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

by
Alisa Davidson

Printed: 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”, progress within the decentralized finance business was dominated by “yield farming”, the place protocols provided high-emission token incentives as a reward for liquidity suppliers. In essence, they have been promising unsustainable yields to encourage customers to gasoline their progress by depositing but extra funds into them. 

These fashions have 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 concentrate on attracting and retaining liquidity at nearly any price generates little intrinsic worth, and requires a relentless stream of latest capital that can’t be stored up eternally. 

Even probably the most ignorant economists recognise that such a mannequin is in the end unsustainable. So somewhat than look forward to every little thing to come back 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 DAOs, initiatives corresponding to dYdX, Lido and MakerDAO need to funnel their revenues again into token buyback packages, much like publicly listed firms. 

They’re taking their inspiration from conventional company finance. Lots of the world’s largest 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 scale back the variety of excellent shares in the marketplace, growing demand and boosting shareholder confidence, and now DAOs try to copy this with their native tokens. 

Who’s Driving DeFi Buybacks? 

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

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 worth, the extra incentives there are for liquidity suppliers to take care of their positions and deposit much more capital. As well as, it will possibly additionally promote higher engagement in ecosystem governance. The speculation being that as their investments develop, token holders shall be extra inclined to need to contribute by voting on proposals that assist to determine the protocol’s destiny. Such methods in the end intention to create a form of virtuous cycle, the place success results in extra engagement, which drives extra innovation and creates but extra worth. 

The decentralized cryptocurrency change dYdX is main the cost right here. In Might it turned one of many very first DeFi protocols to undertake a token buyback program, and within the intervening months its DAO has repurchased thousands and thousands of $DYDX tokens. It executes these buybacks in a clear manner, 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 at the moment engaged in discussions about the opportunity of ultimately utilizing 100% of its community charges to repurchase $DYDX in an effort to scale back the quantity of tokens in circulation. Proponents argue that such a transfer would progressively improve validator incentives, growing the protocol’s attraction to the broader DeFi neighborhood. 

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 strain that helps to spice up its worth and reinforce financial stability. 

Lido’s DAO has proposed one thing totally different. The proposal, which is at the moment up for vote, requires the implementation of a system often known as NEST, which is able to use $stETH tokens (staked Ethereum) to purchase again $LDO tokens. If the proposal is accepted, Lido plans to begin testing the system in December 2025, with the purpose being to scale back the circulating provide of $LIDO and drive up demand. 

A Signal Of Rising Maturity

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

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

These new tokenomics fashions characterize a profound shift within the DeFi market, indicating the rising maturity of protocols as they search to ascertain 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 higher sense of collective possession and shared future. Members will really feel as in the event that they’re all in it collectively, and attempt to make sure the neighborhood’s long-term success. 

Getting The Steadiness Proper 

The primary problem for any DAO is to strike the proper stability between effectivity and democracy. They want to make sure that all actions taken really replicate the desire of the protocol’s customers, however on the identical time, they have to additionally guarantee that selections may 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 burden of every token holder’s vote have to be balanced in an effort to forestall 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 might have a detrimental impact. 

Some of the sturdy fashions may 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, corresponding to how, when and the place to buyback tokens and methods 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 totally different method with its Grants mannequin, which goals to facilitate decentralized capital allocation. It has not but instituted buybacks, however its neighborhood has grow to be very energetic in voting on how the treasury distributes its funds to totally different initiatives and growth initiatives. As a result of each $ARB token holder is invested within the undertaking’s success, it encourages them to contemplate the implications of every proposal very rigorously and guarantee the advantages outweigh any dangers the modifications could introduce. 

The Promise Of Broader Participation

The rise of DeFi buybacks is simply the beginning, and we are able to 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 belongings 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 manner wherein they permit broad neighborhood participation provides them the potential to out-innovate their company cousins in the long run, paving the best way for DeFi to develop extra subtle ecosystems and enhance worth for all stakeholders.  

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

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