Is it really beneficial for token holders when protocols use funds for buybacks?

Author: danny

Original Title: "Why I am not optimistic about protocols that use most of their revenue for buybacks and burns"

On April 23, 2023, American home goods retailer Bed Bath & Beyond filed for bankruptcy protection. The company, which sells bed linens, towels, and kitchen supplies, also announced it had secured approximately $240 million in financing commitments for the bankruptcy process to support its business wind-down and related procedures. At this stage, what it needed most was cash to continue paying its creditors.

Ironically, over a year ago, it was aggressively buying back its own stock. In the fiscal year ending February 26, 2022, the company spent approximately $589 million on stock buybacks, while its net cash generated from operating activities was only about $17.85 million. In the same year, it also needed to invest about $354 million in capital expenditures. In other words, the operating cash flow that year could not even cover capital expenditures, yet buybacks continued.

It was renovating stores, upgrading digital channels and supply chains, and promoting its own brands. The problem was that these transformations had not yet proven sufficient to turn the business around, while the company simultaneously returned a large amount of funds to the stock market. By the summer of 2022, some suppliers began to demand stricter payment terms, including advance payments. Suppliers were no longer willing to extend credit as they had in the past, leading to subsequent issues.

Of course, we cannot simply blame Bed Bath & Beyond's bankruptcy filing on buybacks. Problems arose from its product strategy, competition, supply chain, and operational execution at that time. But buybacks and these issues occurred on the same balance sheet: money spent here cannot be used there simultaneously. It bought back its own stock but did not buy back customers, nor did it make suppliers more willing to extend credit.

The Essence of Business and Establishing Competitive Advantage

Returning to crypto, whenever a crypto protocol announces that it will use 80%, 90%, or even all of its revenue for buybacks and then burns its tokens, I think of this company. What the market sees is a reduction in the number of tokens, providing a reason to buy, but I want to know more: after the buyback, how much capacity does the protocol have left to continue its business?

To earn profits exceeding those of peers in the long term, a business must make itself increasingly difficult to replace and gain more competitive advantages (refer to Michael Porter's "Competitive Advantage"). Users are willing to stay because of better depth, cheaper transactions, more suitable products, or higher switching costs. From the perspective of business interests, being close to a monopoly is the most comfortable position; stepping back to an oligopoly is acceptable, but at least one must have advantages that are difficult for others to replicate in a certain market. Of course, monopoly is not a necessary condition for success, but it is hard to retain excess profits in a business without differentiation.

However, establishing such advantages, or even deepening these barriers, requires money—lots of it. Trading protocols need to maintain depth, expand distribution channels, and bear R&D and security costs; to transform from trading tools to infrastructure, they also need to invest in ecosystems to encourage other developers to do business around them. Spending money does not guarantee success, as the failed transformation of Bed Bath & Beyond reminds us. But when effective investment opportunities exist, buybacks also come at a cost: they may crowd out the next generation of products, an important channel, or the survival time in the next downturn.

The benefits of buybacks in the secondary market are obvious and immediate. How much was spent today, how many tokens were bought, and how much supply was burned can all be checked on-chain, and the community can create posters the same day. Product improvements and channel building take longer and may also fail. Thus, teams can easily be trained by the market to prioritize resources in the areas that garner the most applause. As for competitiveness two years down the line, who cares?

Preconditions for Buybacks

Some may argue that Apple also engages in large-scale buybacks, so why can't decentralized protocols, launchpads, and PerpDex do the same? In fiscal year 2024, Apple allocated approximately $94.95 billion for buybacks, but it also confirmed $31.37 billion in R&D expenses and $9.45 billion in capital expenditures that same year. After deducting the aforementioned capital expenditures from operating cash flow, their free cash flow was about $108.81 billion, with buybacks accounting for approximately 87.3%. This ratio is not low, but it is not the same as "taking 90% off the top of the fees received".

At the end of that year, Apple held approximately $156.65 billion in cash, cash equivalents, and marketable securities. This figure does not account for debt and is not entirely cash, so it cannot be considered as freely spendable net assets; however, it reminds us that beyond the buyback ratio, there is an entire balance sheet. Citing only the $94.95 billion buyback while overlooking R&D, capital expenditures, and financial resources only teaches us about the actions of a mature company, without understanding the preconditions for those actions.

The products and services Apple sells generate profits and free cash flow only after bearing these investments, allowing for discussions on how to allocate that cash. A young protocol that suddenly earns a large amount of fees from a market cycle has not yet proven whether users will stay, and borrowing the capital return logic of mature companies skips the most challenging part of business: turning temporary income into sustainable profitability.

Explosive cash flow does not equate to the profitability of mature enterprises. Bed Bath & Beyond even reminds us that years of operation do not guarantee a company will always be in a mature, stable state. Competitive advantages can erode, customers can leave, and when it comes time to reinvest, management must be willing to keep the money.

Comparing Protocols with Buyback Mechanisms

Comparing specific protocols makes this issue much clearer.

PONS's V1 documentation states that 80% of the protocol's fees are used to buy back and burn PONS, with the remaining 20% allocated to infrastructure and team expansion. The question is whether that remaining 20% is enough to support operations and withstand risks?

Pump.fun currently has an official target of 50%, with a year-long programmatic buyback and burn scheduled to start on April 28, 2026.

Raydium's CLMM and CPMM pools distribute 84% of total trading fees to liquidity providers, 12% for buying back RAY, and 4% for the treasury. On the surface, only 12% is used for buybacks, but after deducting LP shares, the protocol only retains 16% of the income, three-quarters of which is converted into its own tokens. PancakeSwap v2 is similar: the buyback and burn ratio is approximately 71.9% based on protocol income as the denominator.

It is important to note that the figures in the table are calculated based on official fee distribution ratios and only represent fee flows. The tokens bought back by Raydium are held by the protocol, while Pendle uses the bought-back tokens for staking rewards. More importantly, the $6, $4, and $9 in the table have not yet turned into profits: they may need to cover R&D, operational, and security costs.

This is also why I am reluctant to only look at buyback ratio rankings. Protocol fees, foundation assets, and development company funds may belong to different entities. A buyback wallet continuously purchasing tokens does not mean the entire ecosystem lacks funds for R&D; however, if the team holds a large amount of its own tokens, it does not mean it has an equivalent amount of cash available to pay bills at any time. Only by looking at the combined funds of these accounts can we understand whether buybacks are using profits, surplus, or funds that may be needed in the future.

Measuring Public Water Fluctuations with Pool Water

The crypto industry is highly cyclical. For example, Coinbase's trading revenue dropped from about $6.837 billion in 2021 to $2.356 billion in 2022, a decline of about 65.5% is commonplace.

The revenue fluctuations of decentralized protocols are even more exaggerated. Taking dYdX as an example, during the 25% buyback distribution phase in 2025, the average monthly buyback budget was about $339,000; by the first half of 2026, the distribution ratio increased to 75%, but the average budget dropped to about $183,000. The ratio tripled, but the buyback amount decreased by about 46% due to a related net protocol revenue decline of about 80%.

Recent data from PONS also indicates that revenue cannot only be viewed during busy times. On October 5, DeFiLlama reported that its consolidated protocol revenue over the past 30 days was about $22.7 million, with about $1.68 million in the past 7 days. Converted to daily averages, these are approximately $757,000 and $240,000, respectively, but you should know that the recent 7-day daily average is about 68% lower than the 30-day average. Taking the performance of the hottest month and multiplying it by twelve (dubbed APY) to promote it as a stable annual buyback capability clearly overlooks fluctuations and can easily lead to losing sight of oneself.

Looking back at Bed Bath & Beyond, cash flow issues will only invite more misfortune. Suppliers tightening payment terms means it needs to pay earlier to receive goods. The same goes for crypto protocols; revenue may drop by 70%, but these costs remain the same or even become more stringent. The customer acquisition cost of an FDV of $1 billion is not comparable to that of an FDV of $10 million.

In addition to operations, the crypto industry also has a security cost. When attacked, how much needs to be paid out? According to Chainalysis, the amount stolen from crypto services is projected to be about $2.2 billion in 2024, $3.4 billion in 2025, and about $5 billion in the first half of 2026. Notably, in 2025, Bybit suffered a single theft of about $1.5 billion. For protocols, security reserves are not meant to cover average losses but rather to guard against incidents that could completely deplete their treasury.

In the 2022 incident, Ronin was hacked, resulting in the theft of 173,600 ETH and $25.5 million USDC. When the official cross-chain bridge was restored, it disclosed that after deducting the Axie DAO portion, the user-related shortfall was 117,600 ETH and $25.5 million USDC.

Users need to reclaim ETH and USDC; no one cares how many of their own tokens were burned in the past. Security reserves may seem inefficient at times, as they do not create buying pressure or reduce supply, but they give the team the confidence to repair the business and restore market trust. Once trust is damaged, relying on issuing or selling their own tokens for financing becomes much more difficult than during a bull market.

Thus, I prefer to focus on another type of capital allocation. Aave's 2026 financial post disclosed that after initiating buybacks for about 10 months, it arranged $42 million to buy back over 205,000 AAVE. However, borrowing fees have decreased by about 25% from peak levels, and costs for service providers and other growth demands are increasing, so the post proposed reducing the annual buyback budget from $50 million to $30 million, a 40% cut. (This is just a proposal and not a confirmed outcome.) Aave's bought-back tokens also enter the ecosystem reserves for rewards and other expenditures, rather than permanent destruction. But this proposal acknowledges a necessary fact: the operating environment has changed, and the methods of buybacks should adapt accordingly. (However, a follow-up post on April 22 disclosed that due to the rsETH cross-chain bridge incident, buybacks were suspended from April 19 onward, citing the need to preserve treasury capacity to address potential losses.)

Conversely, if the team cannot reduce buybacks because doing so would undermine the most important selling point of the token, then the so-called capital allocation begins to constrain operations. The business needs money, but the market demands continued buying pressure; to maintain this commitment, the protocol may turn to financing, foundation token sales, or a new round of incentives.

Today's buybacks are packaged as value returns, but little do they know, this is merely overdrawing the protocol's future competitive advantages and risk resilience.

Complex Buybacks = Buybacks for Nothing

After the upgrade on June 17, 2026, Aster allocated 99% of its daily platform fees to buy back ASTER, but the bought-back tokens are distributed to veASTER holders; the protocol then burns an equivalent amount of tokens from reserves, prioritizing the team's allocation until total supply is reduced to 3 billion tokens. This mechanism simultaneously includes market purchases, reward distributions, and inventory destruction.

Similarly, PancakeSwap proposed a target of at least 4% net deflation annually, but it also has an incentive issuance mechanism. For secondary traders, does this increase or decrease supply?

Burning team inventory can reduce future potential supply, which is valuable in the long run—however, this approach only applies to mature projects.

But if bought-back tokens are redistributed, they may re-enter circulation. Focusing solely on the total supply decrease without considering how circulating supply changes or how much cash decreases can turn three originally positive messages into an incomprehensible one. For a decentralized protocol still in growth, this is merely a pointless loss.

Just an interlude on the path of chasing trends.

Mandatory Buybacks Only Create Exit Conditions

At this point in the discussion, I am concerned not just about how money is distributed, but whether the entire project's operational goals will change: making tokens easier to sell and more liquid gradually becomes more important than developing the business. For those protocols that prioritize high buybacks as a main selling point without clearly addressing reinvestment and risk reserves, I am more inclined to view them as a business model oriented towards selling tokens.

When a protocol commits to using most of its revenue for buybacks, it provides an easily understandable reason for buying in the secondary market: the platform makes money every day, buys tokens every day, and supply continuously decreases. Buyers may thus be more willing to take over, and trading heat brings price discussions, social dissemination, and more attention. The project gains a customer acquisition path revolving around the token. From a business perspective, buyback expenditures also serve the function of marketing expenses: they create buying pressure and explain why others should buy in.

Here, "selling" does not necessarily refer to the team directly selling tokens, but rather the entire mechanism prioritizes making the market willing to buy, hold, and trade this token. Fees become the buyback budget, and buybacks become the reason for purchase, while the heat in the secondary market is used to showcase the project's growth. If the final success metrics are all about token price, trading volume, and discussion levels, then the boundary between managing tokens and managing business will become increasingly blurred.

This is also where it is worth discussing alongside "high FDV, low float." The mechanisms differ: high valuation and low circulation rely on limited chips to form prices and then extrapolate those prices to gain liquidity in other venues; buyback and burn at least may utilize cash earned from business, which should not be confused. But if the design focus is entirely on supporting prices and creating scarcity to encourage the next buyer to take over, while the enterprise's ongoing competitiveness takes a back seat, they may serve similar interests.

Competitive advantages cannot be bought with money, but maintaining products, security, channels, and ecosystems usually requires continuous investment. Buybacks should not come before these investments.

Especially when the tokens of the team and early investors continue to unlock, while the protocol continues to use revenue for buybacks. Buybacks provide buying pressure, and a more active secondary market improves the exit conditions for sellers.

Premature Buybacks Are a Stumbling Block to Building Competitive Advantages

The issue is that a lively secondary market and a company forming its own competitive advantages are two different things. A person buys tokens because of a high buyback ratio does not mean they will use the protocol; even if they start using it, it does not mean they will stay once subsidies decrease and the market cools. Users drawn in by token prices today may leave tomorrow for another token that rises faster. Attention can bring traffic, but it does not necessarily create loyalty, pricing power, or products that competitors cannot replicate.

The attention brought by rising token prices is certainly valuable. It may attract developers, market makers, and distribution partners, deepening liquidity, improving products, and ultimately forming a network that users cannot leave. But each step in between requires investment and validation. More convincing evidence includes whether users without additional incentives are increasing, whether users will return, whether customer acquisition costs are decreasing, and how much cash can be retained after deducting subsidies. If most funds continue to be used to create buying pressure without resources to turn attention into products, channels, and customer relationships, then the project is merely paying to maintain its heat.

Risk reserves will not automatically increase with discussion levels. The number of people bullish on social platforms cannot pay for security audits, team salaries, and accident compensations for the protocol. Especially in downturns, business revenue, token prices, and market attention may all decline together; mechanisms that previously relied on buybacks to maintain heat may lose their funding sources precisely when they need support the most. The data from dYdX showing an increase in buyback ratios while the budget decreases is a good wake-up call.

I do not oppose returning excess funds to the market. After all, protocols that are light assets, have stable competitive positions, limited reinvestment opportunities, and ample reserves have a suitable reason to maintain high buyback ratios. The standard for judgment is always how this capital is used to enhance long-term value.

However, using most of the revenue permanently for token buybacks and burns before the business is stable and reserves are sufficient is my reason for being reluctant to buy in easily.

The Confidence of Continuous Operation

It is important to know that when Bed Bath & Beyond filed for bankruptcy protection, the stocks it had previously bought back could not be turned back into cash flow, nor could they restore suppliers' trust. This story does not prove that every buyback is inappropriate, but it reminds us that the value a company leaves for its holders ultimately depends on whether it can continue to operate and regain customer trust after a downturn.

If a protocol can tell me every day how many tokens it burned but cannot explain how the attention from the secondary market translates into a more irreplaceable business and thicker cash reserves, I will regard it as a way to sell tokens rather than a reason for long-term holding.

Buybacks can help tokens find the next buyer, but only the ability to operate continuously can give those who stay a reason not to rush to find the next buyer. Selling tokens can be a successful business, but what holders need is a business that can continue to make money after the excitement has passed.

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