Bankless: Is Token Buyback Meaningful?

Author: David C, Bankless; Translation: Deng Tong, Jinse Caijing

Aave recently announced a new tokenomic reform featuring a buyback, and it is not the only project to take this step.

Since Trump won the election, more and more crypto projects have introduced tokenomic reforms, whether through revenue sharing or buybacks, as they believe the regulatory environment is more conducive to such experiments. Arbitrum Arbitrum is another well-known company that adopts a buyback program, indicating that as crypto projects attempt to increase profits and better control token supply, they will turn to implementing TradFi technology.

With the implementation of these tokenomic reforms, there has been a debate on whether buyback is the right way to strengthen digital assets on X. Opponents argue that buyback and burn are outdated and limited solutions from TradFi, while supporters hail it as a direct embodiment of product-market fit and market dominance.

Next, we will explore both sides of the argument, consider the pitfalls of applying TradFi practices to our emerging markets, and focus on introducing some alternative solutions to token buybacks.

Case Study of Token Repurchase

Many protocols and users see repurchase as a direct signal of long-term consistency, revenue stability, and growth potential, so let's take a look at the main arguments supporting this practice.

Confidence in Product-Market Fit

Those who support token buybacks believe that these plans reflect a commitment to sustainability and revenue growth. By repurchasing tokens, the team demonstrates confidence in the moat and long-term prospects of their protocol, which can enhance market confidence and position the protocol as a major owner of its tokens, potentially giving it more control over price dynamics.

When the protocol is already profitable, buyback is particularly praised: Aave decides to use part of its revenue to buy back its own tokens, which is widely seen as a decisive demonstration of strength; in contrast, competitors invest heavily in liquidity mining, which often leads to high inflation of the protocol's tokens and usually only moderate adoption. In fact, if your favorite protocol does not buy back its own tokens, why would you do so?

Fundamental Season

The buyback program can be perfectly aligned with a broader shift in fundamentals. In the past year, especially in the current market downturn, more and more investors tend to favor protocols with actual income and stable liquidity. Repurchases can support the argument of this 'fundamental season' by reducing the circulating supply and indicating stable returns. However, this view only truly materializes when the protocol achieves substantial income, making Aave's decision more appealing than Arbitrum's decision.

Arguments Against Repurchase

On the other hand, critics of repurchase believe that the mechanism is just 'superficial', only creating exit liquidity for major shareholders, while other strategies can better achieve the same goal.

Investment expansion

Critics argue that using the national treasury funds for buybacks will divert capital from more effective pursuits—expanding product supply, increasing the liquidity of different assets (i.e., buying $BTC instead of native tokens), allocating national treasury assets to DeFi for high yields, or establishing strategic partnerships. These measures are generally seen as bringing more tangible long-term benefits, enhancing the protocol's market position, and providing a more solid foundation for its 'buyback' or future improvements to its tokenomics.

Cryptocurrency is not traditional finance

Although buybacks are common in the stock market—companies often use extra cash or cheap debt to repurchase undervalued stocks—cryptocurrency projects have a different dynamic.

Tokens are typically locked up by founders and early investors, so buybacks may ultimately absorb tokens, while insiders cash out, nullifying their impact. Additionally, the continuous change in token ownership may dilute any buyback effect, and significant announcements about token buybacks sometimes only signal selling points to insiders, providing little value to long-term holders.

There are better alternatives

Some opponents suggest bypassing the open market repurchase entirely and seeking other mechanisms to increase token prices.

• Purchase Unallocated Supply: CT anon Giver suggests using the treasury fund to buy unallocated allocations from early investors and then removing these tokens from circulation. This strategy will reduce insider trading in the open market and reduce overall unallocated supply. Investors will benefit, and the open market will be spared from its price impact.
• veTokenomics: Others, such as fiddy (a researcher at Lido Finance who previously worked at Curve Finance), advocate for token locking mechanisms, such as veModel, to reward users for locking tokens to establish long-term governance and liquidity. However, when looking at the price performance of veTokens such as $CRV or $CVX, the results of this system are mixed.

When does buyback make sense

Overall, through these analyses of the pros and cons of repurchasing, we can clearly see when repurchasing can become part of the token economics of a protocol. When the entire token supply is in circulation or fully owned, repurchasing can act similarly to share buybacks, striving to set a price floor and accumulate "undervalued" shares. Within this framework, projects like Jupiter and Hyperliquid have a unique advantage due to the lack of external funding, meaning they have tokens without VC ownership that can be unlocked. Therefore, considering these projects' control over the supply and market maturity, their implementation of repurchasing holds different implications.

At the same time, once the project has established a solid competitive advantage and covered growth channels - expanding the product line or exploring new markets - moderate repurchase can become a way to return capital to token holders. If timed properly and not too early, it can enhance market confidence and consolidate the protocol's position (if it has enough revenue and dominance to formulate influential repurchase plans).