How do crypto protocols handle revenue and cash flow?

I recently looked at stablecoin supply as a measure of liquidity, combined with the number of tokens in the market, in an attempt to figure out the liquidity of each asset. As expected, liquidity eventually approaches zero, and the chart drawn from the analysis is a work of art.

In March 2021, each cryptocurrency will enjoy about $1.8 million worth of stablecoin liquidity, while by March 2025, this figure will be only $5,500.

As a project, you have to compete with 40 million other tokens for the attention of users and investors, and this number was only 5 million three years ago. So how do you retain token holders? You can try to build a community, let members say "GM" on Discord, and do some airdrops.

But then what? Once they get the tokens, they will move to the next Discord group to say "GM".

Community members will not stay for no reason, you have to give them a reason. In my opinion, a high-quality product with actual cash flow is the reason, or, it makes the project data look good.

Russ Hanneman Syndrome

In the American TV series "Silicon Valley", Russ Hanneman once boasted that he would become a billionaire by "moving the radio to the Internet". In the crypto field, everyone wants to be Russ, chasing overnight wealth, but not worrying about business fundamentals, building moats, and obtaining sustainable income. These "boring" but practical issues.

Joel's recent articles "Death to Stagnation" and "Make Revenue Great Again" emphasize the urgent need for crypto projects to focus on sustainable value creation. Just like the impressive scene in the show, Russ Hanneman dismissed Richard Hendricks' concerns about building a sustainable revenue model. Many crypto projects also rely on speculative narratives and investor enthusiasm. Now it seems that this strategy is obviously unsustainable.

But unlike Russ, founders can’t just shout “Tres Comas” (Russ’s phrase for showing off his wealth in the show) to make the project successful. Most projects need sustainable income, and to achieve this, we first need to understand how the current projects with income do it.

Zero-sum game of attention

In traditional markets, regulators maintain liquidity of tradable stocks by setting high barriers to listing. There are 359 million companies in the world, and only about 55,000 are publicly listed, accounting for only about 0.01%. The benefit of this is that most of the available funds are concentrated in a limited range. But it also means that investors have fewer opportunities to bet on companies early and chase high returns.

The price of all tokens being easily traded publicly is the scattered attention and liquidity. I am not here to judge which model is better, just to simply show the difference between the two worlds.

The question is, how to stand out in the seemingly endless sea of tokens? One way is to show that the project you are building has demand and let token holders participate in the growth of the project. Don't get me wrong, not every project has to be equally obsessed with maximizing revenue and profits.

Revenue is not the goal, but the means to achieve long-term vitality.

For example, an L1 that hosts enough applications only needs to earn enough fees to offset token inflation. Ethereum's validator yield is about 3.5%, which means that its token supply will increase by 3.5% every year. Any holder who stakes ETH for income will have their tokens diluted. But if Ethereum destroys the same amount of tokens through the fee burning mechanism, then the ETH of ordinary holders will not be diluted.

Ethereum, as a project, does not need to be profitable because it already has a thriving ecosystem. As long as validators can earn enough income to keep the nodes running, Ethereum can have no problem without additional income. But this is not the case for projects with a token circulation rate (the proportion of circulating tokens) of about 20%. These projects are more like traditional companies and may take time to reach a state where there are enough volunteers to keep the project running.

Founders must face the reality that Russ Hanneman ignored. It is crucial to generate real and continuous income. It should be noted that in this article, whenever I mention "revenue", I actually mean free cash flow (FCF), because for most crypto projects, the data behind revenue is difficult to obtain.

Understanding how to allocate FCF, such as when to reinvest it for growth, when to share it with token holders, and the best way to allocate it (such as buybacks or dividends), these decisions may determine the success or failure of founders who aim to create lasting value.

It is helpful to refer to the equity market to make these decisions effectively. Traditional companies often allocate FCF through dividends and buybacks. Factors such as company maturity, industry, profitability, growth potential, market conditions, and shareholder expectations all influence these decisions.

Different crypto projects naturally have different opportunities and limitations in value redistribution based on their life cycle stage. I will describe them in detail below.

Crypto Project Lifecycle

(I) Explorer Phase

Early crypto projects are usually in the experimental stage, focusing on attracting users and polishing core products rather than aggressively pursuing profitability. The fit between product and market is still unclear, and ideally, these projects prioritize reinvestment to maximize long-term growth rather than revenue sharing plans.

The governance of such projects is usually centralized, with the founding team in charge of upgrades and strategic decisions. The ecosystem is still budding, network effects are weak, and user retention is a major challenge. Many of these projects rely on token incentives, venture capital, or grants to maintain initial user guidance rather than organic demand.

While some projects may achieve early success in a niche market, they still need to prove whether their model is sustainable. Most crypto startups fall into this category, and only a small number can break through.

These projects are still looking for product-market fit, and their revenue models highlight their difficulties in maintaining sustained growth. Projects like Synthetix and Balancer have seen a sharp surge in revenue followed by a significant decline, indicating that they have a period of speculative activity rather than steady market acceptance.

(II) Climbers

Projects that have passed the early stages but have not yet taken the leading position belong to the growth category. These protocols can generate significant revenue, between $10 million and $50 million per year. However, they are still in the growth stage, the governance structure is constantly evolving, and reinvestment remains a priority. Although some projects consider revenue sharing mechanisms, a balance must be found between profit distribution and continued expansion.

The above chart records the weekly revenue of crypto projects in the climber stage. These protocols have gained some traction but are still in the process of consolidating their long-term position. Unlike the early explorer stage, these projects have obvious revenue, but the growth trajectory is still unstable.

Projects like Curve and Arbitrum One have relatively stable revenue streams with obvious peaks and troughs, indicating fluctuations due to market cycles and incentives. OP Mainnet also shows a similar trend, with surges indicating a period of strong demand, followed by a slowdown. Meanwhile, Usual's revenue is growing exponentially, indicating rapid adoption, but there is a lack of historical data to confirm whether this growth is sustainable. Pendle and Layer3 saw a sharp spike in activity, indicating that this is a time of high user engagement, but also reveals the challenges of maintaining momentum in the long term.

Many L2 scaling solutions (such as Optimism, Arbitrum), decentralized financial platforms (such as GMX, Lido), and emerging L1s (such as Avalanche, Sui) fall into this category. According to Token Terminal, only 29 projects currently have annual revenue exceeding $10 million, but the actual number may be slightly higher. These projects are at a turning point, and those that consolidate network effects and user retention will enter the next stage, while others may stagnate or decline.

For climbers, the path forward lies in reducing reliance on incentives, strengthening network effects, and proving that revenue growth can be sustained without a sudden reversal.

(III) Giant stage

Mature protocols such as Uniswap, Aave, and Hyperliquid are in the growth and maturity stage. They have achieved product-market fit and can generate a lot of cash flow. These projects are well-positioned to implement structured buybacks or dividends, which enhance trust among token holders and ensure long-term sustainability. Their governance is decentralized, and the community is actively involved in upgrades and treasury decisions.

Network effects create a competitive moat, making them difficult to displace. Currently, only a few dozen projects have achieved this level of revenue, which means that very few protocols have truly reached maturity. Unlike early or growth stage projects, these protocols do not rely on inflationary token incentives, but instead earn sustainable revenue through transaction fees, lending interest, or staking commissions. Their ability to withstand market cycles further distinguishes them from speculative projects.

Unlike early or growth stage projects, these protocols demonstrate strong network effects, a solid user base, and deeper market roots.

Ethereum leads in decentralized revenue generation, showing cyclical peaks that coincide with periods of high network activity. The revenue profile of the two largest stablecoins, Tether and Circle, is different, with more stable and structured revenue streams rather than large fluctuations. Solana and Ethena, while generating significant revenue, still have clear cycles of growth and decline, reflecting their changing adoption status.

Meanwhile, Sky's revenue is more volatile, suggesting that demand is more volatile rather than consistently dominant.

While the giants stand out in terms of scale, they are not immune to volatility. The difference lies in their ability to cope with downturns and maintain revenue over the long term.

(IV) Seasonal projects

Some projects experience rapid but unsustainable growth due to hype, incentives, or social trends. Projects like FriendTech and memecoin may generate huge revenues during peak cycles but have difficulty retaining users over the long term. Premature revenue sharing plans can exacerbate volatility because speculative capital will quickly withdraw once incentives dry up. They often have weak or centralized governance, thin ecosystems, and limited adoption of decentralized applications or insufficient long-term utility.

While these projects may temporarily achieve extremely high valuations, they are prone to collapse once market sentiment changes, leaving investors disappointed. Many speculative platforms rely on unsustainable token issuance, fake transactions, or inflated yields to create artificial demand. While some projects are able to escape this stage, most are unable to establish a lasting business model and are inherently high-risk investments.

Profit Sharing Models of Public Companies

We can learn more by observing how public companies handle surplus profits.

This chart shows how profit sharing behavior of traditional companies evolves as they mature. Young companies face high financial losses (66%) and tend to retain profits for reinvestment rather than distribute dividends (18%) or make stock buybacks (28%). As companies mature, profitability generally stabilizes, and dividend payments and buybacks increase accordingly. Mature companies frequently distribute profits, and dividends (78%) and buybacks (82%) become common.

These trends echo the life cycle of crypto projects. Like young traditional companies, early crypto "explorers" often focus on reinvesting to find product-market fit. In contrast, mature crypto "giants" are like old and stable traditional companies, with the ability to distribute income through token buybacks or dividends, enhancing investor confidence and the long-term viability of the project.

The relationship between company age and profit sharing strategy naturally extends to practices in specific industries. While young companies generally prioritize reinvestment, mature companies adjust their strategies based on the characteristics of their industry. Industries with stable, rich cash flows tend to favor predictable dividends, while industries characterized by innovation and volatility prefer the flexibility afforded by stock buybacks. Understanding these nuances can help crypto project founders effectively adjust their revenue distribution strategies to match the project's life cycle stage and industry characteristics with investor expectations.

The chart below highlights the unique profit distribution strategies of different industries. Traditional, stable industries like utilities (80% of companies pay dividends, 21% do buybacks) and consumer staples (72% of companies pay dividends, 22% do buybacks) strongly favor dividends due to their predictable revenue streams. In contrast, technology-focused industries such as information technology (27% do buybacks, with the highest percentage of cash returned through buybacks, 58%) tend to favor buybacks to provide flexibility when revenue fluctuates.

These have direct implications for crypto projects. Protocols with stable, predictable revenue, such as stablecoin providers or mature DeFi platforms, may be best suited to adopt a continuous dividend-like payment method. Instead, high-growth, innovation-focused crypto projects, especially those in the DeFi and infrastructure layers, can adopt flexible token repurchase approaches, emulating strategies from the traditional tech industry to adapt to volatile and rapidly changing market conditions.

Dividends vs. Buybacks

Each approach has its pros and cons, but buybacks have become more popular than dividends lately. Buybacks are more flexible, while dividends are sticky. Once you declare a dividend of X%, investors expect you to do it every quarter. So buybacks give companies room to be strategic: not only in how much profit they return, but also when they return it, allowing them to adapt to market cycles without being constrained by a rigid dividend payment schedule. Buybacks don't set fixed expectations like dividends do, and are seen as a one-time effort.

But buybacks are a form of wealth transfer, and a zero-sum game. Dividends create value for every shareholder, so there's room for both.

Recent trends show that buybacks are becoming more popular for the reasons mentioned above.

In the early 1990s, only about 20% of profits were distributed through buybacks. By 2024, about 60% of profit distributions were distributed through buybacks. In dollar terms, buybacks surpassed dividends in 1999 and have been ahead ever since.

From a governance perspective, buybacks require careful valuation assessments to avoid inadvertently transferring wealth from long-term shareholders to those who sell when valuations are high. When a company buys back its shares, it (ideally) believes that the stock is undervalued. Investors who choose to sell their shares believe that the stock price is overvalued. Both views cannot be correct at the same time. Companies are often believed to know their plans better than shareholders, so those who sell their shares during buybacks may miss out on higher profits.

According to a Harvard Law School paper, current disclosure practices often lack timeliness, making it difficult for shareholders to assess the progress of buybacks and maintain their shareholdings. In addition, buybacks may affect executive compensation when compensation is linked to metrics such as earnings per share, which may encourage executives to prioritize short-term stock performance rather than the company's long-term growth.

Despite these governance challenges, buybacks remain attractive to many companies, especially US technology companies, due to their operational flexibility, investment decision autonomy, and lower future expectations compared to dividends.

Revenue Generation and Distribution in Cryptocurrency

According to Token Terminal, there are 27 projects in the crypto space that generate $1 million in revenue per month. This is not comprehensive because it leaves out projects like PumpFun, BullX, etc. But I think it's not far off. I studied 10 of these projects and observed how they handle revenue. The point is that most crypto projects should not even consider distributing revenue or profits to token holders. In this regard, I admire Jupiter. When they announced the token, they made it clear that they had no intention of sharing direct revenue (such as dividends) at that stage. Only after the number of users grew more than tenfold did Jupiter initiate a buyback-like mechanism to distribute value to token holders.

Revenue Sharing in Crypto Projects

Crypto projects must rethink how to share value with token holders, both drawing inspiration from traditional corporate practices and adopting unique methods to circumvent regulatory scrutiny. Unlike stocks, tokens provide innovative opportunities that are directly integrated into the product ecosystem. Instead of simply distributing revenue to token holders, projects actively incentivize key ecosystem activities.

For example, Aave rewards token stakers for providing critical liquidity before launching a buyback. Similarly, Hyperliquid strategically shares 46% of revenue with liquidity providers, similar to traditional consumer loyalty models in established businesses.

In addition to these token-integrated strategies, some projects take a more direct revenue-sharing approach reminiscent of traditional public equity practices. However, even direct revenue-sharing models must be carefully operated to avoid classification as securities, balancing rewarding token holders with regulatory compliance. Projects based outside the United States, like Hyperliquid, often have more room to maneuver when adopting revenue-sharing practices.

Jupiter is an example of a more creative value-sharing approach. Instead of conducting a traditional buyback, they utilize a third-party entity, Litterbox Trust, which is coded to receive JUP tokens in an amount equal to half of Jupiter's protocol revenue. As of March 26, it has accumulated about 18 million JUP, worth about $9.7 million. This mechanism ties token holders directly to the success of the project while circumventing the regulatory issues associated with traditional buybacks.

Keep in mind that Jupiter embarked on a path of returning value to token holders only after having a robust stablecoin treasury that would sustain the project for many years.

The rationale for allocating 50% of revenue to this accumulation program is simple. Jupiter follows a guiding principle of balancing ownership between the team and the community, promoting clear alignment and shared incentives. This approach also encourages token holders to actively promote the protocol, directly tying their financial interests to the growth and success of the product.

Aave also recently launched a token buyback after a structured governance process. The protocol, which has a healthy treasury of over $95 million (excluding its own token holdings), launched the buyback program after a detailed governance proposal in early 2025. The program, called “Buy & Distribute,” allocates $1 million per week for buybacks and follows extensive community discussions around token economics, treasury management, and token price stability. Aave’s treasury growth and financial strength allow it to launch this initiative without affecting its operational capabilities.

Hyperliquid uses 54% of revenue to buy back HYPE tokens, and the remaining 46% is used to incentivize liquidity on the exchange. The buybacks are conducted through the Hyperliquid Assistance Fund. Since the launch of the program, the Assistance Fund has purchased over 18 million HYPE. As of March 26, the value is over $250 million.

Hyperliquid stands out as a special case, with a team that shunned venture capital, likely self-funded development, and now uses 100% of revenue to reward liquidity providers or buy back tokens. It may not be easy for other teams to replicate this. But both Jupiter and Aave exemplify one key aspect: they are financially strong enough to conduct token buybacks without affecting core operations, reflecting rigorous financial management and strategic vision. This is something every project can emulate. Have sufficient funds in reserve before launching a buyback or dividend.

Tokens as a Product

Kyle makes a great point that crypto projects need to have an Investor Relations (IR) position. For an industry built on transparency, it’s ironic that crypto projects fare poorly in terms of operational transparency. Most external communication is via sporadic Discord announcements or Twitter posts, financial metrics are selectively shared, and expense expenditures are mostly opaque.

When token prices continue to fall, users quickly lose interest in the underlying product unless it has built a strong moat. This creates a vicious cycle: falling prices lead to waning interest, which drives prices down further. Projects need to give token holders good reasons to stick around and non-holders reasons to buy.

Clear, consistent communication about development progress and funding can itself be a competitive advantage in today’s market.

In traditional markets, investor relations (IR) departments bridge the gap between companies and investors through regular earnings releases, analyst calls, and guidance. The crypto industry can learn from this model while leveraging its unique technological advantages. Regular quarterly reporting of revenue, operating costs, and development milestones, combined with on-chain verification of treasury flows and buybacks, will greatly enhance stakeholder confidence.

The biggest transparency gap is in spending. Publicizing team salaries, expense breakdowns, and grant allocations preemptively answers questions that only arise when a project collapses: “Where did all the ICO money go?” and “How much did the founders pay themselves?”

Strong IR practices provide strategic benefits beyond transparency. They reduce volatility by reducing information asymmetry, expand the investor base by making institutional capital more accessible, foster long-term holders who fully understand operations and can hold on through market cycles, and build community trust that can help projects weather difficult times.

Forward-thinking projects like Kaito, Uniswap Labs, and Sky (formerly MakerDAO) are already moving in this direction, publishing regular transparent reports. As Joel points out in his article, the crypto industry must move away from speculative cycles. By adopting professional IR practices, projects can shed their reputation as “casinos” and become what Kyle envisions as “compounders,” assets that can continue to create value over the long term.

In a market where capital is becoming increasingly discerning, transparent communication will become a prerequisite for survival.