DeFi has long struggled with the challenge of token value accumulation and retention. As the ecosystem matures, it's time to address these fundamental economic issues head-on. This article explores why DeFi token economics need adjustment and what new models might look like for sustainable growth.
The Case for Token Economics Reform
Tokens as Revenue Rights
While governance capabilities provide a compelling reason to hold tokens, many still fail to effectively accumulate and retain value. The Web3 community increasingly recognizes that tokens must begin offering revenue sharing alongside governance functions.
Key considerations about revenue-sharing tokens:
- They may increase regulatory scrutiny regarding securities classification
- Without this evolution, DeFi risks remaining primarily a speculative market
- Mainstream adoption requires token prices to reflect underlying protocol profitability
👉 Discover how leading protocols are innovating token economics
Current Approaches to Token Value Capture
Protocols currently employ two primary methods to distribute revenue to token holders:
Buybacks of native tokens through:
- Distribution to stakers
- Token burning
- Treasury retention
- Direct revenue redistribution to token holders
While Yearn.finance's YFI token saw an 85% price surge after announcing buybacks, long-term revenue sharing proves superior to token repurchases. DAOs should only repurchase tokens when they're fundamentally undervalued.
Emerging Best Practices in Token Design
The GMX Model: A New Standard
GMX pioneered an innovative approach on Avalanche and Arbitrum:
- Stakers receive 30% of protocol fees
- LPs earn the remaining 70%
- Fees paid in ETH/AVAX rather than native tokens
This model demonstrates that revenue sharing doesn't hinder innovation, as GMX continues developing new products like X4 and PvP AMM.
Key Principle for Reinvestment
Reinvestment only makes sense when protocols can use capital more effectively than distributing to stakeholders. Most DAOs should distribute revenue earlier than traditional Web2 companies due to:
- Lower capital management efficiency
- Decentralized contributor networks
Lessons From Past Models
Terra's Short-Lived Success
Despite its collapse, Terra demonstrated that:
- Token burning effectively accumulates value in the short term
- Supply manipulation creates unsustainable conditions
- Easy circulation growth undermines long-term stability
(3,3) Tokenomics and OlympusDAO
This model showed that:
- High staking participation drives short-term price increases
- Unrestricted unstaking leads to value extraction
- Later unstakers suffer at the hands of early exits
ve Tokenomics: Locked Rewards
Curve's ve model addresses sustainability through:
- Long-term token locking (up to 4 years)
- Inflation rewards and governance power expansion
However, challenges remain:
- Inflation acts as an indirect tax on all holders
- Massive sell-offs occur when lock periods expire
👉 Explore the future of sustainable token models
Designing the Ideal Token Model
A sustainable token model should align incentives for:
- Users
- Investors
- Founders
Key objectives from Yearn.finance's approach:
- Implement token buybacks
- Build sustainable ecosystems
- Incentivize long-term perspectives
- Reward loyal users
Proposed Revenue and Tax Model
This innovative design features:
- Governance rights plus revenue shares for stakers
- Unstaking taxes instead of lock periods
Tax distribution:
- ⅔ to remaining stakers
- ⅓ burned
Benefits include:
- Rewarding long-term holders
- Reducing downward volatility
- Creating deflationary pressure
Implementation Considerations
Addressing Whale Risks
For large holders unstaking:
- Even with taxes, significant price impact occurs
- Remaining stakers gain proportionally larger revenue shares
- Progressive taxation could mitigate effects
Protocol Lifecycle Timing
Adoption recommendations:
- Early stage: Focus on liquidity mining
- Mature stage: Transition to value accumulation models
Key Takeaways
- Sustainability matters most - Models must endure market cycles
- Protocol fundamentals dictate token value - No mechanism compensates for lack of revenue
- Evolution required - As protocols mature, their token economics must adapt
FAQ
Why do DeFi tokens struggle with value retention?
Most focus solely on governance without creating real economic incentives for holders. Revenue-sharing models address this by tying token value to protocol performance.
How does staking taxation benefit long-term holders?
The tax mechanism rewards those who remain staked longest by redistributing portions of unstaked tokens and creating deflationary pressure through burns.
What's wrong with current ve token models?
While effective short-term, inflation rewards lose value over time, and locked tokens eventually flood the market when periods expire.
When should protocols transition token models?
After achieving significant TVL and stable revenue streams, typically in mature phases after establishing product-market fit.
How does GMX's approach differ from traditional models?
By paying fees in ETH/AVAX rather than native tokens, it avoids inflationary pressures while still rewarding stakers with real value.
What's the biggest risk in the proposed tax model?
Whale unstaking could cause significant short-term price drops, though long-term holders would benefit through increased revenue shares.