Is token buyback poison? The lack of equity is the urgent issue that needs to be addressed in the crypto industry.
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Is token buyback poison? The lack of equity is the urgent issue that needs to be addressed in the crypto industry.
Buybacks have historically been a more tax-efficient form of dividend.
Navigating Web3 tides with focused insightsWritten by: fejau
Compiled by: AididiaoJP, Foresight News
The crypto industry has been building in the murky minefield of regulation, and now finally has a chance to stand its ground after enduring the SEC's oppressive oversight. Regulatory uncertainty has forced many projects to adopt unconventional capital structures.
Due to a lack of clear guidance—is a token a security? If so, how should it be registered?—many organizations had to find alternative paths. Uniswap is an early case: they had to erect a "firewall" between a lab entity holding equity and a foundation managing the governance token. Frankly, that governance token was largely useless, given that the SEC never clarified how to compliantly structure a blockchain token entity.
Now, with the CLARITY Act poised for passage, promising to provide the final legal guidance for a compliant path for crypto tokens, the industry may finally be able to "grow up."
I'm not criticizing those projects forced to separate equity and tokens. Under Gary Gensler's aggressive litigation, they had no choice and no compliant path to follow.
This situation led to a proliferation of "down-only" altcoins. These tokens, lacking equity attributes, became tools for crypto VCs to "market-capitalize" illiquid assets. When these so-called "fundamental" tokens performed poorly, meme coins and Pumpfun became the only "fair" game in town.
At least you know: the things you're trading inherently have no value.
But now, things are changing. The bifurcation of the cryptocurrency market is accelerating: 90% of tokens continue to decline, while the remaining 10% receive solid buying support.
These 10% of tokens can stand firm mainly for two reasons: first, their token supply structure is healthy (no massive selling pressure from VCs or investors), and second, most come from projects that are genuinely profitable. This is a remarkable shift for the entire industry. People are still slowly coming to terms with the fact that "crypto projects can actually make money."
These 10% of "revenue-generating tokens" are at the critical frontier of whether the industry can mature. But as companies start generating revenue, cash flow analysis becomes feasible, and how to handle profits becomes a hot topic. Thus, we've come full circle back to the world of corporate finance and capital structure decisions. This has caught many off guard, as not everyone diligently attended their corporate finance classes.
Hyperliquid is the catalyst for the "revenue-generating token" trend. They began programmatically buying back tokens, regardless of price, and committed 100% of the exchange's revenue to these buybacks.
In crypto, buybacks are often simplistically understood as "reducing supply, pumping the price." While that's not wrong, it overlooks a deeper question: how much of a company's revenue should be used for buybacks?
To understand this, think of buybacks as a form of "dividend." Mechanically, buybacks have historically been a more tax-efficient dividend.
In the traditional finance world, the decision logic for profit distribution typically goes like this:
A company earns annual net profit, part of which is paid out as dividends, and the remainder becomes "retained earnings" on the balance sheet.
From retained earnings, a company can choose to: repay debt, fund maintenance capital expenditures, reinvest for internal growth, or buy back its own shares.
In recent years, large companies have favored buybacks because they are essentially a more tax-efficient dividend. Buybacks increase earnings per share, and theoretically, the stock price rises accordingly, similar to a dividend, but shareholders don't face immediate tax liability.
If a company's Return on Invested Capital (ROIC) is higher than its Weighted Average Cost of Capital (WACC), it's wiser to reinvest profits into company growth. Conversely, if the net present value of internal reinvestment is negative, it's more reasonable to distribute the money to shareholders.
For mature companies lacking high-return investment opportunities, returning cash to shareholders via dividends or buybacks is more appropriate.
So, buybacks are essentially an "upgraded dividend."
So, ask yourself: what early-stage growth company in history has made "distributing most of its revenue (not even profit!) as dividends" its core strategy?
None, of course. It simply doesn't make sense.
The fundamental reason it's illogical is that equity holders in a company typically believe that reinvesting profits yields a higher return than receiving dividends and seeking alternative investments. If you hold company equity, you likely believe in its growth potential; otherwise, why invest?
Therefore, setting a programmatic, indiscriminate, high-percentage buyback is nonsensical.
The buyback ratio should be a customized decision, depending on:
- The balance between ROIC and WACC
- The company's stage of development
- Current market valuation
For ultra-early-stage companies (which 99.9% of the crypto industry comprises), a reasonable buyback ratio should be close to zero. As an equity holder in these companies, you should trust the founders and let them focus on building.
This issue isn't prominent in traditional finance because equity rights are clear: shareholders have explicit legal claims to the company's residual value and ongoing cash flows.
The problem in crypto is precisely that most tokens lack strong equity attributes.
In this vacuum of rights, panicked investors and projects alike have latched onto "buybacks" as a lifeline because they barely provide an illusion of equity-like rights. But this is a very crude and inefficient approach that can stifle a company's growth potential.
If we could establish clear token equity rights, investors would have the confidence to let founders build freely and reinvest profits, knowing they have a legal claim to the company's ultimate value. Right now, everyone is desperately clinging to the buyback life raft because it seems like the only thing within reach.
Only by resolving equity rights can the industry truly mature.
It is for this reason, along with the positive momentum I'm currently seeing, that I am very optimistic about the future of the crypto industry.
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