Governance Yield Farming
Yield, in a bear market? How audacious.
Let me introduce you to the newest form of yield farming — Governance Yield Farming.
Sounds a bit silly, but let me explain.
As frothy yield farms and returns in the 10–20 percent fade away from protocols’ UIs, the opportunity for risk-free* return is becoming sparse. No more Olympus forks — that was a 0-interest rate environment. So what’s next?
Crypto was sold to the masses as a way to “park your money” and earn competitive savings rates (see Voyager, see Celsius); that yield is no longer. Now, crypto-natives and curious onlookers have to become more creative in their pursuit of above-market rewards.
Enter Governance and compensating delegates.
Whether explicitly or retroactively, more protocols are starting to reward delegates who meet certain delegation thresholds. Let’s take a look at a few opportunities of different sizes.
[The following yield calculations use the assumption that delegation is 100% self-delegated]
HOP
Ok, let’s start by setting the scene -
Pioneered by a community-led initiative, HOP is in its second iteration of the “delegate incentivization” trail. On the forum there is a discussion to amend some of these rules:
As the trial exists today, a delegate must maintain a certain threshold to qualify for rewards. This level is clearly outlined in the original HIP (HOP Improvement Proposal), shared below:
“To remain eligible for delegate incentives, a delegate must maintain at least 90,000 HOP voting weight.”
With a total of 1,000,000,000 circulating supply, 90,000 HOP equates to around 0.0009% of the voting supply — at current levels, 28 delegates maintain this level.
Now armed with this knowledge and the tight group of delegates, let’s look at the yield and ROI. HOP trades at $0.07201 per token (as of 1/4/2023).
90,000 HOP * $0.07201 = $6,474.6
$6,474.6 to get into the qualifying group
90,000 = 1414.85 HOP rewards per month
(1414.85 HOP * $0.07201) * 12 = $1222.4304
1222.4304 / 6,474.6 = ~18.9% yield per annum
These numbers are subject to change with token prices and assumes the program continues for a year.
Now, who said I wasn’t a math guy? 18.9% yield is madness. That’s higher than the levels we were spoiled with last year…
While there is a maximum on eligible rewards, it begs the question of why aren’t more folks buying HOP and self-delegating.
Some benefits:
- More liquid (No need to stake or lock up)
- Yield rewards(Above market rate)
- Branding (personal marketing)
Seems like a pretty solid deal — may be more simple than those pesky yield farms. Ok, now onto the next guy.
MakerDAO
FADE IN:
EXT. DISNEYLAND — DAY
The sun is shining brightly as tourists and families mill about the bustling theme park. The iconic Disneyland castle stands tall in the distance.
Cut to:
INT. DISNEYLAND — LINE FOR SPLASH MOUNTAIN — DAY
A group of excited friends, RUNE (30s), MARK (40s), and CINDY (40s) stand in line for the popular ride, the Endgame. They chat and laugh, eagerly anticipating their turn.
JESSICA: I can’t believe we’re finally here! I’ve been wanting to ride Splash Mountain for years.
CINDY: Me too! I heard it’s the best ride in the whole park.
MARK: (nervously) I hope I don’t chicken out. I’m not the biggest fan of water rides.
RUNE: (laughs) Don’t worry, Mark. It’s just a little bit of water. It’ll be fun, I promise.
The line inches forward as the group approaches the loading area.
FADE TO BLACKWas never a director per se, but as these passengers quickly found out, Maker is entering its final stage of maturation with contention, suspense, and hopefully — a large splash.
As onlookers wait eagerly (and nervously) for this famous ride, contributors and delegates do the same for the next interaction of MakerDAO; it’s big and exciting.
Maker, an OG in the industry, has pioneered many ideas. A few notable ones are:
- “Vaults,” a way to collateralize crypto assets and borrow against
- Stablecoins, an asset pegged to a fixed value (often $1.00)
- Real World Assets (RWA), integrating portfolios and initiatives in the “real world” and collateralizing them on the blockchain.
Another idea that has influenced much of the discussion and topic of this article; Maker was the first to pay its delegates and did so generously. Due to this policy introduction, MakerDAO attracted a range of mature delegates and participants, from passionate anons (see The Problem With Anons), industry heartthrobs, and full-time delegate teams such as Flipside.
MakerDAO has required the most attention and resources, but its compensation has remained above other DAOs, attracting delicate time of delegates.
Let’s use Flipside’s delegation to calculate the yield:
MKR as an asset is much more difficult to accumulate delegation due to its price — 1 MKR = ~0.4119 ETH — this has led MKR to be more concentrated / fewer delegators. Over the past year, the DAO has done a good job in further diversifying where this voting power lies.
Back to yield — the important stuff.
Maker outlines its compensation, clearly here:
https://mips.makerdao.com/mips/details/MIP61
At a maximum, a delegate can make $144,000 a year. That’s surely an adequate salary…
Let’s use assumptions similar to HOP above.
MKR trades at $516.88 per token (as of 1/4/2023).
9,033 MKR * $516.88 = $4,668,977.0
9,033 with 90% participation and 97% communication = $11,400/month
$11,400 * 12 = $136,800
$136,800 / $4,668,977.0 = 2.92% yield per annum.
Phew, my head hurts. While much lower than the froth of last year’s market, a 2.92% yield to vote and communicate your rationale isn’t bad.
I will admit — written under the assumption that your delegation is self-delegated, this is much more difficult to achieve in Maker, but doable.
This moderate yield may be more attractive to institutions trying to take a directional bet on DeFi while earning a 2–3% yield along the way.
Optimism
While not stated explicitly, Optimism has been steadily rewarding its most active contributors.
Quietly planning and calculating participation in the background, the OP Collective outlined rewards for Seasons 1 & 2 in the following post:
Flipside is a delegate and received 10,500 OP in compensation; let’s use our delegation (~270,000) as a baseline to calculate the true yield from Optimism.
Here we go again — math time:
OP trades at $1.28 per token (as of 1/9/2023).
270,000 OP * 1.28 = $345,600
270,000 = 1.15% of total delegated power
1.15% = 10,000 OP for for rewards
10,500 OP = $13,440
$13,440 / $345,600 = 3.8% yield biyearly -> 7.6% yield per annum.
Seven point four percent. It’s better than Maker, worst than HOP. But hey, a few hundred basis points better than a t-bill..
While there is opacity with the level (and duration) of rewards, Optimism is a budding ecosystem with more and more participants and eyes per day. Snapshot votes in Optimism yield around 25,000 participants on average — that’s stellar.
Analysts like myself are starting to notice, bringing with them the expertise and resources of large teams, venture firms, and curious audiences. If you’re excited about the growing L2 ecosystem Optimism governance is the best way to gain exposure.
As is true with life, there is a capital requirement to qualify for the minimum amount of rewards (~$75,036) but just wait till the degens hear about the yield…
What’s Next?
As governance becomes a way to attract and retain high-quality contributors, the perks of becoming a “governor” are greater.
DAOs — large and small — are looking to the models of Maker, HOP, and others as a way to distinguish themselves and create a stronger operational layer.
Aave, with the upcoming release of its protocol native stablecoin, GHO, seems like a perfect fit for a similar trial. OP — is starting to become more consistent (and predictable), and there are many fruitful DAOs yet to be born.
As DAOs, L1, and L2 ecosystems, look for marketing, user retention, and value capture, paying delegators for Governance seems like the first step.
In the meantime, there will be yield junkies looking for the next high, signing up for the next hot protocols’ Governance.
