When people start talking about fundamentals again: How crypto will make income great again

The future direction of the industry may only be gradually reached through frank dialogue among all parties.

This article is compiled from the article "Make revenue great again" by Joel John, a columnist of Decentralised.co. At a time when the crypto market is turning from frenzy speculation to rational return, this article focuses on the core contradiction of the token economy-should tokens support value through real income? Is the team obliged to strengthen the utility of tokens through repurchase? The article conducts in-depth analysis from multiple dimensions such as market cycles, business models, and technological evolution, revealing the challenges and opportunities of the current crypto ecology.

ChainCatcher compiled and sorted without changing the original meaning. When people start to discuss the fundamentals again, you know how bad the market situation is. This article raises a core issue: Should crypto projects obtain operating income through tokens? If the answer is yes, then is the team obliged to start a token repurchase mechanism? Like many complex issues, there is no standard answer-the future direction of the industry may only be gradually reached through frank dialogue among all parties.

Life is nothing more than a game of capitalism.

This article is inspired by a series of conversations with Ganesh of Covalent, exploring the cyclicality of revenue, the evolution of business models, and whether protocol treasuries should make token buybacks a strategic priority. This is a supplement to Tuesday's article "The Death of Stagnation in the Crypto World".

Private capital markets (such as venture capital) always swing between excess liquidity and scarcity. When asset liquidity increases and external capital pours in, market enthusiasm pushes up prices. Observing the market performance of newly listed stocks or initial tokens can confirm this law - liquidity expansion directly pushes up asset valuations, while stimulating investors to increase risk appetite and giving birth to a new batch of startups. When the underlying assets (such as ETH, SOL) continue to appreciate, profit-seeking capital will migrate to earlier projects, trying to surpass the benchmark yield by betting on innovative targets. This capital migration itself constitutes the underlying driving force of industry innovation.

This is a mechanism, not a loophole.

The liquidity cycle of the crypto market is closely related to the Bitcoin halving. Historically, a market rebound will occur within six months after the Bitcoin halving. In 2024, ETF inflows and Michael Saylor (MicroStrategy CEO) buying became a "demand black hole" for Bitcoin. Saylor alone spent $22.1 billion on Bitcoin last year. But the surge in Bitcoin prices did not drive up the long-tail small-cap tokens.

We are in an era where fund allocators are facing tight liquidity, their attention is scattered among thousands of assets, and founders who have built a token ecosystem for many years have difficulty finding the meaning of their efforts. Who will bother to develop valuable applications when the returns from issuing Meme coins are higher? In previous cycles, L2 tokens received a valuation premium due to exchange listings and VC endorsements. But as more players enter the market, this premium is being wiped out.

As a result, the valuation of tokens held by L2 has declined, limiting their ability to subsidize small products through grants or token revenue. Excessive valuations force founders to ask an eternal economic proposition-where does the income come from?

Transactions First

The above figure clearly shows the typical revenue model of the crypto industry. For most products, the ideal state is like Aave and Uniswap. Whether benefiting from the "Lindy effect" (the longer something has been around, the more likely it will continue to exist in the future) or first-mover advantage, both products have continued to generate revenue for many years. Uniswap can even generate revenue through front-end fees, which reflects the solidification of user habits - now Uniswap has become the "Google" of decentralized exchanges.

In contrast, FriendTech and OpenSea's revenue is only quarterly. The cycle of the NFT craze lasts about two quarters, while Social-Fi speculation lasts only two months. Speculative income still makes sense if the revenue scale is large enough and consistent with the product goals. Many meme coin trading platforms have entered the "$100 million + fee club", which is the best result that founders can expect through tokens or mergers and acquisitions, but for most people, such success is often out of reach.

Instead of developing consumer applications, they focus on infrastructure - the revenue logic here is completely different.

From 2018 to 2021, VCs invested heavily in developer tools, hoping that developers would bring in a large number of users. But by 2024, the ecosystem will undergo two major changes:

Smart contracts have unlimited scalability and do not require human intervention: the size of the Uniswap or OpenSea team does not need to expand with the growth of transaction volume.

The progress of LLM and AI has reduced the dependence on crypto developer tools: this track is facing a revaluation.

Web2's API subscription model relies on a large number of online users, while Web3 is still a niche market, and few applications have reached a scale of millions of users. The advantage of Web3 lies in the high user revenue contribution rate: crypto users invest more frequently due to the characteristics of blockchain. In the next 18 months, most projects need to adjust their business models and obtain revenue directly from user transaction fees.

This idea is not new. Stripe initially charged by API call, and Shopify adopted a subscription system. Later, both switched to revenue sharing. For Web3 infrastructure providers, this means grabbing the market through low-price strategies-even providing services for free until a certain transaction volume is reached, and then negotiating the share ratio. This is an idealized assumption.

Take the actual operation of Polymarket as an example: the core function of the UMA protocol token is dispute arbitration, and the number of dispute events is positively correlated with the demand for tokens. If a transaction-sharing mechanism is introduced, 0.10% of each disputed deposit can be used as a protocol fee. Based on a $1 billion presidential election bet, UMA can earn $1 million in direct revenue. Ideally, UMA can use the revenue to buy back and destroy tokens, but this has pros and cons.

MetaMask is another example. Its built-in exchange function has processed about $36 billion in transaction volume, and this alone has revenue of more than $300 million. Similar logic applies to staking service providers such as Luganode - fees are linked to the size of the staked assets.

But if the demand for API calls continues to weaken, why should developers choose a certain infrastructure provider? If revenue sharing is required, why choose a specific oracle? The answer lies in network effects. Infrastructure providers with multi-chain compatibility, millisecond data parsing accuracy, and index response speed leading by three standard deviations will be given priority when new projects are launched - these technical parameters directly determine the migration cost of developers.

Burning out

Linking token value to protocol revenue is not a new trend. Recently, several teams have announced that they will repurchase or destroy tokens in proportion to their revenue, including Sky, Ronin, Jito, Kaito, and Gearbox.

Token repurchases imitate stock repurchases in the US stock market, and their essence is to return value to shareholders (here, token holders) without violating securities laws. In 2024, the scale of US stock repurchases reached $790 billion, far exceeding the $170 billion in 2000. Before 1982, stock repurchases were considered illegal. Apple alone has spent $800 billion on stock repurchases in the past decade. Whether the trend can continue or not, the market has clearly divided: tokens with cash flow and willingness to invest in their own value and tokens with neither.

For early protocols or dApps, using revenue to repurchase tokens may not be the best use of their funds. One feasible solution is to allocate enough funds to offset the dilution caused by the issuance of additional tokens. The founder of Kaito recently explained its repurchase strategy: the centralized company obtains cash flow through corporate customers and uses part of the funds to repurchase tokens through market makers, with the repurchase volume twice that of new tokens, thereby achieving deflation.

Ronin takes a different approach: the blockchain adjusts fees based on the number of transactions per block. During peak periods, a portion of network fees is transferred to the treasury to control asset supply rather than directly repurchase. In both cases, the founders designed mechanisms to tie value to economic activity.

In the future, we will analyze in depth the impact of such operations on token prices and on-chain behavior. But what is visible now is that with valuation suppression and less VC funding in the crypto space, more teams will compete for marginal capital inflows.

Since blockchain is essentially a funding track, most teams will switch to a transaction volume sharing model. If the project is tokenized, the team can implement a "buy back and burn" mechanism. Well-executed projects will win in the liquid market, but this requires the risk of buying back during the valuation bubble. The truth can only be seen in hindsight.

Of course, one day, the discussion of price, earnings, and revenue will become obsolete again - people will throw money at Doge again and snap up the Bored Ape NFT. But for now, founders worried about survival have begun to have a conversation around revenue and burn.

Create value for shareholders, Joel John.