Buyback and Burn Merely an Empty Promise? The Unbridgeable Rights Gap Between Tokens and Equity
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Buyback and Burn Merely an Empty Promise? The Unbridgeable Rights Gap Between Tokens and Equity
Examining the token holder rights vacuum through cases like Venice and Aave.
Navigating Web3 tides with focused insightsWritten by: Prathik Desai
Compiled by: Saoirse, Foresight News
When you hold stock in a company, you enjoy residual claim rights: after the company settles payments to all other creditors, all remaining assets belong to the shareholders. The order of capital liquidation is employee compensation, bondholders and lending institutions, general creditors, taxes, preferred stock, and finally common stock shareholders.
This residual claim also comes with exclusive rights: you have the right to vote to select company management, share in dividends distributed by the company, and if the company is sold or liquidated, you also receive a share of the remaining assets.
For a long time, major crypto protocols have painted a similar blueprint for token holders — at least in their marketing rhetoric. As long as you hold tokens, you can participate in network governance decisions and share in the project's future revenue and growth dividends. But this narrative has been a one-sided agreement from the start. The crypto industry has long deliberately avoided this fact simply because there were no sharp conflicts of interest in the past. Now, however, the situation is changing.
Previously, regulatory gaps allowed crypto protocols to maintain this narrative to appease token holders, but the ongoing CLARITY Act will seal off this gray area. Some crypto protocols are issuing equity while simultaneously selling tokens to the public; the coexistence of these two types of holders further highlights the vast difference in rights between shareholders and token holders.
What Ownership Truly Means
Stocks have become an enduring financial instrument not solely due to investment returns. Often, bonds yield higher returns with less volatility. The unique appeal of equity lies in its rights structure: it represents corporate ownership with contractual force. After a company generates profit, the board of directors can distribute dividends, and shareholders legally enjoy the earnings; if the board refuses to distribute dividends, shareholders can vote to reorganize the board; if a majority of shareholders wish to sell the company, there is a pathway to execute this request. All these rights do not rely solely on the goodwill of management.
Over the past century, companies have continuously adjusted the level of control shareholders have over daily operations, but shareholders' legal claim to corporate earnings has remained fundamentally unshaken.
In 2004, Google's IPO established a dual-class share structure, where founders Larry Page, Sergey Brin, and then-CEO Eric Schmidt had voting rights ten times those of ordinary public shareholders, but the economic rights enjoyed by ordinary shareholders were completely equal to those of founders and insiders. Snap Inc. issued non-voting stock in 2017; Berkshire Hathaway has implemented a dual-class share system since 1996.
Although the above cases have reshaped traditional shareholding models, they all retain the core foundation of equity: a legal claim to the residual value of the enterprise that can be enforced through courts.
Crypto protocol token holders, however, completely lack this right. They have no right to receive dividends, and when the enterprise is acquired, they are not qualified to share in the sale proceeds. This is the essential difference between truly owning an asset and being told you own an asset. All legal systems related to ownership default to the owner having enforceable rights, yet token holders have nothing.
A common way projects support token prices is to use a portion of revenue to buy back and burn tokens on the secondary market. But the worst part is: these arrangements are not bound by any contractual enforcement. Protocols can modify, suspend, or even completely terminate buyback and burn policies without board approval. Token holders whose rights are infringed have no basis to initiate legal action.
Since this rights gap has always existed, why is it only being discussed heavily now? In the early stages of the crypto industry, this contradiction was not prominent; there were no equity holders as a reference point at that time, and only one type of asset existed in the market: tokens. Community users, founding teams, and project parties all held tokens, so interests were naturally aligned.
But now the balance is being broken.
Mature crypto protocols are gradually shifting towards commercial operations, with revenue, products, and user volume becoming core metrics. Sooner or later, they will need large-scale financing for expansion, and the most mature way to obtain large capital is still to raise funds from traditional capital markets, just as Google and Snap went public, and Tesla and SpaceX conducted private financing before going public.
On July 1, Venice AI completed a $65 million Series A financing round, led by Dragonfly and Coinbase Ventures, with a company valuation of $1 billion. Investors received 8.98% equity plus token rewards. This financing structure completely changed the ownership structure, exposing structural flaws that the crypto industry has deliberately ignored for a decade.
Before financing, Venice had only one type of equity holder; after financing, it differentiated into two groups: the first type is equity investors, who possess formal legal contracts, board seats, information rights, anti-dilution protection, and legally enjoy earnings corresponding to 8.98% of the company's assets; the second type is native token VVV holders, who rely solely on the burn plan voluntarily implemented by the company, which the project party can terminate at any time.
This round of financing established a market valuation for Venice equity. For future appreciation generated by corporate growth, equity investors enjoy it directly through legal contracts; token holders cannot automatically share in growth dividends, and whether they benefit depends entirely on whether Venice management continues to execute buybacks and burns. In other words, the initiative for the distribution of every future revenue stream of the enterprise lies in the hands of management — management can treat both types of holders fairly, or directly abandon token buybacks.
Venice is not an isolated case. Aave uses 100% of protocol revenue for AAVE token buybacks; Hyperliquid has built a top-tier buyback mechanism in the crypto market size, cumulatively investing over $1.2 billion in protocol revenue for HYPE buybacks, distributing 97% of fees annually, corresponding to an annualized buyback ratio of approximately 5%~6% of market cap. Although these projects have not yet carried out equity financing in the Venice model, they all face the same underlying problem: buyback policies are entirely at the team's discretion, and there are no rules to prevent the Hyperliquid team from misappropriating support funds.
One real-world case is enough to show the outcome: In May 2026, Sol Strategies acquired Houdini Swap for $18 million. All acquisition funds were paid to founders and equity holders, while Houdini Swap native token LOCK holders received nothing, and the token price went all the way to zero.
Source: @coingecko
The above cases confirm: mechanisms originally intended to protect token holders' interests ultimately have control resting in the hands of the protocol. All returns expected by investors holding tokens depend entirely on whether project management changes its mind. The root cause lies in: the acquirer has no legal obligation to compensate token holders.
The Legal Dilemma
The "CLARITY Act" passed the U.S. House of Representatives in July 2025 and remains stalled in the Senate as of July 2026; once implemented, it will further exacerbate the above contradictions. The bill plans to divide all crypto tokens into two major regulatory categories:
- Digital Commodities: Regulated by the CFTC (commodities such as crude oil, wheat, gold, etc. fall under this agency's jurisdiction);
- Investment Contract Assets (Securities): Regulated by the SEC (stock and bond regulatory agency).
Almost all protocols hope tokens will be classified as digital commodities, thereby enabling free trading on public exchanges; once classified within the securities category, token liquidity will shrink significantly, and compliance costs will crush the vast majority of projects.
The constraints attached to the two regulatory tracks are where the key contradiction lies.
The bill clearly stipulates: digital commodity tokens can be set with governance rights, staking rewards, and their value can rise with protocol usage. However, issuers are strictly prohibited from granting token holders legal claims to corporate revenue, profits, assets, or debts. In simple terms: tokens can capture value generated from network usage, but cannot enjoy the corporate appreciation of the company operating this network.
Protocols can still design tokens whose value is linked to trading activity, but cannot use corporate operating revenue as the basis for token appreciation. Buyback and burn happens to fall within this regulatory gray area. To date, the SEC has not clearly defined this, but regulators have no obligation to make interpretations favorable to token holders.
During the regulatory gap period, projects walked through legal fog, promoting tokens externally as akin to informal equity, using rule ambiguity to attract investors. Although the "CLARITY Act" is not yet effective and no statute prohibits this kind of promotion; after the bill is implemented, projects can no longer classify tokens as commodities while promising holders corporate ownership.
Many protocols have already attempted to find balance on the edge of compliance. Aave launched Aavenomics 3.0 on June 27, abolishing the buyback model controlled manually by the committee, replacing it with an automated, non-human-intervenable on-chain mechanism, where all revenue from the protocol and GHO (Aave's decentralized over-collateralized stablecoin) will be used to buy AAVE on the secondary market.
Aave founder Stani Kulechov stated this mechanism is automated and unchangeable. This is perhaps the ultimate attempt by a DeFi project to make a binding commitment to the community.
But Aavenomics 3.0 is ultimately just code; the legal contract that should have enforceable force is still missing. The Aave governance council can still initiate a vote to shut down the buyback mechanism. Token holders whose interests are harmed cannot sue the project for breach of contract. At most, it can be viewed as a policy that most holders are willing to trust the governance team to uphold. All protocols attempting to bypass securities registration and build value capture mechanisms will encounter restrictions brought by the "CLARITY Act" in the future.
Meanwhile, Aave will soon face the same dilemma encountered by Venice. News emerged at the end of June that Kraken's parent company Payward is negotiating to acquire 15% equity in Aave Group, corresponding to a valuation of $385 million. Stani Kulechov questioned the transaction valuation but did not deny the negotiations were real. If the transaction goes through, Aave will become the second head protocol to add formal equity on top of circulating tokens.
Can crypto projects rationalize this "equity + token" dual ownership structure?
The industry's common justification is that tokens possess real utility. For example, Venice's DIEM token can be exchanged for $1 worth of AI computing power per day, belonging to utility tokens; various exchange fee tokens are similar. But utility tokens have natural shortcomings: value is bound to usage scenarios, making long-term compound appreciation difficult. Like casino chips, they can only be used for consumption within the venue and exchanged for cash after closing; even if someone holds chips long-term, there is no value store attribute outside the casino scenario. The logic for DIEM, which can be exchanged for equivalent computing power, is the same. Short-term supply and demand imbalances may push up prices, but cannot form long-term continuous appreciation.
Once the core marketing rhetoric for a project launching tokens is "the protocol will use profits to push up token value," the token is essentially pseudo-equity, and it is difficult to avoid the "CLARITY Act" certification standards for securities assets.
There are only two clear paths available to protocols: First, acknowledge the token positioning as digital commodities and stop promoting that tokens can share in corporate operating earnings; Second, if you want token holders to enjoy real economic returns, you must register the tokens as securities and bear the corresponding compliance costs.
Over the past decade, the narrative that "tokens equal assets" could hold because no one was willing to delve into the terms and details. As long as all market parties tacitly accepted this set of rules, the game could continue. But once external equity investors enter with formal investment agreements, the old narrative will collapse. Aave's automated buyback mechanism may be the optimal solution to appease token holders, but the validity of this guarantee ends on the day the governance layer votes to modify the rules. And that day may be only one term sheet away for major head projects.
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