Do Token Buybacks Make Sense?

Aave recently announced a new tokenomics overhaul featuring buybacks, and it’s not the only project out there making this move. 

Since Trump won the election, more crypto projects have introduced tokenomics rehauls, whether via revenue share or buybacks, viewing the regulatory climate as more accommodating for such experimentation. Arbitrum is another prominent name adopting a buyback program, signaling a shift toward implementing TradFi techniques as crypto projects attempt to boost their bottom line and better control their token supply.

With these tokenomic overhauls, chatter has erupted on X about whether or not buybacks are the right approach for strengthening digital assets. Opponents dismiss buyback-and-burn as an outdated, finite solution from TradFi, whereas supporters tout it as a direct demonstration of product-market fit and market dominance. 

Below, we explore both sides of the debate, consider the pitfalls of applying TradFi practices to our nascent market, and highlight some proposed alternatives to token buybacks 👇

The Case for Token Buybacks

Many protocols and users see buybacks as direct signals of long-term alignment, revenue stability, and growth potential, so let’s look at the main arguments supporting the practice.

💰 Confidence in Product-Market Fit

Those supporting token buybacks argue that these programs reflect a commitment to sustainability and revenue growth. By repurchasing tokens, teams signal faith in their protocol’s moat and long-term prospects, which can bolster market confidence and position the protocol as the primary owner of its token, potentially granting it more control over price dynamics.

Buybacks are especially lauded when the protocol is already profitable: Aave’s decision to funnel part of its revenue into purchasing its own tokens is widely seen as a decisive show of strength, in contrast to competitors that spend heavily on liquidity mining, which typically proves to be highly inflationary for a protocol’s token and usually only nets modest adoption. Indeed, if your favorite protocol isn’t buying its own token, why would you?

☀️ Season of Fundamentals

Buyback programs can dovetail neatly with a broader pivot to fundamentals. Over the past year and especially now amid the market’s downturn, more investors have gravitated toward protocols with real revenue and stable liquidity. A buyback can buttress this “fundamentals season” narrative by shrinking the circulating supply and indicating steady earnings. Once again, though, this perception only really comes when a protocol has achieved substantial revenue, making Aave’s decision more attractive than Arbitrum’s in this case.

The Argument Against Buybacks

On the other hand, buyback critics argue that the mechanism proves “cosmetic” and can simply create exit liquidity for large holders and that other tactics better accomplish the same goal.

💸 Invest in Expansion

Critics argue that allocating treasury funds to buybacks diverts capital from more productive pursuits — expanding product offerings, increasing liquidity across diverse assets (i.e., buying $BTC instead of a native token), allocating treasury assets to DeFi for high yields, or forging strategic partnerships. These initiatives are often seen as delivering more tangible, long-term benefits that bolster a protocol’s market standing and provide it a more substantial basis to do “buybacks” or revamp its tokenomics in the future. 

🙅‍♂️ Crypto is Not TradFi

Although buybacks are common in equities — where companies often use extra cash or cheap debt to repurchase undervalued shares — crypto projects come with different dynamics. 

Tokens frequently remain locked up for founders and early investors, so a buyback can end up absorbing tokens, and at the same time, insiders cash out, zeroing out its effect. Additionally, the constant vesting of tokens can undermine the impact of any buyback, while big announcements about token repurchases sometimes serve merely to signal a sell-off point for insiders, providing minimal value to long-term holders.

🤔 Better Alternatives Exist

Some opponents recommend bypassing open-market repurchases altogether and looking to other mechanisms to provide a lift to the token price. 

• Buying Unvested Supply: CT anon Giver suggests using treasury funds to buy out unvested allocations from early investors, then remove those tokens from circulation. This strategy would mitigate insider selling in public markets and reduce the overall vesting supply in one fell swoop. Investors would receive returns while the public market would be spared their price. 
• veTokenomics: Others, like fiddy (a researcher at Lido Finance and formerly of Curve Finance), advocate token lock mechanisms, like the veModel, which reward users for locking up tokens to build long-term governance and liquidity. This system comes with mixed results, though, when looking at veTokens like $CRV or $CVX’s price performance. 

When Buybacks Make Sense

Overall, from these analyses of the pros and cons of buybacks, a picture becomes clear of when buybacks may serve to be a part of a protocol’s tokenomics. When the entire token supply is in circulation or entirely vested, buybacks can function similarly to an equity buyback, working to establish a floor for price and amass “undervalued” shares. Through this framework, Projects like Jupiter and Hyperliquid have a unique edge given their lack of outside funding, meaning they have no VC-vested tokens to unlock. Thus, these projects instituting buybacks have different implications, given their control over their supply as well as their market maturity. 

In parallel, once a project has established a solid competitive edge and covered growth avenues — expanding product lines or exploring new markets — a measured buyback can serve as a way to return capital to token holders. If timed well and not coming premature, it can boost market confidence and reinforce the protocol’s standing if it has the revenue and dominance to develop an impactful buyback program.