Title: Make revenue great again
Author: Joel John, Decentralised.co
Compiled by: Riley, ChainCatcher
The article is compiled from the column article "Make revenue great again" by Joel John of Decentralised.co. In the current market where the crypto market is shifting from frenetic speculation to rational return, the article focuses on the core contradiction of the token economy - should tokens be supported by real yield? Do teams have an obligation to strengthen token utility through buybacks?
The article conducts an in-depth analysis from multiple dimensions such as market cycles, business models, and technological evolution, revealing the challenges and opportunities in the current crypto ecosystem.
When people start re-discussing fundamentals, you know the market condition is really bad. This article raises a core issue: should crypto projects generate operating revenue through tokens? If the answer is yes, then do teams have an obligation to initiate a token buyback mechanism? As with many complex issues, there is no standard answer - the future direction of the industry can only be gradually reached through candid dialogue among all parties.
Life is just a game of capitalism.
This article is inspired by a series of conversations with Ganesh of Covalent, discussing the cyclicality of revenue, the evolution of business models, and whether protocol treasuries should prioritize token buybacks as a strategic priority. This is a supplement to the Tuesday article The Death of Stagnation in the Crypto World.
The private capital market (such as venture capital) is always oscillating between excess liquidity and scarcity. When asset liquidity increases and external capital flows in, market euphoria will drive up prices. The market performance of newly listed stocks or initial token offerings can validate this rule - liquidity expansion directly drives up asset valuations, while also stimulating investors to increase their risk appetite, creating a new batch of startups.
This is a mechanism, not a loophole.
Source: https://x.com/credistick/status/1897688251667714300
The liquidity cycle of the crypto market is closely related to the Bitcoin halving. Historically, there is a market rebound within six months after the Bitcoin halving. In 2024, ETF capital inflows and Michael Saylor's (CEO of MicroStrategy) purchases will become the "demand black hole" for Bitcoin. Saylor alone spent $22.1 billion to buy Bitcoin last year. However, the surge in Bitcoin's price did not drive the rise of long-tail small-cap tokens.
We are in an era where capital allocators are tight on liquidity, attention is scattered across thousands of assets, and founders who have built token ecosystems for years struggle to find meaning in their efforts. When the returns from meme coin issuance are higher, who would bother to develop valuable applications? In the previous cycle, L2 tokens received a valuation premium due to exchange listings and VC backing. But as more players enter the market, this premium is being erased.
Therefore, the declining valuation of L2-held tokens limits their ability to subsidize small products through grants or token revenue. The overvaluation forces founders to ask an eternal economic question - where does revenue come from?
Transaction-Centric
The image clearly shows the typical revenue model of the crypto industry. For most products, the ideal state is like Aave and Uniswap. Whether benefiting from the "Lindy effect" (the longer something has existed, the more likely it is to continue existing in the future) or first-mover advantage, these two products have been generating revenue for years. Uniswap can even generate revenue through front-end fees, reflecting the solidification of user habits - now Uniswap has become the "Google" of the decentralized exchange space.
In contrast, the revenue of FriendTech and OpenSea is only seasonal. The NFT hype cycle lasts about two quarters, and Social-Fi speculation only lasts two months. If the revenue scale is large enough and consistent with the product's goals, speculative revenue still has meaning. Many meme coin trading platforms have joined the "$100 million+ fee club", which is the best result founders can expect through tokens or acquisitions, but for most, this kind of success is still out of reach.
They are not developing consumer applications, but focusing on infrastructure - the revenue logic is completely different.
From 2018 to 2021, VCs invested heavily in developer tools, hoping that developers would bring massive users. But by 2024, there will be two major transformations in the ecosystem:
- Smart contracts have infinite scalability and do not require human intervention: the team size of Uniswap or OpenSea does not need to expand with the increase in transaction volume.
- The progress of LLM and AI has reduced the dependence on crypto developer tools: this track is facing a revaluation of value.
The API subscription model of Web2 relies on a large online user base, while Web3 is still a niche market, with few applications reaching the scale of millions of users. The advantage of Web3 is the high user revenue contribution rate: crypto users invest funds more frequently due to the characteristics of the blockchain. Over the next 18 months, most projects need to adjust their business models to directly generate revenue from user transaction fees.
This idea is not new. Stripe initially charged per API call, Shopify adopted a subscription model, and later both shifted to revenue sharing. For Web3 infrastructure providers, this means capturing the market through low-price strategies - even providing free services until a certain transaction volume is reached, and then negotiating the revenue share. This is an idealized assumption.
Taking Polymarket as an example: the core function of the UMA protocol token is dispute arbitration, and the number of dispute events is positively correlated with the demand for the token. If a transaction sharing mechanism is introduced, 0.10% of each dispute deposit can be taken as a protocol fee. Calculated based on a total betting volume of $10 billion for the presidential election, UMA can obtain a direct revenue of $1 million. In an ideal scenario, UMA can use the revenue to buy back and burn tokens, but this has both advantages and disadvantages.
MetaMask is another case. Its built-in exchange function processed about $36 billion in transactions, generating revenue of over $300 million. Similar logic applies to staking service providers like Luganode - fees are linked to the scale of staked assets.
But if the demand for API calls continues to weaken, why would developers choose a particular infrastructure provider? If revenue needs to be shared, why choose a specific oracle? The answer lies in network effects. Infrastructure providers with multi-chain compatibility, data parsing accuracy to the millisecond, and response speed leading by three standard deviations, will have priority in the selection of new projects - these technical parameters directly determine the migration cost of developers.
Burning to the ground
Linking token value to protocol revenue is not a new trend. Recently, several teams have announced plans to buy back or burn tokens in proportion to their revenue, including Sky, Ronin, Jito, Kaito, and Gearbox.
Token buybacks mimic the stock buybacks in the traditional stock market, essentially returning value to shareholders (in this case, token holders) without violating securities laws. In 2024, the size of US stock buybacks reached $790 billion, far exceeding the $170 billion in 2000. Prior to 1982, stock buybacks were considered illegal. Apple alone has spent $800 billion on buybacks over the past decade. Regardless of whether the trend can be sustained, the market has clearly differentiated: tokens with cash flow and a willingness to invest in their own value, and those without either.
For early protocols or dApps, using revenue to buy back tokens may not be the best use of their funds. One viable option is to allocate sufficient funds to offset the dilution caused by token issuance. The Kaito founder recently explained their buyback strategy: the centralized company generates cash flow from enterprise clients and uses a portion of the funds to buy back tokens through market makers, with the buyback volume being twice the new token issuance, thereby achieving deflation.
Ronin, on the other hand, has adopted a different strategy: the blockchain adjusts the fees based on the transaction volume per block. During peak periods, a portion of the network fees is diverted to the treasury to control the asset supply rather than directly buying back. In both cases, the founders have designed mechanisms to tie value to economic activity.
In the future, we will delve deeper into the impact of such operations on token prices and on-chain behavior. But what is currently visible is that - with valuation pressure and a decrease in crypto VC funding - more teams will compete for marginal cash inflows.
Since blockchains are essentially financial tracks, most teams will shift towards revenue-sharing models. If the project has already been tokenized, the team can implement a "buyback-and-burn" mechanism. Well-executed projects will thrive in the liquidity markets, but this requires taking on the risk of buybacks during the valuation bubble period. The truth can only be seen in hindsight.
Of course, one day, discussions about price, yield, and revenue will become outdated again - people will start throwing money at Doge and scrambling to buy BAYC NFTs. But for now, founders concerned about survival have begun to engage in discussions around revenue and burning.
Creating value for shareholders, Joel John.
Disclaimer:
- This article does not constitute investment advice
- co-related individuals hold CXT tokens
