Three ways of token value accrual

Buyback&burn, Tax-oriented, Real Yield

The public is usually familiar with three types of tokens: utility, commodity, and security. But the mechanisms of their value accrual can differ significantly. In this report, we will look at three additional value accrual mechanisms implemented by tokens, compare them, and evaluate their impact on token value.

You will know:

– Incentives for value accrual

– Buyback and burn ($BNB, $MKR)

– Tax-oriented ($UNIBOT)

– Real Yield ($GMX)

In the most general sense, tokens can be classified as assets, similar to equities in their purpose. And the purpose is value sharing and accumulation. Traditional equities provide their holders with certain rights, such as voting power and dividends, while tokens, in addition to a wider range of possible use cases, have the undeniable advantage of universal convertibility, i.e., they can be exchanged for any other token at any time.

However, universal convertibility has its downside: the constant threat of tokens being dumped by holders. Therefore, an additional mechanism of value accrual is crucial; it not only can bring value back to the token holders but also make a direct impact on the token’s market value. With each passing year, new mechanisms for additional value accrual emerge, but now we will look at three of the most popular and successful ones.

Buyback and Burn

The buyback and burn mechanism involves the protocol using its revenue to buy back its tokens, which are then sent to a burn address, thereby reducing the total supply on a regular basis. This mechanism indirectly rewards token holders by creating buying pressure and deflating the total supply.

BNB case

Binance uses a quarterly auto-burn mechanism. The auto-burn adjusts the quantity considering the BNB price and the number of blocks generated on the BNB Smart Chain (BSC) during the quarter.

– The goal is to reduce the total BNB supply to 100 million.

– Since Q1 2022, Binance has stopped buybacks of BNB tied to its revenue; right now, there’s no clear correlation between burns and price movements.

Impact: Binance’s burn rate peaked during the bull market of Q4 2021, burning nearly $900 million in BNB. The pace has moderated since then. To date, 23.8% of the total BNB supply has been burned, primarily through its quarterly burn activities. It’s projected that BNB will hit the 50% reduction milestone in around 4.5 years.

MKR case

MakerDAO introduced the Smart Burn Engine (SBE) on July 5, 2023, which is designed to burn MKR using the protocol surplus when it exceeds $50 million. The SBE purchases MKR and adds liquidity to the Uniswap v2 DAI-MKR pool to maintain a steady buy pressure on MKR.

The protocol’s surplus has been accumulating at a rate of $4.42 DAI per second, and it is projected that the SBE will purchase an estimated $72.7 million worth of MKR over the next year.

– Real World Assets income constitutes 67% of MakerDAO’s total revenue, a significant portion of which comes from U.S. Treasury bills. With current high interest rates, the benefits are robust, but a rate’s cut could significantly lower this revenue.

Impact: The launch of SBE contributed to the price growth of MKR, which started to outperform BTC with minimal drawdowns, while the increased liquidity in the Uniswap V2 MKR-DAI pool contributed to price stabilization. MKR has shown a consistent upward trajectory since the initial announcement of its buyback and burn initiative, which could be a positive sign for its continued strength.

Tax-oriented

Generally, a tax is charged on any token swap, and it’s at the project’s discretion to determine how it is used or distributed. But recently, some projects have drawn attention to taxation mechanisms, creating competitive and sustainable business models without attracting outside investors.

Unibot case

Unibot derives revenue from two main sources: fees incurred for trades executed by their bots and a tax charged for token transactions.

Tax Distribution:

Initially, Unibot imposed a 5% trading tax, which was later reduced to 4% to remain competitive with Banana Gun. Now, it is distributed as:

– 2% for revenue share

– 1% for operations

– 1% is directed to the Ecosystem Fund through buybacks; prior to October 13, 2023, it was allocated to the Liquidity Pool.

Impact: Taxation has been a significant source of revenue; since its launch, Unibot has accumulated a revenue of ~9200 ETH, with a substantial 7300 ETH coming from taxes. Thanks to the tax mechanism, Unibot has reached approximately $5 million in liquidity within their Uniswap v2 pool. This is a notable achievement considering that reaching such liquidity levels typically requires a more substantial protocol investment.

Real Yield

The birth and maturation of DeFi have led to the rise of yield farming protocols and, with them, the demand for mechanisms for distributing organic revenue to token holders.

GMX case

GMX has been a pioneer in the real yield narrative. In the GMX model, liquidity providers earn the trader profit or loss and the majority of fees. Rewards are gained in three forms: escrowed GMX, multiplier points, and ETH/AVAX rewards.

– 30% of fees generated from swaps and leveraged trading are converted to ETH / AVAX and distributed to staked GMX tokens.

Impact: Despite the real yield provided by GMX, the market does not seem to prioritize GMX’s fundamentals. There is a notedly strong negative correlation between GMX’s price-to-sales (P/S) ratio and the fees generated, suggesting that GMX’s reputation as a blue-chip asset in DeFi is secure and not solely dependent on its income-generating capabilities.

GMX was the pioneer, but real yield protocols such as GNS, Synthetix, LQTY, and THALES have followed suit. Their value-preserving models are a step forward and deserve to be analyzed separately.

The market seems to prioritize trends and hype over fundamental token metrics. Currently, real yield is valued more as a checkbox item than for its income potential. Real yield has the advantage of rewarding only those who contribute (through staking, voting, or liquidity provision), unlike buybacks, which benefit all holders regardless of their contribution. At the same time, models with a tax mechanism ensure value accrual for the protocol rather than the user, reducing the user’s motivation to hold the token.

Output

Mechanisms that directly distribute value back to token holders are the ones that benefit them the most. Therefore, those protocols that will best be able to capture Real Yield revenue in their tokens and share it with the users will probably win the race for value accrual.

Buybacks can provide indirect value by creating upward price pressure, which can enhance positive market sentiment during a bull market. But during bear times, the effectiveness of buybacks significantly drops, while protocol revenues are usually spent in the same measure; this can lead to mismanagement of funds. After all, buyback and burn mechanisms simply increase the rarity of the token, but they don’t improve the business model per se. Taxation isn’t the most efficient method for value accrual either; however, it may help to bootstrap a project without external funding.