When Tokens Burn

Breaking down how crypto-protocols approach revenue and cashflow.

Hello!

Tokeconomics is one of those words that flirts with being considered pseudoscience. Very little literature correlates data with market action. Over the past few weeks, I explained why revenue will be a defining feature for tokens going forward.

Today’s story by Saurabh takes it further by breaking down the forms and scale of revenue crypto-protocols show. In fact, he went through data from the S&P 500 to learn how buybacks and dividends have impacted companies in the past. It is an exploration of how protocols may evolve in the coming quarters.

We are trying to put the economics back into token economies.

My intention is to blend market-data with expertise from operators to paint a better picture of what is happening in the markets. A blend of proprietary information and on-chain data are needed to make these stories. Today’s issue for instance had inputs from Kash Dhanda of Jupiter.

If you are a senior at a protocol considering tying revenue to their token economies, we’d love to chat and learn more. We have been building capabilities to consult and help execute tokens all the way from designing them to market making operations. Drop us a note at venture@decentralised.co.

On to the story now..
Joel

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Sometimes, it’s about sending a message.

Quite recently, I took stable coin supply as a proxy for liquidity. Then, I considered the number of tokens in the market. My intention was to find the liquidity per asset. As expected, that number tends to zero. The chart that came out of it is a work of art.

In March 2021, every token shared ~$180 thousand worth of stablecoin liquidity. This number sits at $5.5k in March 2025.

As a project, you're competing for user and investor attention against 40 million other tokens—up from just 5 million three years ago. So how do you keep your token holder’s attention? You can try to build your community and ask them to say “GM” in Discord and dangle airdrop activity.

But then what? Once they get their tokens, they’ll just move on to the next Discord to say “GM”.

It is abundantly clear that the community doesn’t stick around just for the sake of it. You need to give them a valid reason. In my view, a good product with real cash flow is the reason. Or, numbers go up. But the latter cannot happen consistently without the former.

The Russ Hanneman Syndrome

In Silicon Valley, Russ Hanneman famously boasted about becoming a billionaire by “putting radio on the internet.” It feels like everyone in crypto wants to be Russ—chasing overnight bajillions without worrying about actual boring things like business fundamentals, building a moat, and sustainable revenue.

Joel’s recent articles —"Death to Stagnation" and "Make Revenue Great Again"—highlight the urgent need for crypto projects to focus on sustainable value creation. Much like the memorable scene where Russ Hanneman humorously dismisses Richard Hendricks' concerns about building a sustainable revenue model, many crypto projects have similarly coasted on speculative narratives and investor exuberance—a strategy that is now clearly unsustainable.

But unlike Russ, founders can't just shout "Tres Comas" into existence.
Most will need sustainable revenue. But to get there, we will need to first learn how the ones with revenue are doing it today.

Zero-Sum Attention Games

In traditional markets, regulations play a role in maintaining liquidity for tradable stocks by placing high barriers on which companies can be listed. Out of 359 million companies worldwide, only about 55,000 are publicly listed—just ~0.01%. The upside to this is that most of the available capital is focused on a limited pool rather than being spread thin. But it also means that investors have fewer opportunities to chase outsized returns by betting on companies early in their lifecycle.

Divided attention and lower liquidity are the price we pay for making it easy for any token to trade publicly. I am not here trying to make a case for one or the other. I am just showing the contrast between the two worlds.

The question is, how do you stand out among the sea of seemingly infinite tokens? One way is to signal that there’s demand for what you build, and you will let token holders participate in the growth. Don’t get me wrong. Not every asset or project needs to obsess equally over revenue and maximising profits.

Revenue is not the end, it is the means to exist perpetually.

For example, an L1 that houses enough applications just needs to make enough in fees to compensate for token inflation. If Ethereum has a validator yield of ~3.5%, it means that it adds 3.5% to its supply every year. Any ETH holder that’s not staking ETH to get this yield is being diluted. But if Ethereum burns the equivalent supply with its fee-burning mechanism, then the average ETH holder is not diluted.

Ethereum as a project doesn’t really need to be in surplus because it already has a thriving ecosystem. As long as validators make enough yield to keep running nodes, it is okay for Ethereum to not have any surplus revenue. But this is not true for projects for which the token float (% circulating tokens) is, say, 20%. These are quite like traditional companies and may take time to reach the foundation status where enough volunteers can keep the project going.

Founders must confront the reality Russ Hanneman humorously ignored. Generating real, recurring revenue matters. For clarity, throughout this piece, whenever you see 'revenue,' what I really mean is FCF (Free Cash Flow). This is because, for most crypto projects, data related to anything after revenue is difficult to acquire.

Understanding how to allocate this FCF like, when to reinvest it for growth or when to share it with tokenholders, and the optimal methods of distribution (such as buybacks or dividends)—will likely make or break founders aiming to create lasting value.

To navigate these decisions effectively, it helps to look at equity markets, where traditional companies regularly distribute FCF through dividends and buybacks. Factors like company maturity, the sector the company operates in, profitability, growth potential, market conditions, and shareholder expectations influence these decisions.

Different crypto projects inherently offer varying opportunities and limitations for value redistribution based on their lifecycle stage. I break down a few below.

The Explorers

Early-stage crypto projects are often in the experimentation phase. They focus on attracting users and refining their core offerings rather than monetising aggressively. Product-market fit remains uncertain, and these projects ideally prioritise reinvestment over revenue-sharing schemes to maximise long-term growth.

Governance in such projects is typically centralised, with founding teams controlling upgrades and strategic decisions. Ecosystems are nascent, and network effects are weak, making retention a major challenge. Many of these projects rely on token incentives, VC funding, or grants rather than on organic demand to sustain initial traction.

While some may achieve early success in niche markets, they are still proving whether their model can scale sustainably. Most crypto startups fall into this category, and only a small fraction will progress beyond it.

These projects are still searching for product-market fit, and the revenue patterns highlight their struggle to sustain consistent growth. Some, like Synthetix and Balancer, show sharp revenue spikes followed by significant declines, suggesting periods of speculative activity rather than steady adoption.

The Climbers

Projects that have surpassed the early-stage phase but are not yet dominant fall into the scaling category. These protocols generate meaningful revenue—between $10M and $50M annually. However, they are still in the growth phase, where governance structures are evolving, and reinvestment remains a priority. While some consider revenue-sharing mechanisms, they must balance distribution with continued expansion.

The chart above captures the weekly revenue of crypto projects in the Climbers category—protocols that have gained traction but are still in the process of solidifying their long-term position. Unlike the early-stage Explorers, these projects generate significant revenue, but their trajectories remain unstable.

Some, like Curve and Arbitrum One, exhibit consistent revenue flows with noticeable peaks and valleys, suggesting fluctuations driven by market cycles and incentives. OP Mainnet follows a similar trend, showing surges that indicate periods of high demand followed by inevitable slowdowns. Meanwhile, Usual has demonstrated an exponential rise in revenue, signalling rapid adoption but lacking historical data to confirm whether the growth is sustainable. Pendle and Layer3 display sharp spikes in activity, indicating moments of strong user engagement but also revealing the challenge of maintaining momentum over time.

Many Layer-2 rollups (Optimism, Arbitrum), DeFi platforms (GMX, Lido), and emerging Layer-1s (Avalanche, Sui) fit this category. According to Token Terminal, only 29 projects currently generate over $10M in revenue, though the actual number may be slightly higher. These projects are at an inflection point— those that solidify their network effects and user retention will graduate to the next stage, while others may plateau or decline.

For Climbers, the path forward involves reducing reliance on incentives, strengthening network effects, and proving that revenue growth can be sustained without abrupt reversals.

The Titans

Established protocols such as Uniswap, Aave, and Hyperliquid fall into the growth and maturity category, having achieved product-market fit and generating substantial cash flow. These projects are positioned to implement structured buybacks or dividends, reinforcing tokenholder trust and ensuring long-term sustainability. Governance is decentralised, with active community participation in upgrades and treasury decisions.

Network effects provide a competitive moat, making them difficult to displace. Currently, only a mid-double-digit number of projects generate revenue at this level, meaning very few protocols have reached true maturity. Unlike early-stage or scaling projects, these protocols do not rely on inflationary token incentives but instead earn sustainable revenue through trading fees, lending interest, or staking commissions. Their ability to weather market cycles further differentiates them from speculative ventures.

Unlike early-stage projects and climbers, these protocols exhibit strong network effects, established user bases, and deeper market entrenchment.

Ethereum continues to lead in decentralised revenue generation, showcasing cyclical peaks that align with periods of high network activity. Tether and Circle, both stablecoin giants, present a different revenue profile, with more stable and structured income streams rather than volatile bursts. Solana and Ethena, while generating substantial revenue, still show distinct cycles of growth and retracement, reflecting their evolving adoption patterns.

Meanwhile, Sky displays a more erratic revenue pattern, suggesting fluctuating demand rather than continuous dominance.

While Titans stand apart in terms of scale, they are not immune to volatility. The difference lies in their ability to weather downturns and sustain revenue over time, reinforcing their position as market leaders in the crypto ecosystem.

The Seasonals

Some projects experience rapid, unsustainable growth due to hype, incentives, or social trends. These projects, such as FriendTech and meme assets, may generate substantial revenue during peak cycles but struggle with long-term retention. Premature revenue-sharing schemes can exacerbate volatility, as speculative capital quickly exits once incentives dry up. Governance is often weak or centralised, and ecosystems tend to be shallow, with limited dApp adoption or long-term utility.

While these projects can achieve sky-high valuations temporarily, they frequently crash when market sentiment shifts, leaving investors disillusioned. Many speculative platforms rely on unsustainable token emissions, wash trading, or inflated yields to create artificial demand. While some evolve beyond this phase, most fail to establish a durable business model, making them inherently risky investments.

Profit Sharing Patterns of Public Companies

A lot can be learnt by looking at how public companies handle their excess profits.

The chart shows how traditional companies' profit-sharing behaviours evolve as they mature. Younger firms (bottom decile) experience high levels of financial loss (66%), leading them to retain profits for reinvestment rather than distributing dividends (18%) or performing stock buybacks (28%). As firms mature, profitability typically stabilises, as reflected in increased dividend payouts and buybacks. Mature companies (top decile) frequently distribute profits, with dividends (78%) and buybacks (82%) becoming common.

These trends parallel the lifecycle of crypto projects. Much like younger, traditional companies, early-stage crypto "Explorers," usually focus on reinvestment to find product-market fit. Conversely, mature crypto "Titans," similar to older, stable traditional firms, are well-positioned to sustainably distribute revenues via token buybacks or dividends, enhancing investor confidence and long-term viability.

The relationship between a company's age and its profit-sharing strategy naturally extends into sector-specific practices. While younger firms typically prioritise reinvestment, mature firms adjust their strategies according to the characteristics of their industries. Stable, cash-flow-rich sectors lean towards predictable dividends, whereas sectors marked by innovation and volatility prefer the flexibility offered by stock buybacks. Understanding these nuances helps crypto founders tailor their revenue distribution strategies effectively, aligning their projects' lifecycle stages and industry characteristics with investor expectations.

The chart below highlights distinct profit distribution strategies across various industry sectors. Traditional, stable sectors such as Utilities (80% dividend payers, 21% buybacks) and Consumer Staples (72% dividend payers, 22% buybacks) strongly prefer dividends due to predictable revenue streams. In contrast, technology-focused sectors like Information Technology (27% buybacks, the highest proportion of cash returned via buybacks at 58%) lean towards buybacks, providing flexibility amidst revenue volatility.

These insights have direct implications for crypto projects. Protocols with stable, predictable revenues—such as stablecoin providers or mature DeFi platforms—may align best with consistent dividend-like payouts. Conversely, high-growth, innovation-focused crypto projects, particularly within DeFi and infrastructure layers, could adopt flexible token buybacks, mirroring traditional tech sectors' strategies to accommodate volatility and rapidly changing market conditions.

On Dividends vs Buybacks

Both methods have their merits, but lately, buybacks have been favoured over dividends. Buybacks are more flexible, while dividends are sticky. Once you announce X% dividend, investors expect you to do so every quarter. So, Buybacks give companies room to get strategic—not only in how much profit they return, but also when they do it, letting them adapt to market cycles instead of locking into rigid payout schedules. Buybacks don’t set the same expectations as dividends do. They are seen as one-off experiments.

But buybacks are a way to transfer wealth. It is a zero-sum game. Dividends create value for every shareholder. So, there is place for both.

A recent trend suggests that for the reasons explained above, buybacks are becoming more and more popular.

Only ~20% of the profit was distributed using buybacks in the early 1990s. In 2024, ~60% of the profit distribution occurred via buybacks. In pure dollar terms, buybacks outpaced dividends in 1999 and have not backed down since.

From a governance perspective, buybacks need careful valuation assessments to avoid inadvertently transferring wealth from long-term shareholders to those selling their shares at elevated valuations. When the company is buying back its shares, it (ideally) assumes they are undervalued. And investors who opt to sell their shares think that the stock is overvalued. Both cannot be right at the same time. One would think that the company always has more information about their plans than shareholders. So those who sell into buybacks may lose out on the opportunity of higher profits.

According to a Harvard Law paper, the current disclosure practices often lack timeliness, complicating shareholders' ability to assess buyback progress and maintain their proportional ownership. Additionally, buybacks may influence executive compensation when remuneration is tied to metrics such as earnings per share, potentially encouraging executives to prioritise short-term stock performance over sustainable, long-term growth.

Despite these governance challenges, buybacks remain appealing to many firms, particularly US tech companies. This is due to their operational agility, autonomy in investment decisions, and minimal future expectations compared to dividends.

Revenue Generation and Distribution in Crypto

Token Terminal says that 27 projects in crypto generate $1 million in revenue per month. It is not comprehensive because it misses things like PumpFun, BullX, and more. But I don’t think it is that far off. I looked at 10 of these projects to understand what they do with their revenue. The point is that most crypto projects should not even be thinking about distributing revenue or profits to token holders. I like clear communication from Jupiter in this regard. The moment they announced the token, they made it clear that they had no intention of sharing direct revenue (like dividends) at that stage. Only after increasing the user base by more than tenfold, Jupiter is carrying out a buyback-like mechanism to distribute value to token holders.

Crypto projects must rethink how they share value with token holders, drawing inspiration from traditional corporate practices but uniquely adapting their approaches to avoid regulatory scrutiny. Unlike stocks, tokens provide innovative opportunities to integrate directly into a product's ecosystem. Rather than simply distributing revenue for holding tokens, projects actively incentivise crucial ecosystem activities.

For instance, long before initiating buybacks, Aave rewarded token stakers providing essential backstop liquidity. Similarly, Hyperliquid strategically shares 46% of its revenue with liquidity providers—echoing traditional consumer loyalty models in established businesses.

Beyond these token-integrated strategies, some projects adopt more direct revenue-sharing methods reminiscent of traditional public equity practices. Yet, even direct revenue-sharing models must navigate carefully to avoid securities classification, maintaining a delicate balance between rewarding token holders and regulatory compliance. Projects based outside of the US, like Hyperliquid, often have greater latitude in adopting more explicit revenue-sharing practices.

Jupiter is a good example of more creative value sharing. They do not conduct traditional buybacks. Instead, they use the Litterbox Trust, a third-party entity that programmatically receives JUP tokens with half of Jupiter’s protocol revenues. It has accumulated ~18 million JUP, valued at approximately $9.7 million as of March 26. This mechanism aligns token holders directly with the project's success, though it also notably avoids regulatory implications associated with traditional buybacks.

Remember that Jupiter went down the route of sharing value back to token holders after it had a very robust treasury of stablecoins that could support the project for a number of years.

The rationale behind allocating 50% of revenue to this accumulation plan is straightforward. Jupiter follows a guiding principle that equally balances ownership between the team and the community, fostering clear alignment and shared incentives. This approach also encourages token holders to actively promote the protocol, directly aligning their financial interests with the growth and success of the product.

Aave also recently embarked on token buybacks after a structured governance process. The protocol, supported by a healthy treasury of over $95 million (excluding its own token holdings), began its buyback program following a detailed governance proposal in early 2025. This program, titled "Buy and Distribute," allocates $1 million weekly for buybacks, initiated after extensive community discussions around tokenomics, treasury management, and token price stabilisation. Aave's treasury growth and financial strength made this initiative possible without affecting operational capabilities.

Hyperliquid uses 54% of the revenue to buyback HYPE tokens and uses the remaining 46% to incentivise liquidity on the exchange. The buyback is done via the Hyperliquid Assistance Fund. Since the start of the program, the assistance fund has bought over 18 million HYPE. The value stands at over $250 million as of March 26.

Hyperliquid stands out as an edge case—its team bypassed VC funding, likely bootstrapped development, and now directs 100% of revenue toward either rewarding liquidity providers or buying back tokens. Replicating this may not be easy for every team. But both Jupiter and Aave exemplify a crucial aspect: they are financially robust enough to perform token buybacks without compromising their core operations, reflecting disciplined financial management and strategic understanding. This is something that every project can emulate. Runway before buybacks or dividends.

Tokens As a Product

Kyle makes an excellent point about the need for Investment Relations (IR) roles in crypto projects. For an industry built on transparency, crypto projects ironically fall short in providing clear visibility into their operations. Most communication happens through sporadic Discord announcements or Twitter threads, with financial metrics selectively shared and expenses remaining largely opaque.

When a token's price consistently trends downward, users quickly lose interest in the underlying product unless it has already established a significant moat. This creates a vicious cycle: declining prices lead to diminished interest, which further depresses prices. Projects need to give tokenholders compelling reasons to maintain their positions and non-holders reasons to buy in. Clear, consistent communication about development progress and fund usage in itself can become a competitive edge in today's market.

In traditional markets, IR functions as a bridge between companies and investors through regular earnings reports, analyst calls, and forward guidance. Crypto can adapt this model while leveraging its unique technological advantages. Regular quarterly reporting on revenue, operational costs, and development milestones, combined with on-chain verification of treasury movements and buybacks, would dramatically increase stakeholder confidence.

The biggest transparency gap lies in expenditures. Revealing team compensation, expense breakdowns, and grant allocations would preempt the questions that only surface when a project collapses: "Where did the ICO money go?" and "How much are the founders paying themselves?"

Strong IR practices offer strategic advantages beyond mere transparency. They reduce volatility through decreased information asymmetry, expand the investor base by making institutional capital accessible, cultivate long-term holders who understand the operations enough to maintain positions through market cycles, and build community trust that sustains projects through challenges.

Forward-thinking projects like Kaito, Uniswap Labs, and Sky (fka MakerDAO) are already moving in this direction with regular transparent reporting. As Joel notes in his articles, crypto must evolve beyond its speculative cycles. By adopting professional IR practices, projects can shed the "casino" reputation and emerge as the "compounders" Kyle envisions— assets delivering sustainable value over the long term.

In a market where capital is increasingly perceptive, transparent communication will become imperative for survival.

Enjoying my V60 pour-over setup,
Saurabh Deshpande

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Disclaimer: DCo and/or its team members may have exposure to assets discussed in the article. No part of the article is either financial or legal advice.