From PumpFun to Hyperliquid: Why is "buyback and burn" superior to "revenue sharing" in terms of value distribution?

Written by: Tim.0x

Compiled by: Yangz, Techub News

About a month ago, Crypto Twitter was filled with discussions about the topic of “revenue,” highlighting its importance in discussing other aspects. At that time, I shared a viewpoint that revenue itself is closely related to all businesses/industries, and we should not discuss it as a “meta” or “trend.” In the traditional financial sector, the success of a startup often depends on its product-market fit (PMF) and revenue, and this should be no different in our industry (the cryptocurrency industry).

Looking at the current hot projects, you will find that those successful protocols with considerable income share some common patterns. In most cases, they either implement buyback plans or adopt revenue-sharing mechanisms to activate and support the economic system of the protocol. At the same time, while some other protocols also use these mechanisms, they have still failed to succeed for various reasons.

So far, some project parties (such as OKX) have implemented buyback and burn strategies, causing token prices to “rise with the tide”; other protocols are following suit and viewing this mechanism as a blueprint for development.

What is a buyback?

In simple terms, buybacks and burns are a mechanism designed in the protocol through smart contracts, where, at a predetermined time, the protocol will repurchase a certain percentage of circulating tokens from the open market, and sometimes send them to an unrecoverable address, making these tokens permanently unable to participate in circulation.

However, not all buybacks are for the purpose of destruction. Sometimes the repurchased tokens are used for distribution to stakers, providing liquidity, or even for user airdrops. The main goal is to reduce the circulating supply of the tokens, and as long as there is market demand for the token, a reduction in circulating supply should correspondingly push up the price of the protocol's tokens.

At the same time, there are many critics who believe that the cryptocurrency industry does not require such mechanisms compared to the operation of traditional finance. However, due to system differences (the concept of circulating supply and other market dynamics), repurchase and destruction are very important for certain protocols based on the initial design of token economics and the current market conditions.

In addition, the protocol often only promotes buyback and burn proposals after the token price has peaked. This is sometimes due to the existence of other proposals, and other times because the protocol is implementing a buyback and burn mechanism that is not suited for a deflationary model, but rather more suitable for an inflationary token.

For example, the design metrics of the Pear protocol on Hyperliquid are as follows:

Token Supply: 930 million PEAR tokens

Maximum supply: 1 billion PEAR tokens

The agreement adopts a revenue-sharing mechanism, and the income generated by the agreement will be distributed to PEAR stakers. However, in this case, when a large number of tokens are released to the public market after the Token Generation Event (TGE), wealthy individuals can purchase a large amount of PEAR and stake it, thereby obtaining most of the profits. In contrast, participants with less capital also have the opportunity/are encouraged to profit from the revenue (as the distribution is proportional), but even so, the effectiveness of running buyback and burn strategies remains limited, as the background PEAR tokens are concentrated in the hands of a few.

If the Pear protocol considers integrating buybacks and burns, then if the maximum supply is initially set to an inflation model, the likelihood of the strategy being effective will be higher. Therefore, buybacks and burns are effective for specific token designs, while revenue sharing is also effective for certain designs. Of course, this does not mean that these two mechanisms are mutually exclusive within the same protocol.

Where did the “buyback” narrative begin?

The trend of buyback and burn originates from two main tracks, including launch platforms and the currently most关注度的 products in the market.

Launch platform

Undoubtedly, Solana has gained immense attention due to its high trading activity (especially in memecoin trading). Seizing this window of opportunity, PumpFun has ignited the track, paving the way for various launch platforms—these platforms provide opportunities for Meme trading through a bonding curve mechanism.

PumpFun set a record for the highest revenue achieved by a cryptocurrency startup in a short period of time, thus gaining attention and value. However, due to the issuance of the PUMP token, inefficient distribution, and poor sales profits, the rate of loss of attention was far beyond expectations. Therefore, during this period, it introduced the PUMP buyback and burn mechanism in an attempt to create FOMO (fear of missing out) around the token.

This is the first sign that the trend has become a major narrative element.

Next is Raydium Launchlabs, which constitutes the second ring of this model. Raydium daily repurchases RAY tokens from the secondary market through transaction fees (not 100%), but only uses the repurchased RAY for other sustainability activities instead of burning them.

This is the second indicator of the pattern observed in the launch platform, while bonkfun constitutes the third ring. You will find that letsbonk repurchases $BONK tokens from the open market and uses the revenue generated from platform trading activities for destruction.

The repetition of patterns can give rise to certain beliefs. Although such operations may not directly yield the expected results, their continued implementation by mainstream teams creates a sense of normalcy, thereby supporting the view that “buybacks are the best strategy.”

Generally speaking, the herd mentality usually prevails most of the time, even if such behavior may not be reasonable.

The product with the highest market attention currently

Hyperliquid and Kaito are two products worth exploring in this trend.

As of the writing, Hyperliquid has accounted for 77% of the total perpetual contract trading volume over the past 6 months, with annual fee revenue exceeding $1 billion. Due to Hyperliquid's success, many protocols and individuals consider its token distribution and value accumulation model to be the most excellent and are eager to emulate it. Therefore, any protocol that decides to adopt a buyback and burn mechanism will be seen as a positive signal.

The following image is a typical discussion case.

Hyperliquid allocates 93% of its fees for the repurchase of HYPE tokens, with 7% distributed to the HLP treasury. If Hyperliquid can achieve this, it will be widely recognized as a success and is likely to be replicated.

On the other hand, Kaito has changed the marketing model of Crypto Twitter (CT) by launching the InfoFI mechanism aimed at incentivizing project attention and establishing reputation standards.

The most interesting thing is that since the launch of the “social token economy” (yapping), it has quickly dominated various information streams. With the buyback and burn model, its tokens have successfully achieved a shift in attention. Given the deflationary mechanism and high demand for staking tokens, holding KAITO is considered a wise choice - as long as market attention is maintained, the token price will continue to rise.

This is the ultimate model and pattern worth paying attention to against the backdrop of buyback and destruction. Although there is controversy within the industry regarding this, buyback and destruction is not the best solution, but it is at least the “least bad” choice, far better than the profit-sharing model.

Why is repurchase and destruction superior to profit sharing?

From the perspective of public goods and effective value allocation, the industry has yet to meet expectations. The distribution method of community airdrops clearly reflects this — in most cases, the returns individuals receive are lower than the input value during the retrospective allocation process, and complaints are still inevitable during the Token Generation Event (TGE) — this is a typical example of the failure of “effective allocation.”

Although it is impossible to definitively conclude whether buyback and burn or profit sharing can achieve optimized distribution, in fact, the probability of effective value distribution through buyback and burn is much higher than that of profit sharing. This method can compensate for the failures of most projects that attempt to create value for early community contributors.

In the economic model, stakers and investors are taken into consideration, and in most cases, they share the profits. However, this sharing may not sufficiently incentivize their economic contributions. Furthermore, if the same profits also need to be shared with equity investors (e.g., SAFE agreements), the allocation pool for stakers and holders will be significantly diluted, ultimately leading to a failure of even the basic allocation.

This is the core reason why Uniswap will fail as a product rather than a business model (the product itself is successful, but the financial model fails) — its 100% revenue is distributed between liquidity providers and Uniswap Labs (equity investors).

dYdX also faces the same issue: its profits are not distributed to the treasury but flow to private companies. Although dYdX has an existing buyback and burn mechanism, it remains ineffective due to initial distribution problems.

A noteworthy case (most CT users are well aware) is: “Products that clearly do not need tokens still insist on issuing tokens.” This is because most protocols adopt the SAFT + token model, where the product team retains a large portion of the revenue—especially in scenarios with few network participants (stakers, validators, etc.). The most typical example is PumpFun.

The profit-sharing mechanism is like the center of a circle, which may ultimately evolve into vicious competition amid multiple parties vying for it. Not all those eager for profit distribution can truly benefit. However, in the buyback and burn mechanism, regardless of how much value/contribution you create for the protocol, buyback and burn can achieve distribution and diffusion of effects. Investors benefit from deflation, and holders/stakers also benefit, achieving a win-win situation for all parties.

Indicators to pay attention to

A large number of projects will soon implement buyback and burn mechanisms, which may set a precedent for blue-chip projects. Therefore, standards for evaluating these projects need to be established.

Hitesh emphasized the importance of measuring the annual burn rate in the post rather than overly focusing on revenue, but in my opinion, the two are complementary. The possibility of maintaining or even increasing the burn rate depends on revenue, and to some extent, it also depends on treasury funds (if the protocol chooses to buy back for other reasons).

For older projects (TGE over 6 months), the following indicators should be considered:

Annual Burn Rate

Income

Price-to-Sales Ratio (P/S)

For new projects (less than 6 months after TGE), it is also necessary to assess the current valuation, product-market fit (PMF), and token distribution mechanism.

Annual burn rate

As a metric, the annual burn rate reflects the number of tokens that can be purchased through a buyback program within a specific timeframe, and this metric is associated with revenue and the price-to-sales ratio (P/S).

It is important to note that due to the differences in buyback frequencies of various projects, not all buyback plans are applicable to these indicators.

Taking Fluid as an example: The project currently proposes a dynamic buyback model strategy—if the valuation of FLUID reaches 500 million USD, 100% of the revenue will be used for buybacks; however, if the x*y=k model is adopted, the proportion of revenue allocated for buybacks will decrease as the valuation increases. Additionally, there are various other types of buybacks that are pending implementation.

The valuation itself is related to the market and its historical valuations. This metric can measure the percentage of tokens repurchased from the circulating supply.

Income

Most protocols do not allocate a sufficient proportion of their revenue for buybacks, thus having almost no impact on the tokens—this illustrates that revenue is not a sustainability metric. However, for those protocols that allocate a higher proportion of their revenue for buybacks, further scrutiny is still required.

What is the worst-case scenario? If the protocol uses 100% of its revenue for buybacks but the revenue plummets, the amount/ratio it buys back from the secondary market will still have a stronger bottom line advantage compared to protocols with lower distribution ratios.

Only when the protocol's revenue and expenses are not mixed together can revenue be a reliable indicator. This is particularly disadvantageous for protocols that rely solely on protocol fees for income and have allocated part of the distribution as incentives — if the net income is negative, buyback and burn will completely fail.

Market Capitalization / Annual Revenue Ratio (Price-to-Sales Ratio)

As mentioned earlier, this metric is related to the annual burn rate. When the ratio is high, it means the market is willing to pay a higher premium for each unit of revenue from the project; whereas when the ratio is low, the market values the project's revenue lower, allowing the project to repurchase tokens from the secondary market at a lower cost.

You can take a look at the price-to-sales ratio analysis of the following projects:

PumpFun has a lower market-to-sales ratio, allowing for more buybacks, with Jupiter closely following. Interestingly, Metaplex still has greater buyback potential. However, it is important to consider the burn rate and the buyback ratio of the circulating supply, as these will affect the effectiveness of the buyback plan.

Other noteworthy case studies include: the buyback mechanism of Story and the performance of the ICM product with buybacks.

Conclusion

Understanding the trend alone is not enough; it is necessary to study the patterns within the protocol to fully capitalize on this trend. Taking the IP of the Story protocol as an example, due to its revenue being nearly zero, it is impossible to calculate the annualized income, and its buyback and burn plan may be ineffective. However, thanks to strong market-making capabilities, the price of the IP continues to rise. Understanding these patterns will help you seize the benefits of this trend. Encouragingly, more reliable indicators may be introduced into our ecosystem in the future.