Source: TradingView, CNBC, Bloomberg, Messari
Value Investors Unite – The Case For Token Buybacks
I’ve never been more right and made less money.
Just about everything we’ve been predicting for the past 7 years is now coming true.
- Most investors are acknowledging that the “Fat Protocol Thesis” isn’t accurate and that apps will accrue more value ultimately than the over-supply of unused Layer-1 protocols.
- Most investors are acknowledging that the short-sightedness of VCs, centralized exchanges, and market-makers, as it pertains to constant new issue launch failures and the lack of resources / efforts to build proper secondary market demand, is now a problem that needs to be addressed.
- Most investors agree that the current slate of tokens contains too much useless garbage, and ultimately blockchains will thrive once real assets come on-chain (stocks, bonds, real estate and new tokens issued by real companies).
- Most investors now agree that tokenholders need better rights and more protections, as it’s the only way these assets sustain value over time. Gone will be the days of misaligned incentives and tension between equity and token.
- For what it’s worth, I believe Arca started this movement 5 years ago when we won activist campaigns against Gnosis, Aragon, and several other companies, and battled relentlessly against the crooks behind Uniswap and dYdX who constantly fattened their own pockets at the expense of tokenholders.
- Most investors are finally beginning to agree that value matters, and memecoins and useless governance tokens are going to take a backseat to cash-flow generating assets with buybacks.
The good news about prices in “down only” mode is that it brings these conversations to the forefront and tends to lead to better products and more functioning markets in the future. For example, Delphi Digital wrote about the
death of Centralized Exchanges, as their constant failures to resolve new issues have finally led token issuers to look elsewhere for decentralized solutions instead. In my opinion, big crypto exchanges like Coinbase have blown it. They made a fortune off of retail trading but made so many bad acquisitions and pointless venture bets while their customers consistently lost money and gave up. They should have invested more in the growth of the secondary market to remain competitive before Robinhood, and the bulge brackets ultimately eat their lunch.
But this week’s topic du jour was token buybacks. Messari may have started the discussions by writing about how
token buybacks have failed to create higher token prices. As many pointed out, token buybacks are not supposed to 'prevent price declines,' but rather, they are supposed to return value to tokenholders. And they do. Just because the buybacks, to date, have not led to token outperformance does NOT mean that it is the wrong strategy.
Token buybacks are by far the best use of capital for protocols, full stop. We believe recent discussions against buybacks miss entirely the biggest difference between tokens and equities.
The key difference between token and equity buybacks is that equity issuance is perpetual. There is no supply limit. Stock is, therefore, outstanding foreve,r and a company can always issue more (even if they have to file a new shelf, which is not a real impediment). As a result, buying back stock is a trade with the goal of buying low and re-selling higher. Thus, this becomes a capital allocation decision (buying back stock versus investing in growth), and this is an important decision for a company. The company’s goal is to create the highest ROI and convince shareholders that their decision is the right one.
Tokens, on the other hand, mostly have a fixed supply (I’m ignoring inflationary tokens as they aren’t relevant for buybacks anyway, and most should be ignored as investments). Moreover, the protocol cannot be "acquired" in the end state. Without that end goal of being acquired, the value of the token has to be based on cash flows today, not what someone would pay for future cash flows. This is why the buyback matters a lot more for tokens. Perhaps even more important is that every stakeholder owns the token – the founding team, their employees, their customers, and passive investors all own the token, so everyone benefits from a buyback. You are essentially paying your stakeholders directly.
Additionally, and this is a big deal, there is often no reason why the token has to exist beyond the initial bootstrapping phase. Unless it’s a proof-of-work or proof-of-stake network, where the token has to be inflationary to pay validators/miners, most other tokens are simply the greatest capital formation and customer bootstrapping mechanism ever created. They are issued by entities that easily could operate with or without a token, and the token is simply a way to align all stakeholders and incentivize early usage of the product to create a more sticky, power-using customer base. And since the token doesn’t need to exist forever, the goal should be to amortize it down to 0 tokens outstanding over a long period of time. Again, in this scenario, every stakeholder wins.
There are many examples of this. My favorite example is the Bitfinex token (LEO). Bitfinex is a company with common equity, but it also has a token that it issued specifically to plug a hole in its balance sheet in 2019. This token has some of the best tokenomics, which includes
daily amortization (via buybacks), and this token may go away completely when Bitfinex gets the money back from the hack (
per the original whitepaper). That's completely fine. Bitfinex will be fine without this token and could issue a new token in the future (LEO2) if they desire it. However, the first goal should be to make LEO tokenholders rich and pay down the entire token (maybe even tender for the rest of it).
Most tokens operate just like LEO. They don't have to exist forever, and it's better for everyone if the company just pays it down. In some ways, a token is a high-growth, 0-coupon bond that starts at 1 cent on the dollar and eventually gets paid down at par (100).
Now, that doesn't mean we can't improve upon the buyback methodology. Instead of buying indiscriminately, maybe a project would be better off instituting a 3-month lag of using revenues to buy tokens, so they don’t only buy at high prices when things are good and fail to buy at lower prices when things are bad. Or maybe they would be better served to set a floor price (buy wall) where they would be the buyer of last resort. There are always ways to make this more efficient. But the goal HAS to be to deprecate the token, or else there is no value and no reason for it to exist. These protocols don't need a lot of cash to operate and certainly don’t need to make acquisitions. In fact, they wouldn’t even have to pay for talent (growth) if the token had clear value (via buybacks), as people in the ecosystem would gladly accept the token as payment/salary. After the buyback, the company can choose to burn the bought supply (reduce the supply forever, thereby increasing earnings per token, or they can hold it in treasury, which offers more optionality/flexibility to one-day re-issue if there is demand (but most likely those never re-enter the market).
Regardless of the exact mechanism, this is something that needs to increase. We’ve recently seen all sorts of successful buyback programs, from Hyperliquid (HYPE), Raydium (RAY), Jupiter (JUP), and more recently Aave (AAVE). We expect to see a lot more of these. And if traditional value investors ever find out these exist, they will likely trade at much higher multiples.
Institutional Focus on RWAs and Stablecoins - a Recap from Digital Asset Summit (DAS)
Members of the Arca team attended the Digital Asset Summit last week. Our own Michal Benedykcinski offered his feedback from the event, for those who weren’t able to attend:
- Many large TradFi asset managers and brokerages are playing the field when it comes to planning any asset issuances on-chain, similar to what we saw with dApps “chainshopping” while farming incentives
- The most common feedback has been that it is not a supply-side issue. Most active in the RWA market today can tokenize these assets either by using 3rd parties like Securitize or doing it in-house. The prevailing issue is still on the demand side - when looking at chains to issue on the number 1 question is “Will you have demand”? Will bringing TradFi yields on-chain move the needle?
- The dominant strategy will be for these TradFi firms to issue on multiple chains. There seems to be a real split view on Ethereum - while many appreciate the depth of liquidity and potential for greater composability, they are unimpressed with the lack of guidance and support (though this might change with Vivek Raman at the helm of Etherealize)
- An example is from a $100B+ asset manager, which had already gone through some first fund tokenization exercises. When they approached a top global investment bank to help them distribute their tokenized offering, the compliance team gave them a 6+ months roadmap, and this is for the exact same credit funds that their private bank already distributes!
- Exchanges, fintech and brokerages
- All U.S. exchanges are racing to offer equities - the Ninja Trader acquisition announced by Kraken on the last day of DAS was no coincidence.
- Asian exchanges are racing to enter or re-enter the U.S. and admit some of the uphill battles with consumer trust building. They will be pushing new offerings to carve out some of the market.
- Brokerages are racing to unlock and offer crypto assets - not even just the top 10, but the likes of Robinhood are aiming to offer the top 100 coins. Some, like CoinList, are, for example, looking to acquire a brokerage license, something they actually sold under Gensler.
- Crypto M&A fueled by healthy balance sheets of exchanges will only ramp up in the coming months as their venture teams continue to show more appetite for new stablecoin adjacent businesses.
- Conservative expectation is that a stablecoin bill will be signed by August, though an optimistic outlook is within the next 60 days. The big lever for U.S. policymakers is that fiat-based issuers are big buyers of U.S. debt and the keystone to this administration’s treasury goals (keep the USD the dominant reserve currency of the world). Many established FinTechs are ramping up their stablecoin teams and moving in lockstep with the regulation. We heard some good nuance from both Republicans (Tom Emmer) and Democrats (Wiley Nickel) about the potential danger of not making the crypto policies (stablecoin Genius ACT, SAB 122, and market structure bill) bipartisan. If Trump and his advisors will try to make it a Republican-only initiative, the odds of success ahead of the midterms in 18 months will diminish.
- Good debate about the impact of the rising tide of stablecoins - going from $250B to $1T and the impact on the broader crypto market. The more stablecoins - the more volume on exchanges. This is an obvious second-order effect, but it will also question the attitudes towards L1/L2 native tokens - is the future of those tokens as an asset you can stake for extra yield or actual transaction fees economic activity will generate? The rise of stablecoins will bring focus to L1s/L2s fees on the movement of stablecoins around their networks, with the TVL becoming a less important indicator of successful stablecoin capture. A case in point of this trend is how Tron (red) and Binance (yellow) have drastically overtaken Solana (green) and Ethereum (blue) recently driven by widespread usage of Tether on Tron and Binance wallet zero fees on swaps campaign
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Source: Blockworks
