes a governance vote concerning internal protocol mechanics and revenue distribution structure. It does not create a new financial instrument, pooled investment vehicle, or profit-sharing contract. sdYFI remains a utility-based liquid staking wrapper subject to market risk and protocol risk. No representation of profit, yield guarantee, or capital preservation is made or implied. ** Transparency and Auditing: ** All SDT transfers and reward distributions will be verifiable on-chain and publicly auditable.

Risk Mitigation: In case of any operational or technical failure, undistributed SDT remains under DAO control within the Rewards Allocation Pool.

Stake DAO does not guarantee the performance, security, or continuity of any third-party protocol or smart contract system, and participation involves technological and market risks.

All counterparties (e.g., Yield Basis contributors) act as independent, decentralized participants and not as agents or representatives of Stake DAO.

Conflict of interest: This proposal directly affects Stake DAO’s revenue capture mechanism. As the protocol treasury benefits from the proposed minting and staking mechanism, veSDT holders are advised to consider potential economic alignment implications when voting. The proposal does not grant discretionary control to any individual contributor or core team member and remains subject exclusively to on-chain governance approval.

Proposal Specifications Admins: veSDT holders Community Feedback: Min 3 days Voting Duration: 7 days

Voting Options YAE — Approve the minting of 41.78973 sdYFI and stake it in the Yearn gauge. NAE — Rework the proposal with another solution. ABSTAIN: No preference.

Disclaimers This proposal does not constitute a financial product or investment solicitation. All SDT transfers are executed on-chain through transparent and auditable smart contracts. No third-party funds are managed or held by the DAO beyond the governance-approved emission schedule. Stake DAO acts solely as a decentralised coordination framework, not as a financial intermediary.