When market sentiment sours and liquidity recedes, crypto founders and investors are forced to confront fundamental questions about tokenomics. Should tokens generate real revenue? And if they do, should teams use that revenue to buy back and burn their own tokens? This article explores these pressing issues, examining the shifting dynamics of value creation and capital allocation in the blockchain space.
We are currently in a period where capital allocators face liquidity constraints. Attention is fragmented across thousands of assets, and founders who have spent years developing tokens are struggling to赋予 them tangible utility. When launching meme assets can generate greater financial returns than building actual applications, the incentive to develop real-world use cases diminishes.
The core challenge lies in identifying sustainable revenue streams and determining the most effective use of that capital to benefit the network and its token holders.
The Shifting Landscape of Crypto Liquidity
Private capital markets, including venture capital, perpetually oscillate between periods of excess liquidity and scarcity. When assets become liquid and external capital floods in, euphoria often drives prices to unsustainable heights. Think of IPOs or initial token launches. This newfound liquidity encourages investors to take on more risk, fueling the birth of a new generation of companies.
Historically, crypto market liquidity has loosely followed Bitcoin’s halving cycles. Data suggests the market often rallies within six months following a halving. In 2024, however, a divergence emerged. Massive Bitcoin ETF inflows and large-scale purchases by institutional players created a "reservoir" for Bitcoin's supply. Yet, the rising tide of Bitcoin’s price did not lift all boats; many smaller altcoins failed to see a commensurate rebound.
This has left many projects, particularly those in the Layer 2 (L2) space, reevaluating their value proposition. L2 tokens once enjoyed a premium valuation based on perceived potential, driven largely by exchange listings and venture capital backing. As the market matures and becomes more crowded, that perception—and the valuation premium it commands—is rapidly eroding.
The result is a decline in the value of many L2 tokens, which in turn limits their ability to subsidize new products, fund development, or generate token revenue through other means. This valuation compression forces founders to re-examine a fundamental question: Where does revenue actually come from?
Deconstructing Crypto Revenue Models
The revenue structure for most successful crypto products ideally resembles that of established giants like Aave and Uniswap. These protocols have maintained steady fee income over many years, benefiting from first-mover advantage and the Lindy effect—the idea that the longer a technology survives, the longer its future life expectancy becomes. Uniswap has even demonstrated an ability to introduce new revenue streams, like front-end fees, indicating deeply entrenched consumer preferences.
In contrast, the revenue of platforms like FriendTech and OpenSea is highly seasonal. The NFT boom, for instance, lasted roughly two quarters, while the speculative frenzy around Social-Fi lasted merely two months. For some products, speculative income is a valid model, provided the revenue scale is substantial and aligns with the product's core purpose. Several meme-trading platforms have joined the "$100 million+ fee club"—a milestone most founders can only dream of achieving through traditional venture funding or acquisitions.
However, the conversation shifts significantly for infrastructure projects, which have entirely different revenue dynamics.
Between 2018 and 2021, venture capital firms heavily funded developer tools, betting that developers would eventually attract a massive user base. By 2024, two major shifts have reshaped the ecosystem:
- Limitless Scalability of Smart Contracts: Protocols like Uniswap or OpenSea can scale infinitely with limited human intervention. Their team size doesn't need to grow proportionally with transaction volume.
- The Rise of AI: Advances in Large Language Models (LLMs) and artificial intelligence have reduced the need for heavy investment in some crypto-native developer tools.
These changes have forced a critical moment of transformation for infrastructure providers.
In Web2, API-based subscription models thrive because of a massive base of online users. Web3, however, remains a niche market with only a handful of applications scaling to millions of users. Web3's advantage lies in its significantly higher revenue per user. Crypto users tend to transact more frequently with higher values because the blockchain is fundamentally a transmission rail for money.
Consequently, over the next 18 months, most Web3 businesses will likely need to recalibrate their business models to capture revenue directly from users via transaction fees. This is not a new concept. Companies like Stripe initially charged per API call, and Shopify used a flat subscription fee, but both eventually moved toward a percentage-of-revenue model.
For Web3 infrastructure providers, this transition might look like lowering the barrier to API usage—or even offering services for free—until a certain transaction volume is reached, at which point a revenue-sharing agreement is negotiated.
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Revenue in Practice: Hypothetical Case Studies
Consider a prediction market platform like Polymarket. In its current form, the UMA protocol's token is used for dispute resolution, where tokens are locked up with each dispute case. The more markets exist, the higher the probability of disputes, directly driving demand for the UMA token.
In a transaction-based fee model, the required collateral could be a small percentage of the total bets, say 0.10%. If the total betting volume on a presidential election reaches $1 billion, this would generate $1 million in revenue for the protocol. In a hypothetical scenario, the protocol could use this revenue to buy back and burn its tokens. This model has both advantages and challenges.
Another example is MetaMask. To date, the wallet's built-in swap functionality has processed over $36 billion** in volume, generating more than $300 million in revenue. The same logic applies to staking service providers like Luganode**, which earn fees based on the total value of assets users stake with them.
In a market where the cost of API calls is constantly decreasing, why would a developer choose one infrastructure provider over another? Why would they opt for an oracle service that requires sharing revenue? The answer lies in network effects.
A data provider that supports multiple blockchains, offers unparalleled data granularity, and can index new chains faster will become the preferred choice for new products. The same logic applies to service categories like intents or gasless swap solutions. The more blockchains supported, and the lower and faster the costs, the more likely a platform is to attract new products. These marginal gains in efficiency not only attract users but also help platforms retain them.
The Mechanics and Rationale of Token Buybacks
The trend of linking token value to protocol revenue is gaining momentum. Recently, several teams have announced mechanisms to buy back or burn their tokens based on generated revenue. Notable examples include Sky, Ronin, Jito, Kaito, and Gearbox.
A token buyback is analogous to a stock buyback in traditional equity markets. It is essentially a method of returning value to shareholders (in this case, token holders) without violating securities regulations.
In 2024 alone, stock buybacks in the U.S. market reached $790 billion**, a staggering increase from **$170 billion in the year 2000. Prior to 1982, stock buybacks were considered illegal. Apple Inc. has spent over $800 billion repurchasing its own stock in the past decade. It remains to be seen if these trends will persist in crypto, but a clear market polarization is emerging: a class of tokens with cash flow that can invest in themselves, and another class with neither.
For most early-stage protocols or dApps, using revenue to buy back their token may not be the most optimal use of capital. A more feasible approach is to allocate enough capital to offset the dilutive effect of new token emissions. This is how Kaito's founder recently explained their token buyback methodology.
Kaito is a centralized company that uses token incentives for its users. It earns centralized cash flow from enterprise clients and allocates a portion to execute buybacks via market makers. The number of tokens repurchased is twice the number of new tokens issued, effectively putting the network in a deflationary state.
Another method can be observed in Ronin's practice. This blockchain dynamically adjusts fees based on the number of transactions within each block. During periods of peak usage, a portion of the network fees flows into the Ronin treasury. This is a method of controlling asset supply without directly buying back tokens. In both cases, the founders have designed mechanisms that tether value to the network's economic activity.
As valuations decline and venture capital flowing into crypto diminishes, more teams will have to compete for the marginal capital entering the ecosystem. Because blockchains are fundamentally financial infrastructure, most teams will likely gravitate toward a percentage-of-transaction-volume revenue model.
When this happens, tokenized teams will have a strong incentive to implement a "buyback-and-burn" model. Teams that execute this strategy successfully may stand out in a liquid market. Alternatively, they might end up buying back their own tokens at excessively high valuations. The actual outcome can only be judged in hindsight.
Frequently Asked Questions
What is a token buyback?
A token buyback is when a project uses its treasury or generated revenue to repurchase its own tokens from the open market. These tokens are often subsequently "burned" (permanently removed from circulation) or held in a treasury. The goal is to reduce the total token supply, potentially increasing the value of remaining tokens by improving scarcity.
Why do projects conduct token buybacks?
Projects initiate buybacks to signal confidence in their long-term value, reward loyal token holders, combat the dilutive effect of token emissions from inflation or investor unlocks, and create a direct link between protocol revenue and token value. It is a capital allocation strategy aimed at enhancing tokenholder value.
Is a buyback always good for a token's price?
Not necessarily. While a buyback can create positive momentum by reducing supply, its impact depends on the execution size, market conditions, and the underlying health of the project. If the market perceives the buyback as a desperate attempt to prop up the price without genuine revenue growth, it may not have a lasting positive effect.
What's the difference between a burn and a buyback?
A buyback is the act of purchasing tokens from the market. A burn is the subsequent act of destroying those tokens, making them permanently inaccessible. A buyback does not always lead to a burn; sometimes projects hold repurchased tokens in a treasury for future use.
How does protocol revenue differ from token price?
Protocol revenue refers to the fees and income generated by the underlying network or application (e.g., trading fees on a DEX). Token price is the market valuation of the project's native asset. While revenue can influence token price by creating demand for buybacks or staking rewards, the two are not directly correlated and can diverge based on speculation and market sentiment.
What are the alternatives to buybacks for creating token value?
Projects can use revenue to fund ecosystem grants, subsidize user growth, increase staking rewards, invest in development, or simply hold it as treasury assets. The "best" use of revenue depends entirely on the project's stage, goals, and specific tokenomic design. Diversifying treasury assets into other cryptocurrencies or stablecoins is another common strategy.
Of course, a day may come when all discussions about price, earnings, and revenue become irrelevant. Perhaps we will return to an era of throwing capital at dog pictures and monkey JPEGs. For now, however, founders concerned with survival are engaging in serious discussions centered on revenue generation and strategic token burns.