Implement BuyBack and Build with Profit

Forum Post: https://forum.yam.finance/t/yip-86-using-profit-to-buyback-and-build/1531

introduction

The goal of YAM is to build a community who will use the treasury to build new DeFi and crypto products that will generate revenues. Beyond just generating these revenues, how they are allocated is a important consideration. With the passing of YIP-80, we have taken a big step creating a foundation on which we can build. Rebalancing and rationalizing the treasury is only the first step in building a strong foundation for YAM.

There have been numerous calls for a revenue/profit distribution mechanism that benefits YAM token holders, and with a solidified model for treasury management we can now reason about how a mechanism might work.

As we are still an early stage project, any distribution mechanism should only consider profit (revenues minus expenses and returns). YAM has quarterly report in which we enumerate the inflows and outflows from the DAO. The most recent one can be seen here: Yam Treasury Quarterly Report - Q2 2021

Using this information we can develop a plan to create a sustainable model to use profits to fund further growth and development.

Methodology

Beyond just looking at profits and expenses for the quarter, we also need to adjust for the overall performance of the treasury between quarters. If the treasury is shrinking then there is no profit, even if our operating revenues are larger than our operating expenses. This is important because it should incentivize YAM holders to manage the treasury in a way that limits investment risk and still rewards investment growth. It also promotes revenue growth since that should be less influenced by market cycles.

There are a few metrics we can use to determine whether the DAO is profitable: Overall growth of the treasury or the difference between product revenues and DAO expenses. I believe treasury growth is the primary metric that we should use. This means that, in the context of this buyback, if the treasury did not grow in the most recent quarter then no profits were realized, even if product revenues outpaced expenses. This is the most holistic way to approach the mechanism.

We can combine a profit buyback mechanism with our need to fund the treasury with YAM to pay contributors. This would create a system where a percentage of profits are use to buy YAM off the open market, which are then used for contributor payments and incentive programs. This model, combined with the ability of the DAO to mint new YAM, provides a framework for which YamDAO can use profits generated to fund itself while also indirectly rewarding token holders, and provide a path to even eventually remove YAM from circulation.

How it would Work

See the Forum post here for a full write-up of the methodology: https://forum.yam.finance/t/yip-86-using-profit-to-buyback-and-build/1531

Other factors

This model creates a number of levers through which governance can influence the project treasury and monetary policy while still prioritizing treasury and project growth. Governance would need to:

1. Determine reasonable payroll and runway figures for contributor compensation. Because YAM may be minted for payroll, this is a parameter that needs to be managed. This includes setting maximum total salaries and the maximum amount of stablecoins that contributors can earn as a portion of their pay.
2. Determine how much YAM is needed for incentive programs.
3. Set a max yearly or quarterly YAM issuance rate for the treasury to limit overall YAM issuance.
4. Determine the appropriate risk level for the Treasury per YIP-80
5. Determine the productProfitReinvestment and investmentProfitReinvestment variables to set how much profit is used to buy YAM.

These different parameters will be in included in upcoming snapshot votes. This vote is intended to ratify the general concept and methodology, with further details determined in future votes.