Should Crypto Protocols Engage In Token Buybacks

September 23, 2024

PRO Debates is a new format where the PRO team chooses hot topics across the crypto industry and shares their own, potentially differing, personal opinions on the topic. Enjoy!

As the crypto landscape matures, a growing number of projects are finding real product-market fit and generating substantial revenue. In fact, more than 60 projects now boast annual earnings exceeding $10M. 💰️ 

This financial success has sparked an important debate: Should these protocols engage in token buybacks?

Critics argue that without buybacks, tokens risk being relegated to mere governance tools, lacking tangible value or investor interest.

While legal challenges around buybacks exist, the bigger question remains: How should protocols best use their revenue to create value for their investors? 🧐

Some projects, like Maker, have embraced buybacks as a way to return value to token holders.

In contrast, others—such as Lido, Aave, and Ethena—generate significant revenue but have chosen not to implement buyback mechanisms. Maybe not just yet? 

In this discussion, we'll dive into the reasoning behind these choices and offer our independent insights on whether buybacks are the right path forward for these high-earning protocols.

Kyle****'s thoughts (@Kyle Reidhead | Milk Road 🥛**):**

I don’t think there is a one size fits all answer to this question.

Of course, token buybacks are a great thing for the token and the investors who hold the token. It should be the goal of any business to drive value back to their token, otherwise, they should have never launched the token to begin with.

But I think crypto twitter has lost the plot on token buybacks. CT always expects that everyone should do everything they can to make sure “their bags go up now”. They did it with NFTs and they do it with tokens. 💬 

A true investor in a company doesn’t expect rewards in an investment on day 1, instead, they should expect the team they invested in to use that investment wisely and generate more value to that capital overtime.

IMO most crypto companies and protocols should be using every resource they have to improve their product and drive more users to it. Outside of Bitcoin, crypto and its applications are still such a tiny part of the world.

While crypto protocols and apps have great use cases that solve big problems, the UX and marketing tend to be sub par, preventing these applications from reaching outside the small world of crypto natives.

Companies that initiate buybacks today are essentially telling you that they are not capable of using that capital to improve their product or grow their business further than the tiny pie of users we have in crypto today. They are settling way too early imo.

The only caveat to this is for those who are making enough profit to use that to buyback tokens as a strategy to accelerate growth. 💸 

What I mean is if a protocol buys back its tokens and then uses those tokens to incentivize growth (ie. grants, retroactive rewards, airdrops, etc.) on a consistent basis then they have created a flywheel to help manage token price while also focusing on growth.

Ultimately, all companies and protocols in crypto with a token should aim to drive value back to their tokens in the long run, however they shouldn’t feel the need to do it immediately. Their focus should be to improve and grow the business to a point at which it then makes sense to start driving value back to the investors. 📊

One final note, in traditional companies, it generally takes 10-20+ years before enabling dividends, generally because at that point the company is a cash generating machine and has saturated the market.

My assumption is this timeline moves shorter for crypto protocols as a result of having significantly less expenses overtime to manage a decentralized protocol. But again, this timeline will be very different for each company/protocol.

Martin****'s thoughts (@m0xt | Milk Road 🥛**):**

I find these discussions exciting because they show we're moving closer to having sustainable crypto projects with real users and actual revenue. 🤩 

It's important to remember that many crypto projects are still in the early stages of growth. Just because these startups have liquid tokens and the ability to do buybacks doesn’t mean they should.

Instead, their primary focus should be on using available resources to fuel growth and strengthen their competitive edge - whether it's by hiring top talent, expanding the user base, acquiring other projects, exploring new chains, or developing innovative features. 💯 

These investments are what will build a stronger competitive edge and drive long-term success.

It's also worth noting that buybacks aren't always the positive price catalyst they might seem. In some cases, they can send a negative signal, suggesting that a project is struggling to find better uses for its cash, which could raise concerns about its future growth. 📉 

Now, think about this: Would you be more excited about an Aave that spends $10M on buybacks, or one that pours that same amount into hiring top talent, expanding its reach, offering grants, and launching groundbreaking new features?

Consider the compound effects of these investments over time versus the short-term boost of buybacks. Which one truly sets the stage for long-term success?

Buybacks should be considered within the broader context of a project’s overall financial health. Take Aave, for example: If they’re generating $70M annually with only $7M in expenses, that’s a significant profit. 📈 

In such a scenario, it’s unlikely they could effectively allocate all excess funds solely into growth opportunities. Therefore, they could easily invest $10M in growth while also conducting $10M in buybacks.

Ultimately, when it comes to buybacks, it's crucial to balance revenue with expenses. If profits are significant but growth opportunities are scarce, buybacks might be justified. However, if there are still valuable opportunities to invest in growth, buybacks should take a backseat.

TL;DR: 

If I own a token tied to revenue or treasury, I don’t need buybacks today to see its value, and I would never call it a valueless governance token. A single proposal for revenue buybacks can quickly shift the narrative from "valueless" to "strong" with recurring buybacks. Until that happens, I want to see solid investments in growth opportunities—and I want to hold the token before that proposal comes through.