DeFi’s Buyback Effect: DAOs Are Reinventing Token Economics For Sustainable Growth

by
Alisa Davidson

Revealed: October 28, 2025 at 11:00 am Up to date: October 28, 2025 at 10:05 am

by Ana

Edited and fact-checked:
October 28, 2025 at 11:00 am

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Through the heady days of “DeFi Summer season”, development within the decentralized finance trade was dominated by “yield farming”, the place protocols supplied high-emission token incentives as a reward for liquidity suppliers. In essence, they had been promising unsustainable yields to encourage customers to gasoline their development by depositing but extra funds into them. 

These fashions had been arguably vital for serving to DeFi protocols get off the bottom and bootstrap liquidity, however additionally they promoted important token inflation, diluting worth for stakeholders. The give attention to attracting and retaining liquidity at nearly any price generates little intrinsic worth, and requires a continuing stream of latest capital that can not be saved up eternally. 

Even probably the most ignorant economists recognise that such a mannequin is finally unsustainable. So reasonably than anticipate the whole lot to return crashing down, a few of the most dominant protocols have taken preemptive motion, reinventing their tokenomics fashions to cement their longevity. Led by their communities by way of DAOs, tasks reminiscent of dYdX, Lido and MakerDAO wish to funnel their revenues again into token buyback packages, much like publicly listed firms. 

They’re taking their inspiration from conventional company finance. Most of the world’s greatest tech firms, like Apple, IBM and Nvidia, purchase again shares on the open market in an effort to prop up the worth of their shares. It’s a tried and examined technique that helps to cut back the variety of excellent shares in the marketplace, rising demand and boosting shareholder confidence, and now DAOs try to copy this with their native tokens. 

Who’s Driving DeFi Buybacks? 

Protocols are partaking in token buybacks in an effort to maintain their long-term well being and encourage additional participation from DeFi traders. The thought is straightforward – use the income they generate from transaction charges to purchase up tokens in the marketplace and cut back the circulating provide. This implies fewer tokens in the marketplace and larger demand, bolstering the token’s value. 

However this isn’t nearly boosting the worth of everybody’s stacks. Liquidity is the lifeblood of DeFi protocols, and so the upper the token’s value, the extra incentives there are for liquidity suppliers to keep up their positions and deposit much more capital. As well as, it could possibly additionally promote larger engagement in ecosystem governance. The idea being that as their investments develop, token holders will likely be extra inclined to wish to contribute by voting on proposals that assist to determine the protocol’s destiny. Such methods finally purpose to create a sort of virtuous cycle, the place success results in extra engagement, which drives extra innovation and creates but extra worth. 

The decentralized cryptocurrency alternate dYdX is main the cost right here. In Might it grew to become one of many very first DeFi protocols to undertake a token buyback program, and within the intervening months its DAO has repurchased tens of millions of $DYDX tokens. It executes these buybacks in a clear approach, with the dYdX DAO allocating 25% of protocol charges to month-to-month buybacks. The tokens are then staked to spice up the community’s safety and generate further income for the dYdX treasury. 

The DAO is presently engaged in discussions about the potential for ultimately utilizing 100% of its community charges to repurchase $DYDX so as to cut back the quantity of tokens in circulation. Proponents argue that such a transfer would progressively improve validator incentives, rising the protocol’s enchantment to the broader DeFi group. 

dYdX’s mannequin was partly influenced by MakerDAO’s “Surplus Buffer” mechanism, which was launched a 12 months earlier. This sees extra income from stability charges and different community operations redirected in the direction of $MKR token buybacks. The tokens are promptly burned, creating deflationary stress that helps to spice up its value and reinforce financial stability. 

Lido’s DAO has proposed one thing completely different. The proposal, which is presently up for vote, requires the implementation of a system often called NEST, which can use $stETH tokens (staked Ethereum) to purchase again $LDO tokens. If the proposal is accepted, Lido plans to start out testing the system in December 2025, with the purpose being to cut back the circulating provide of $LIDO and drive up demand. 

A Signal Of Rising Maturity

These are all modern examples of how DeFi DAOs try to regulate their tokenomics fashions to raised align incentives for each stakeholder. The purpose is to create an financial suggestions loop that includes components reminiscent of treasury diversification and staking yields. 

The improved token worth equates to extra engaging staking yields, which inspires extra individuals to spend money on the ecosystem. On the similar time, the buybacks assist to make token values extra resilient, to allow them to climate durations of elevated market volatility and forestall traders from panic promoting. 

These new tokenomics fashions symbolize a profound shift within the DeFi market, indicating the rising maturity of protocols as they search to determine themselves as sustainable, value-generating entities. When DeFi communities see {that a} protocol is investing in its long-term future, they grow to be extra inclined to take part, fostering a larger sense of collective possession and shared future. Contributors will really feel as in the event that they’re all in it collectively, and attempt to make sure the group’s long-term success. 

Getting The Stability Proper 

The principle problem for any DAO is to strike the suitable stability between effectivity and democracy. They want to make sure that all actions taken actually replicate the desire of the protocol’s customers, however on the similar time, they have to additionally ensure that choices could be taken rapidly sufficient to speed up innovation and keep forward of the sport. 

This requires DAOs to rigorously think about what sort of voting mechanism is employed. The load of every token holder’s vote have to be balanced so as to stop so-called whales from gaining an excessive amount of affect over the decision-making course of. Within the case of dYdX, the burden of every particular person’s vote relies on the quantity of $DYDX tokens they’ve staked, which ensures that anybody closely invested in its ecosystem will keep away from voting on proposals that would have a detrimental impact. 

Probably the most sturdy fashions could be present in Compound’s DAO, which depends on a system of on-chain proposals. With this, $COMP token holders are entitled to submit, debate after which vote on the protocol’s operational parameters, reminiscent of how, when and the place to buyback tokens and the way to handle its treasury successfully. The mannequin ensures that everybody will get to take part within the decision-making course of and that outcomes replicate their democratic will. 

Arbitrum has taken a barely completely different method with its Grants mannequin, which goals to facilitate decentralized capital allocation. It has not but instituted buybacks, however its group has grow to be very energetic in voting on how the treasury distributes its funds to completely different tasks and improvement initiatives. As a result of each $ARB token holder is invested within the undertaking’s success, it encourages them to think about the implications of every proposal very rigorously and guarantee the advantages outweigh any dangers the adjustments might introduce. 

The Promise Of Broader Participation

The rise of DeFi buybacks is simply the beginning, and we will count on DeFi protocols to embrace additional improvements in community-led treasury administration in future. Already, we see a number of DAOs engaged in discussions round superior yield methods for treasury property and extra subtle threat administration frameworks. Some are even holding talks with different DAOs about cross-protocol capital coordination plans. 

Whereas DAOs have taken their lead from conventional finance, the distinctive approach by which they allow broad group participation offers them the potential to out-innovate their company cousins in the long term, paving the way in which for DeFi to develop extra subtle ecosystems and enhance worth for all stakeholders.  

Alisa, a devoted journalist on the MPost, focuses on cryptocurrency, zero-knowledge proofs, investments, and the expansive realm of Web3. With a eager eye for rising developments and applied sciences, she delivers complete protection to tell and have interaction readers within the ever-evolving panorama of digital finance.

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