Sometimes, we need to stop and smell the roses.

Life at Beefy is great right now. In the last 6 months, our DAO has returned to significant profitability, our protocol has overtaken the OG yield aggregator - Yearn - to become the largest, and our contributor team has launched a sensational new product that’s stormed its way to $50m TVL in just 2 months. Though the market has seen gains so far this year, it’s clear that Beefy has outperformed it by nearly every metric that we care about, and consolidated its leading position. There’s a lot to be thankful for, and a lot to be excited about.

For these reasons, I believe that now is the right time to pause and reflect on our position. Not just to bask in glory or make ourselves feel good, but for perspective as to the measure of our success, and what we have to lose…

In particular, I want to talk about our profits and how we use them. Readers may remember that I raised this topic for deliberation before, citing that the wrong time to discuss a framework for using profits is in the midst of bullish mania. This post is the spiritual successor to that debate, and aims to outline a potential way forward. In doing so, it accompanies a draft proposal which I’m seeking comments on from all Beefy stakeholders. But before we get to those ends, let me start by outlining my reasoning…

Profitability Problem

People have long wondered why I talk about profitability as a problem, or why it concerns me if our DAO is swimming in cash. “Many DAOs have large treasuries” is a frequent rebuttal I hear. But I hasten to point out that most DAOs started with a large base of their own tokens from which to diversify, leading to large treasuries that shouldn’t be “distributed” like profits. Beefy - by contrast - retained none of our $BIFI token from the initial distribution; everything in our treasury is a profit from our activities. And everything in our treasury is at risk from our liability.

When I phrase this as a “problem”, I really mean a problem in the scientific sense:

noun: problem [PHYSICS • MATHEMATICS] - an inquiry starting from given conditions to investigate or demonstrate a fact, result or law.

Beefy’s “Profitability Problem” is effectively an optimisation question: how do we optimise for the performance of the DAO, protocol and product, together with the interests of all of our stakeholders (users, tokenholders and contributors)? As with many real-world optimisation problems, there’s not a singular logic answer to find from our inquiry. Instead, I expect that the optimal approach to our Profitability Problem will be discovered only through a process of trial and error.

With that said, people are right to think that I’m concerned about the Profitability Problem. In my opinion, large piles of redundant assets are not good for any economic system. Yes, they may represent individual wealth for a small handful of people, however static assets never reflect any tangible economic activity, any actual benefit or any real fun. Though mankind is eternally doomed to seek our own personal fortune, from an organisational perspective we must be conscientious about hoarding assets.

I believe much of this concern can be broken down into three specific issues:

1. The “Distraction Issue” - if stable assets are not invested, they will gradually lose their value over time in the context of other inflating assets. Holding lots of assets creates reason to find profitable uses for those assets, to protect their value. The “Distraction Issue” is that DAOs can become distracted by the need to “do something” with their wealth, and devote large amounts of their time, energy and resources to existential problems like investing, in place of building real value.

2. The “Greed Issue” - though all entrepreneurs and investors arrive at Web 3.0 seeking to create profit, we should all acknowledge that DeFi is intended to level the financial playing field, not polarise it. The “Greed Issue” is that holding great amounts of wealth can bring out the worst in people, and will test the moral fortitude of our community. It encourages selfish and internal thinking that becomes increasingly isolated from the people that community is meant to serve. Our DAO is a community built around value, not greed.

3. The “Target Issue” - the burden of wealth is that others will lose sight of your purpose beyond being a source of money. The “Target Issue” is that - as blockchains, DeFi and Beefy continue to grow - more and more eyes will be attracted to our growing treasury as an opportunity for personal enrichment. In its cleanest guise, this can mean external players entering our governance to direct our spending towards their own causes. Or, at its dirtiest, it can mean attackers seeking to exploit our software, governance or legal position, all in the hope of extracting funds from our treasury.

Though these issues may seem abstract and distant given Beefy’s current size, the principles that can be taken from them are worth their weight in gold for the future of any DAO. And these are all precisely the type of problems that are too often ignored until its too late to stop.

To me, the solution is obvious. Before anything else, sufficient funds should be set aside to sustain current operations, maintain a buffer for unexpected downturns, attract and retain talent, and invest in the growth and development needed to sustain or grow our competitive position and product range. Then, where treasury is sufficient to meet all of those goals, we should aim to neutrally, fairly and automatically distribute the proceeds of our work to those who participate in and support our activities.

So that’s why the Profitability Problem is an important concern, and one that bears thinking about in times like these. Next, I want to talk about how we address the problem, and specifically a guiding principle in doing so:

Incentive Alignment

I believe that the distribution of profits should be guided first and foremost by the alignment of incentives among all the stakeholders listed above. By “incentive alignment”, I mean efforts to balance, harmonise or cancel out the competing interests of each group, such that all of us are rowing (more or less) in the same direction. This is achieved by deploying valuable benefits around positive behaviours for each group in order to encourage more of them.

Human history has shown time and time again that poor alignment among different factions within an organisation damages that organisation’s effectiveness. Conflicting interests waste time and resources with endless debates, makes it difficult to retain talent or create a good working atmosphere, and often lead to demise by separation. They also can explain other negative externalities like wasteful behaviours, apathy and even corruption. Contrast this with the best organisations, and you’ll find that a key general difference between the effective and the ineffective is the willingness and enthusiasm for large groups of people to work together.

Value alignment is so important to me, that I’ve placed it at the very centre of the voting bloc that I’m building with Staworth. It’s my personal number one priority for improving and developing the Beefy DAO.

How do we achieve this? First, we need to be clear on our collective mission. I think that this is already clear… Beefy aims to create and sustain virtuous cycles of value creation through automation, security, simplicity and user experience; our shared goal is to perpetuate that cycle and help create value.

Next, we need to consider how we align each of our stakeholders in that mission:

• Contributor Alignment - for contributors, the number one metric should be profitability, as a numerical representation of the value generated. In particular, expanding revenues through existing and new products is central; however effective management of costs and expenses is important to avoid bloat. History shows us that a static pay cheque or cut of revenue is not enough to cancel out the risks of mismanagement; a stake in the profits is key.

• User Alignment - when it comes to users, our goal should be to maximise sustainable TVL, both by servicing as much of each user’s portfolio as possible, and expanding the number of users. This in turn is caused by many factors including the range of products and chains, the user experience of accessing them and the yields on offer. In particular the last category can be easily incentivized by either reducing fees or allocating profits back towards products (e.g. with bribes).

• Tokenholder Alignment - for tokenholders, the goal should be to maximise engagement in the DAO to improve our overall community, output and the quality of our decisions. This involves maximising both the financial and temporal investments and interests from tokenholders, by rewarding them for taking an active and supporting role. By contrast, handing over all our profits to holders without any engagement is likely to discourage any real interest.

Finally, we need to think about a solution that can achieve that mission of value creation, and the different alignments that I describe above. Here’s the fun part:

The Solution

The accompanying proposal aims to put forward a framework (the “Framework”) to address our Profitability Problem. The Framework has three steps:

1. Operating Runway - Beefy should first retain in treasury enough funds to ensure sufficient runway for the project, including any viable options for growth and investment to maintain competitiveness and expansion.

2. Contributor Incentives - Beefy should then utilize a portion of its earnings to incentivise long-term contributions to help grow the project, beyond just standard compensation for services performed.

3. User Incentives - Beefy should utilise the remainder of its earnings to incentivise user activity, participation and the expansion of our flywheel.

Operating Runway

As the DAO now has processes in place for sophisticated financial management, Beefy is capable of specifying with precision what our costs and runway should be, and adapting our activities to meet the needs of the current time. And as we currently have sufficient runway, the first step of the Framework is generally already being taken care of. That leaves us with a degree of freedom and resources with which to explore the other components of the Framework…

Contributor Incentives

As for contributor incentives, the goal is simply to motivate contributors by giving them a share of the profits being made. This will create a strong incentive alignment in knowing that contributions which make the DAO more profitable will grow the contributor’s share of those profits.

It’s well understood from both history and theory that simply handing out profits as large bonuses doesn’t tend to create loyalty and long-term value beyond the end of the bonus window. So, the proposal suggests contributor incentives should vest over a longer period of 3 months. To maximise alignment in the meantime, the incentives should be denominated in $BIFI or $mooBIFI, which will be bought at the start of the vesting period, creating additional demand for the token. That way, in any given quarter a contributor is motivated by both current performance (for the size of the next quarter’s profits) and the token price (for the value of the previous quarter’s incentives).

As a final point, I wanted to add that the incentives are framed as a bonus on top of base contributor compensation. The battle to reach proper contributor funding for the DAO has only recently reached a fair and comfortable balance, after years of struggling to properly fund and motivate contributors. With this proposal, I don’t intend to stir the pot, but instead recognise that profit distribution most typically takes the form of performance bonuses, which this proposal attempts to mirror.

User Incentives

Finally, user incentives seek to align both user and tokenholder interests. At first, this allocation might look like its solely for users, in that it aims to return profits to products and not directly to tokenholders. This is based on an expectation that tokenholders are generally always users, and therefore will also benefit them indirectly. If for any reason tokenholders choose to invest in $BIFI but not with Beefy, they still stand to benefit as the focus on users aims to draw more TVL to the protocol, profits to the DAO and value in the organisation as a whole.

The proposed model is inspired by the recent distributions under the Arbitrum Long Term Incentives Pilot Program (“LTIPP”) grant, where 600,000 $ARB tokens have been distributed in 13 weeks. That process has been a proof of concept for how incentive distribution can work with Beefy’s new CLM products, and has demonstrated the flexibility and ease with which incentives can now be handled. Ideally, the long-term user incentives under this proposal will pick up the baton from LTIPP, ensuring a continuous and permanent program of incentives on the platform.

For those unfamiliar with that process, each week Beefy distributes a selection of small packages of incentives to 20-100 products to be given out in the course of that week, before incentives are refreshed in the week following. This has lead to constant boosts across the platform, as well as lots of opportunities for collaboration and co-incentives with partners, in turn causing far more than just Beefy’s allocation of incentives to be distributed to our users. The impact on short-term TVL has been very significant under LTIPP, as CLM skyrocketed to $50 million TVL in just over 2 months.

However, Beefy’s own permanent incentive program could expand on this, by placing the decision about which products to boost into the hands of tokenholders. By this I mean running weekly gauge votes in Beefy’s Snapshot space, where users can split their share of $BIFI voting power among as many products as they want, with rewards being shared in accordance with the share of voting power received for each product. This would add functionality to the $BIFI token, and allow tokenholders to reward themselves by voting for their preferred product. Though it would take some time to build and automate this system properly, if the solution works then this is the direction we should be heading in in the coming months.

The Proposal

With those broad principles outlined, it’s time to consider the draft proposal for a profit distribution Framework. Ultimately, the Framework that I’ve outlined in this post will take time to consider and create, so we are still months away from realizing this vision. As such, the proposal includes a few initial limitations that users need to consider in their votes.

Trial Period

As I say above, the process for optimising our use of profits will be one of trial and error. It’s possible that the proposed Framework will fail to excite the community or assist with incentive alignment.

To preempt that risk, I’m proposing that the new profit distribution model be trialled first for a period of 3 months, using the significant profits from Q2 2024. This will give the team time to work out the execution, and the community time to try it out and share their feedback. Even if the proposed Framework is no good, the process of trialling it should help us to better understand our collective expectations when it comes to profit distribution.

In particular, a trial period will give more people time to consider the what I’ve proposed, and for the way forward to be debated. At the end of the 3-month period, I plan to put forward a full profit distribution framework proposal for discussion and debate. If the system has worked well, and there are profits to distribute from Q3, the hope would be to continue on with the process as a permanent addition.

Infrastructure and Development

The Framework I’m proposing is a significant departure from our existing processes. Though we already have the technology and knowledge within the core team to execute on both the contributor and user incentives proposed, it will take time to prepare the necessary smart contracts and infrastructure across the entire protocol, and to iron our the kinks in their operation.

In particular, the concept of tokenholders voting on the distribution of user incentives is a long way from fruition. Beefy has historically run weekly gauge votes for our binSPIRIT product, though this required a huge amount of work and trailed off together with the market conditions. For a permanent program, we will need to produce automation for every stage in that process, and that will take months, not days.

For the initial trial period, I’m proposing that we begin with a continuation of the LTIPP process, where the core team manages distribution behind the scenes, though with public feedback and suggestions from the community. The process would need to start slow, with just a handful of chains, and only products with the necessary infrastructure (starting with CLM, as these have been constructed with all necessary functionality). By the end of the trial period, I would like to see tokenholder voting trialled at least once, though I expect a complete automated system may be beyond the scope of a trial (if for no other reason than because any extension beyond the trial could be shot down!).

Distribution Configuration

Finally, the trial needs an initial configuration of how much of our profits should go to each bucket. This will be a highly contentious topic, and one that changes depending on the circumstances.

It’s foreseeable that some readers may disagree with parts of the proposal and agree with others, for example by proposing a zero allocation to one group. I believe it’s very important for incentive alignment to be dealt with holistically, and that any group who is not sufficiently engaged in the process may cause the whole system to grind to a halt.

As such, I think we need to begin with a simple but substantial allocation to each bucket. For the trial period, I propose:

1. Operating Runway - 50% of Adjusted Net Income ($178,952.50 for Q2 24) - this money will be retained in treasury as usual, whilst market conditions do not yet guarantee strong profitability for the rest of the year.

2. Contributor Incentives - 25% of Adjusted Net Income ($89,476.25 for Q2 2024) - this initial figure is aimed at achieving a reasonable percentage bonus on top of current contributor funding in line with what might seen in comparable tech industries. For Q2 - the most successful quarter in recorded history - this reflects a relatively modest 16.8% bonus when annualised.

3. User Incentives - 25% of Adjusted Net Income ($89,476.25 for Q2 2024) - a reasonable $6,883 per week, or $983 per day, in additional incentives on the platform. This should be enough to boost 10-50 products per week with a small amount each. A modest start will minimise risk in the early period, whilst the kinks are still being ironed out.

Note that each category is defined as a percentage of Adjusted Net Income (as defined in our quarterly reporting). In quarters where there are no profits, no incentives should be paid out.

The expectation is that we will revisit the precise configuration for the full proposal in 3 months’ time, and that the configuration can be changed whenever the community reasonably desires with a new proposal for the next quarter. The aim is that this initial configuration is simple but effective enough, that the community will have faith and give it a try. In any event, I expect the risk of running a trial is fairly minimal.

I also wanted to flag an important but obvious point. We consider that all funds held by the treasury are the property of the DAO, and that ultimately tokenholders have the final say over these funds. The 50% allocated to operating runway is therefore held for the benefit of the DAO and may in future be redeployed into other uses, whether that be increasing user incentives or adding separate initiatives to distribute profits. However, for the time being the Framework should be kept modest whilst we understand if it works and if it’s valuable. Only once we know those things should we consider changing the allocation to suit the preferences of tokenholders.

Conclusion

For some time now, Beefy has been focused on stabilising its competitive and financial positions, to ensure our survival in the bear market. Now, I believe, is the right time to reawaken our DAO and our governance, to spur on activity and add value to our token.

With this Framework for profit distribution, I hope to address our Profitability Problem long before it becomes a serious concern for our DAO, and to ensure a stronger alignment of incentives and values across the whole DAO and protocol. Though we may still be some way from realising this goal, through a 3-month trial I hope we can at least begin moving in the right direction, and open up the right conversations.

However, this is all just my own vision for the way forwards. The most important aspect of this process will be the feedback and discussion we have as a community about the future direction of this DAO. And even if my own proposal falls flat on its face, I’ll be happy if constructive feedback is unlocked in the process.

Thank you for reading!