Yield Basis, a protocol launched just three months ago, initiated its fee switch on Thursday. This move comes amid mounting demands for crypto protocols to share their revenue with investors. Founder Michael Egorov emphasized the importance of "closed-loop economics," warning that tokens could underperform without them. Developed by Egorov, who also founded Curve Finance, Yield Basis has now begun channeling revenue to its tokenholders. Users have a four-week window to claim over 17 Bitcoin, amassed since the protocol's September debut, valued at nearly $1.6 million as of Friday. This decision to activate the fee switch was unanimously approved by Yield Basis tokenholders on Wednesday.
Crypto protocols often issue tokens to reward investors and shift management responsibilities to users. However, there's been a notable lack of engagement, as many decentralized autonomous organizations (DAOs) struggle to reach voting quorums. As a result, protocols are increasingly pressured to ensure their tokens offer more than just voting rights. While some have shared revenue with users for years—Curve did so in 2020—this practice has gained momentum recently. Major DAOs such as Uniswap, Ethena, Aave, and Jito have adopted token buybacks or fee switches to enhance token value, aiming to appease discontented holders. Egorov noted that it's become safer for US-based projects to follow suit recently.
As of Friday, Yield Basis has seen Bitcoin deposits exceeding $130 million. The protocol aims to tackle the issue of impermanent loss, a longstanding challenge for decentralized exchanges. Platforms like Curve enable users to trade crypto assets within pools, offering liquidity providers a small share of each transaction. While potentially profitable, providing liquidity can result in opportunity costs during bullish market phases. Impermanent loss refers to the potential gains liquidity providers forgo by not holding their tokens directly. Yield Basis employs a leveraged trading strategy to mitigate impermanent loss within Curve’s Bitcoin-crvUSD pool. Investors in Yield Basis can lock their YB tokens to receive a share of the protocol's revenue. Egorov stated that investors have benefited from trading fees without incurring impermanent loss on their Bitcoin, and the protocol plans to expand to other cryptocurrencies, beginning with Ethereum.
Despite the growing popularity of strategies to boost token valuations, such approaches have faced scrutiny. In October, crypto market maker Keyrock highlighted flaws in many buyback programs, which often overspend when prices rise and underspend during downturns, diverting resources from marketing and growth. A March report by Messari found these programs have minimal impact on token prices. In June, Morpho founder Paul Frambot expressed his reluctance to implement a fee switch, questioning the wisdom of distributing revenue at the expense of reinvestment. Egorov, however, countered these criticisms, asserting that reinvesting in growth frequently involves token incentives, which are ineffective if tokens lack value beyond governance. "You will inevitably have the token performing very badly if you don’t have closed-loop economics," he stated. "To close the loop, you must do some form of fee distribution if you want to use token incentives at all."