- DeFi protocols are increasing token buybacks.
- However, it is not certain that such strategies are always effective.
- Buybacks can be effective if planned well, according to Keyrock.
Decentralized financial protocols are transmitting revenue to holders of their tokens at a record pace as they work to gain investor trust, but this could be a waste of money.
That’s according to a new report from crypto market maker Keyrock, which examined token buybacks, one of the most popular ways for protocols to tie their success to the price of the tokens they issue.
Keyrock found that the top 12 revenue distribution protocols spent nearly $800 million on token buybacks and other revenue sharing activities in July, an increase of more than 400% since the start of 2024.
“Much like public companies using buybacks to signal long-term commitment and inspire investor confidence, crypto teams leverage them to increase token value and communicate belief in the project’s future,” said Amir Hajian, the Keyrock researcher who wrote the report.
Token buybacks have become increasingly popular in recent months.
The idea is that buybacks – paid for with fees generated by users of the protocol – will tie a token’s value to the success of its associated DeFi protocol, regardless of how the broader crypto market trades.
In other words, the more profit a protocol generates, the more it will spend to buy back its token, thereby increasing its market value.
Poor use of capital?
However, the effectiveness of token buybacks is unclear.
“Buyouts are on hiatus, but can be improved,” Hajian said in the report, adding that many programs overspend when prices are high and underspend in recessions, when it matters most.
Buybacks can also be ineffective because they can divert funds from marketing and growth initiatives, Hajian added.
It’s not just Keyrock making this point. In March, a report from crypto research firm Messari also argued that buybacks are a poor use of capital.
“Our analysis finds no clear evidence that the market rewards these initiatives, as token performance remains driven by metric growth and narrative formation,” said Sunny Shi, the report’s author.
Nonetheless, the perception that buybacks help support token prices is strong.
Perpetual futures exchange Hyperliquid has made token buybacks an integral part of its strategy. Many investors equate Hyperliquid’s buyback program with the strong performance of its HYPE token, which has soared 500% since its November 2024 launch.
With this success, others, like leading lending protocol Aave, are also implementing buyback programs.
Uncertain value
While DeFi tokens soared in 2021 as enthusiasm around the sector peaked, many have since underperformed as the hype died down and investors began to question their lofty valuations.
Even tokens from successful DeFi protocols, like liquid staking protocol Lido and credit protocol Sky, are trading well below their 2021 highs, despite a significant increase in revenue since then.
“Tokens do not guarantee dividends, confer legal rights, or provide clarity in profit metrics,” the Keyrock report said. “The link between protocol performance and token holder value is therefore indirect and often uncertain.”
Buybacks are an attempt to base token valuation on something tangible, like a percentage of the protocol’s total revenue.
Despite their problems, data shows that buybacks are not a bad idea, according to the Keyrock report.
“Disciplined programs, built on revenue stability, cash flow strength and valuation awareness, can build alignment and credibility,” Hajian said.
Tim Craig is DL News’ DeFi correspondent based in Edinburgh. Contact us with advice at tim@dlnews.com.
