YAM: More Than a Game (Potentially)

Disclaimer: I assisted in the launch of YAM, an unaudited, experimental protocol. The ideas you see below are simply my own personal thoughts and don’t reflect the views of the YAM community or any of the other individuals who helped build YAM. It’s important to note that any potential experiments listed below may never be tried, may not work, and that only the community of YAM holders has the power to enact any future ideas regarding YAM. When we said we don’t have any ability to control or dictate outcomes for YAM, we meant it.

Over the past several days in the aftermath of the YAM bug, I have seen several opinions designating YAM as an interesting game to play, but one that is ultimately zero-sum and garden-variety. These opinions come from people I greatly respect and consider some of the smartest in DeFi, and yet I feel sentiments which align a project like Spaghetti Money with YAM miss the mark, which is either a great success or great failure. While the initial concept was indeed very game-like, it became clear that underneath there was an idea that was more than a game.

YAM has the potential to be a capital accrual and allocation protocol disguised as a money game. The memes, hype, and rebase functionality have largely obscured the novelty of the reserve and its leveraging of the rebase mechanism. Because many are familiar with rebasing, many seem to view monetary elasticity as the main value and potential of YAM; I believe, however, the potential of YAM lies in the treasury, which is only mentioned as a footnote in Hasu’s recent article.

I read basically everything Hasu writes and greatly respect his views; his opinions of YAM are shared among many in the DeFi community. To help deepen community discussion, the below are some general thoughts I’ve had on YAM. The ideas proposed do not reflect the current reality of YAM, but rather the concept of what YAM might become in the future. I have no more ability to influence these outcomes than any other community member.

It seems one of the major issues many take with YAM is the concept of rebasing itself. This is fair, as in most cases rebasing is not actually generative and is essentially shifting numbers around to reflect shifting demand. In YAM’s case however, the rebase functionality plays the critical role of programmatically measuring and leveraging demand for a specific purpose: building the treasury. Hasu calls this mechanism a “tax,” but I prefer to think of it as a unique fundraising mechanism that perfectly calculates the amount of capital to raise on an ongoing basis.

While the above is an interesting concept, it is only part of the story. What exactly does the treasury look like and how does it operate? As an early sanity check into the reserve mechanism, a rough simulation was run on APML’s rebase history, allocating 10% of each positive rebase to a reserve as YAM planned to do. At the time of the simulation, AMPL would have had $40M in their treasury according to our calculations.

While not comparable to major DeFi protocols TVL, such a treasury is capable of earning significant yield for those with a stake, especially under effective community management. While initially YAM utilized a simple yield-bearing token with yCRV to generate yield, the opportunities the community could choose to act upon are far greater. There seem to be five major buckets into which we can group potential reserve functionality:

1. Strategic investments: This is essentially the decentralized fund model for the reserve. The community could choose to allocate a portion of the reserve to various projects, such as those farmed, as well as newer upstarts, potentially paying for audits in return for tokens as @ceterispar1bus suggests here.

2. Native financial protocol liquidity: This one of the most exciting, but most ambitious ways to leverage the liquidity in the reserve: building out a financial protocol. The simplest implementation would be a money market, in which reserves are lent out in return for collateral. This collateral would be then lent out in return for additional collateral, etc. The treasury then earns a yield + spread on the initial capital it controls, as well as a spread on any additional rehypothecated lending. This is just the tip of the iceberg.

3. Protocol and Organizational Development: At the core of any initiative of the reserve is the community of YAM holders and builders. There could be significant development and maintenance costs, security audits, potential legal counsel, and other development costs that come with organizing a large community to a common goal. The reserve could serve as an excellent way to promote the protocol and community’s development.

4. Public goods funding: As a community-oriented project, it might make sense to allocate a portion of the treasury for public goods funding. While it may not generate immediate yield for the reserve, it would likely have positive effects for the ecosystem and project visibility.

5. Price floor for YAM: As a treasury accrues, there becomes inherent value in the protocol, not just meme value, assuming a mechanism for treasury redemption exists that would allow a YAM holder to ragequit and claim a pro rata share of treasury. This means in the event of a loss of confidence, there would be some price floor at which the YAM market cap would be equal to its treasury.

If you put these pieces together, you may find something analogous to a decentralized, community-owned and governed bank. In the traditional financial system, banks issue shares to raise capital, then deploy and manage that capital, ideally generating profits for the bank and shareholders, and ultimately leading to shares trading at some multiple of “book value,” or the assets a bank holds. This is, of course, NOT what YAM has done in a legal, regulatory, or functional sense, but it is a tangential mental model to help conceptualize the possibility of what YAM could become, if the community so chooses. The rebase functionality in YAM’s system essentially ensures that the capital raising process is always in line with current demand for the treasury and yield it would be generating.

Now, it’s worth noting that perhaps none of the above works today. It requires a lot of coordination, governance, and effective management, and you could say you don’t believe it will work. You could say it’s a DAO with extra steps, which is also potentially valid criticism. Like we said at launch, there is no inherent value to YAM, and we meant that. Any value that accrues to YAM is going to be a result of a community coming together and hashing out these ideas into a cohesive system. But I think that, if nothing else, saying YAM is a zero-sum ponzi game majorly misses the mark and ignores what could still become one of the great DeFi experiments.

Thanks to all who continue to engage with and support the YAM experiment, I’m excited to see where this amazing community chooses to go.