Make Income Great Again

Original Article Title: Make Revenue Great Again
Original Article Author: Decentralised.Co

Translation Credit: Block unicorn

This article is inspired by a series of conversations with Ganesh Swami, covering the seasonality of revenue, the evolution of business models, and whether token buybacks are the best use of protocol capital. This is a follow-up to my previous article on the cryptocurrency stagnation.

The private capital markets like venture capital swing between liquidity abundance and scarcity. When these assets become liquid and external capital flows in, market frenzy drives up prices. Think of a newly launched IPO or token issuance. The newfound liquidity exposes investors to more risk, which in turn fuels the birth of a new generation of companies. As asset prices rise, investors seek to move funds into early-stage applications, hoping for higher returns than benchmarks like ETH and SOL. This is a feature, not a bug.

Cryptocurrency liquidity follows a cyclical pattern similar to Bitcoin halving events. Historically, market rebounds have occurred within six months after Bitcoin halving. In 2024, ETF inflows and Saylor's purchases became the absorber of Bitcoin's supply. Saylor alone spent $22.1 billion buying Bitcoin last year. However, last year's Bitcoin price surge did not translate into a rebound for small altcoins.

We are witnessing an era where capital allocators face liquidity constraints, attention is scattered across thousands of assets, and founders who have been toiling on tokens for years struggle to find meaning in it. Why would anyone bother building a real application when launching meme assets can yield more financial returns? In previous cycles, L2 tokens enjoyed premiums due to listings on trading platforms and venture capital support, driven by perceived value. But as more participants enter the market, this perception (and its valuation premium) is fading.

As a result, the valuations of L2-owned tokens are decreasing, limiting their ability to fund small products through grants or token-based revenue subsidies. This valuation excess in turn forces founders to pose an age-old question that plagues all economic activities — where does revenue come from?

So Transactional

The diagram above nicely explains the typical operation of cryptocurrency revenue. For most products, the ideal state is akin to AAVE and Uniswap. Thanks to the Lindy Effect or first-mover advantage, these two products have maintained fees over the years. Uniswap can even increase frontend fees and generate revenue. This indicates the level of consumer preference definition. Uniswap to decentralized exchanges is like Google to search.

In contrast, the revenue of friendtech and OpenSea is seasonal. During the NFT summer, the market cycle lasted for two quarters, while social finance speculation only lasted for two months. If the scale of revenue is large enough and aligned with product intent, speculative revenue for a product makes sense. Many Meme trading platforms have joined the over $1 billion fee club. The scale of this number is what most founders can hope for at best through a token or acquisition. But for most founders, this kind of success is rare. They are not building consumer apps; they are focused on infrastructure, where revenue dynamics are different.

Between 2018 and 2021, venture capital heavily funded developer tools, hoping developers would attract a large user base. However, by 2024, the ecosystem underwent two significant changes. First, smart contracts achieved unlimited scalability with minimal human intervention. Uniswap or OpenSea don't need to scale their team proportionally to transaction volume. Second, advances in LLM and AI reduced the investment demand for cryptocurrency developer tools. Therefore, as a category, it is at a reckoning moment.

In Web2, the API-based subscription model was effective because of the massive online user base. However, Web3 is a smaller niche market, with few apps reaching millions of users. Our advantage is the high-income metrics of each user. The average cryptocurrency user tends to spend more money at a higher frequency because blockchain enables you to do so—they make fund flows possible. Therefore, over the next 18 months, most businesses will have to redesign their business models to directly capture revenue in the form of transaction fees from users.

This is not a new concept. Stripe initially charged per API call, Shopify took fixed fees for subscriptions, and later both shifted to revenue-based fees. For infrastructure providers, this model's transition in Web3 is quite straightforward. They will compete in API feasibility by undercutting prices—one might even offer the product for free before a certain transaction volume and then negotiate revenue sharing. This is the idealized hypothetical scenario.

What will this look like in practice? An example is Polymarket. Currently, the UMA protocol's tokens are used for dispute resolution, with tokens tied to disputes. The more markets, the higher the probability of disputes. This drives demand for the UMA token. In the transaction model, the required collateral can be a small fraction of the total bet amount, like 0.10%. For example, a $1 billion bet on a presidential election result would bring in $1 million in revenue for UMA. In the assumed scenario, UMA can use this revenue to buy and burn their tokens. This approach has its benefits and challenges, and we will see them soon.

Another participant doing so is MetaMask. The transaction volume handled through its embedded swap feature is approximately $360 billion. The exchange revenue alone exceeded $3 billion. A similar pattern applies to staking providers like Luganode, where fees are based on the staked asset amount.

But in a market where API call costs are increasingly dropping, why would a developer choose one infrastructure provider over another? If revenue sharing is required, why would one choose an oracle over another? The answer lies in network effects. A data provider that supports multiple blockchains, offers unparalleled data granularity, and can index data from new chains more quickly will become the preferred choice for new products. The same logic applies to transaction categories such as intention or gasless swaps. The more chains supported, the lower the profit margin, the faster the speed, the higher the likelihood of attracting new products, as this marginal efficiency helps retain users.

Full Burn

The shift to pegging token value to protocol revenue is not new. In recent weeks, several teams have announced mechanisms to buy back or burn tokens proportionally based on revenue. Notable among these are SkyEcosystem, Ronin Network, Jito SOL, Kaito AI, and Gearbox Protocol. Token buybacks are similar to stock buybacks in the U.S. stock market—essentially a way to return value to shareholders (or in this case, token holders) without violating securities laws. In 2024, the U.S. market alone had around $790 billion for stock buybacks, compared to $170 billion in 2000. Whether these trends will continue remains to be seen, but we are witnessing a clear market divide, with one side being tokens with cash flow willing to invest in their own value and the other side being tokens with neither.

For most early protocols or dApps, using revenue to buy back their own tokens may not be the best use of capital. One way to execute such an operation is by allocating sufficient capital to offset the dilution brought by newly issued tokens. This is how the Kaito founder recently explained their token buyback approach. Kaito is a centralized company that incentivizes its user base with tokens. The company receives centralized cash flow from its enterprise clients. They use a portion of the cash flow to execute buybacks through a market maker. The amount purchased is double the newly issued tokens, effectively making the network deflationary.

Ronin, on the other hand, takes a different approach. The blockchain adjusts fees based on the transaction volume of each block. During peak usage, a portion of the network fees goes into Ronin's treasury. This is a method to control asset supply without necessarily buying back the token itself. In both cases, founders have designed mechanisms to peg value to network economic activity.

In future articles, we will delve into the impact of these operations on the price and on-chain behavior of tokens participating in such activities. However, it is currently evident that as valuations are suppressed, the amount of venture capital flowing into cryptocurrency is decreasing, and more teams will have to compete for the marginal funds flowing into our ecosystem. As blockchain is fundamentally a money track, most teams will shift to a transaction-fee-based model. In such a scenario, if teams are tokenized, they will be incentivized to adopt a buyback and burn model. Teams that excel in this aspect will emerge as winners in the liquidity market.

Of course, one day, all these discussions about price, returns, and revenue will become irrelevant. We will once again spend money on dog pictures and purchase monkey NFTs. However, looking at the current market situation, most founders worried about survival have already begun discussions around revenue and burn.

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