Private capital markets like venture capital swing between periods of excess liquidity and scarcity. When these assets turn liquid and external sources of capital pour in, euphoria drives prices upward. Think of newly launched IPOs. Or token launches. The newfound liquidity makes investors take on more risk, which in turn fuels a new generation of companies. When asset prices rise, investors seek to rotate money into earlier-stage applications in hopes of generating greater returns compared to benchmarks like ETH and SOL. This is a feature, not a bug.

Source: https://dco.link/DanGrayOnX

Liquidity in crypto has followed periodic cycles marked by Bitcoin’s halving. Historically, a market rally occurs within six months of Bitcoin’s halving. ETF inflows and Saylor’s buying were supply sinks for Bitcoin in 2024. Saylor alone spent $22.1 billion acquiring Bitcoin in the previous year. But Bitcoin’s price surge did not translate to a rally for the long tail of smaller altcoins last year.

We are witnessing a time when capital allocators are tight on liquidity, attention is divided across thousands of assets, and founders who have been working hard on tokens for years struggle to find meaning in it all. Why would someone bother building real applications when launching meme assets yields more financial outcomes? In previous cycles, L2 tokens held a premium because of perceived value, driven by exchange listings and VC backing. But as more players flood the market, that perception (and its valuation premium) is getting wiped out.

As a result, tokens owned by L2s see lower valuations, limiting their ability to subsidise smaller products with grants or token-based revenue. This glut in valuation, in turn, forces founders to ask the same old question that has plagued all economic endeavours throughout time—where would revenue come from?

So Transactional

The chart above is a good explanation of how revenue in crypto typically functions. For most products, the ideal state is that of @aave and @Uniswap. Blame it on Lindy effects or being early—both products have sustained fees over the years. Uniswap could even add a front-end fee and generate revenue. This shows the extent to which consumer preferences are defined. Uniswap is to decentralised exchanges what Google has been for search.

In contrast, @friendtech and @opensea have seasonal revenue. During NFT summer, a market cycle lasted two quarters, whereas social-fi speculation lasted all of two months. Speculatory revenue for products makes sense if the scale of the revenue is large enough and aligns with the product’s intent. Many meme trading platforms have joined the $100 million+ club in fees. The sheer scale of that figure is what most founders could expect in a best-case scenario through tokens or an acquisition. But for most founders, this level of success is rare. They are not building consumer apps; they are focused on infrastructure, where revenue dynamics are different.

Between 2018 and 2021, VCs heavily funded developer tooling hoping that developers would onboard large troves of users. But by 2024, the ecosystem had shifted in two significant ways. First, smart contracts enabled infinite scalability with limited human intervention. Uniswap or OpenSea don’t need to scale their teams in proportion to transaction volume. Second, advancements in LLMs and AI have reduced the need to invest as much into developer tooling for crypto. So, as a category, it is in a moment of reckoning.

In Web2, API-based subscription models work because of sheer user volume online. Web3, however, is a smaller, niche market with very few applications scaling to millions of users. What we have going for us is a high revenue per user metric. The average user in crypto tends to spend more money at a higher frequency because that’s what blockchains enable you to do—they enable the movement of money. So, over the next 18 months, most businesses will have to redo their business models to source revenue directly from users in the form of transaction fees.

This is not a new concept. @stripe initially charged per API call, @Shopify had a flat fee for subscriptions, and both platforms switched to a percentage of revenue generated. The way this will translate to Web3 for infrastructure providers is fairly straightforward. They will cannibalise the market on the API side by racing to the bottom—perhaps even offering the product for free until a certain transaction volume is achieved, after which they could negotiate a revenue cut. This is the ideal, hypothetical scenario.

What would this look like in practice? One example is @Polymarket. Currently, @UMAprotocol‘s tokens are used for dispute resolution, with tokens bonded to disputes. The higher the number of markets, the higher the probability of dispute. This drives demand for UMA’s tokens. In a transactional model, the bond required could be a small percentage, say, 0.10%, of the total amount bet. For example, a $1 Billion bet on the presidential election outcome would translate to $1 million in revenue for UMA. In a hypothetical world, UMA could use this revenue to buy their tokens and burn them. This has its own benefits and challenges, as we’ll soon see.

Another player doing this is @MetaMask. Around $36 billion in volume has moved through the wallet’s embedded swap feature. Revenue from swaps alone exceeds $300 million. A similar model applies to staking providers like @luganodes, where fees are based on the amount of assets staked.

But why would a developer pick one infrastructure provider over the other in a market where API calls are trending lower by the day? Why pick one oracle over another if it requires sharing revenue? The answer lies in network effects. A data provider that supports multiple blockchains, offers unmatched data granularity, and can index new chains faster, will become the go-to choice for new products. The same logic applies to transactional categories like intents or gasless swap enablers. The more chains supported at the lowest margins with the fastest speeds, the higher the likelihood of attracting new products, as that marginal efficiency helps retain users.

Burn it All Down

The shift toward tying token value to protocol revenue isn’t new. In recent weeks, several teams have announced mechanisms for buying back or burning their own tokens in proportion to revenue generated. Notable among these are @SkyEcosystem, @Ronin_Network, @jito_sol, @KaitoAI, and @GearboxProtocol.

Token buybacks mirror stock buybacks in the U.S. equity markets—essentially a way to return value to shareholders (or, in this case, token holders) without violating securities laws.

In 2024, some $790 billion was spent on equity buybacks in US markets alone, compared to $170 billion in 2000. Up until 1982, stock buybacks were deemed illegal. @Apple alone has spent over $800 billion buying back its own stocks in the last decade. Whether these trends are here to stick remains to be seen, but we are seeing a clear bifurcation in the market between tokens that have cash flow and are willing to invest in their own value, and those with neither.

Source: https://dco.link/Bloomberg

For most early-stage protocols or dApps, using revenue to buy back their own token is probably not the best use of capital. One way to execute such an operation would be to allocate just enough capital to cancel out token dilution from new emissions. This is how Kaito’s founder recently explained his approach to token buybacks. Kaito is a centralised firm that uses token incentives for its user base. The firm has centralised sources of cash flow from its enterprise customers. They use a portion of that cash flow to execute a buyback through a market maker. The amount purchased is twice that of new tokens released, so in effect, the network becomes deflationary.

A different approach is seen with Ronin. The blockchain adjusts fees depending on the number of transactions per block. During times of peak usage, a portion of the network’s fees goes toward Ronin’s treasury. This is one way of cornering the supply of the asset without necessarily buying back the token itself. In both instances, founders have devised mechanisms to tie value to economic activity on the network.

In a future post, we’ll dive into what these operations mean in terms of price and on-chain behaviour for tokens engaged in such activities. But for now, this is what is apparent—as valuations suppress and the amount of venture dollars flowing into crypto declines, more teams will have to compete for the marginal dollar flowing into our ecosystem.

Since blockchains are money rails at their core, most teams will switch to a percentage-of-transaction-volume model. When this happens, if the team is tokenised, they will have an incentive to issue a buyback-and-burn model. The teams that do this well stand to be winners in the liquid market. Or perhaps, they may end up buying their own tokens at extremely high valuations. The reality of things can be seen only in hindsight.

Surely, there will be a point in time when all this talk of price, earnings, and revenue becomes irrelevant. We will be throwing dollars at pictures of dogs and buying monkey NFTs again. But if I look at where the market is, most founders who are worried about survival have begun conversations around revenue and burns.

Creating shareholder value,

Joel John

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