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 time”, 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 gas their development by depositing but extra funds into them. 

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

Even essentially the most ignorant economists recognise that such a mannequin is in the end unsustainable. So quite than await every part 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 via DAOs, tasks corresponding to dYdX, Lido and MakerDAO want to funnel their revenues again into token buyback packages, just like publicly listed corporations. 

They’re taking their inspiration from conventional company finance. Most of the world’s greatest tech corporations, 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 available on the market, rising 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 traders. The thought is straightforward – use the income they generate from transaction charges to purchase up tokens available on the market and cut back the circulating provide. This implies fewer tokens available on the market and better 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 will possibly additionally promote better engagement in ecosystem governance. The idea being that as their investments develop, token holders might be extra inclined to wish to contribute by voting on proposals that assist to resolve the protocol’s destiny. Such methods in the end goal 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 Could 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 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 present engaged in discussions about the potential for finally utilizing 100% of its community charges to repurchase $DYDX to be able to cut back the quantity of tokens in circulation. Proponents argue that such a transfer would progressively improve validator incentives, rising the protocol’s attraction 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 direction of $MKR token buybacks. The tokens are promptly burned, creating deflationary strain that helps to spice up its value and reinforce financial stability. 

Lido’s DAO has proposed one thing completely different. The proposal, which is at present up for vote, requires the implementation of a system referred to as 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 aim being to scale 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 aim 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 folks to spend money on the ecosystem. On the similar time, the buybacks assist to make token values extra resilient, to allow them to climate intervals 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 ascertain themselves as sustainable, value-generating entities. When DeFi communities see {that a} protocol is investing in its long-term future, they turn into extra inclined to take part, fostering a better sense of collective possession and shared future. Members will really feel as in the event that they’re all in it collectively, and try to make sure the group’s long-term success. 

Getting The Stability Proper 

The primary problem for any DAO is to strike the proper steadiness between effectivity and democracy. They want to make sure that all actions taken actually replicate the need of the protocol’s customers, however on the similar time, they have to additionally be sure that selections could be taken shortly sufficient to speed up innovation and keep forward of the sport. 

This requires DAOs to fastidiously contemplate what sort of voting mechanism is employed. The load of every token holder’s vote should be balanced to be able 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 individual’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, corresponding to how, when and the place to buyback tokens and the best 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 turn into 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 challenge’s success, it encourages them to contemplate the implications of every proposal very fastidiously 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 will anticipate 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 refined 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 group participation provides them the potential to out-innovate their company cousins in the long run, paving the best way for DeFi to develop extra refined 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 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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