A ♥ · Incentive · Draft
Buyback & Burn
A protocol spends its revenue to buy its own tokens back and destroys them, so fewer tokens remain.
How it works
The protocol earns fees from its users. It sends part of that revenue to a contract that buys its own token on the open market. The tokens it buys are sent to an address that nobody controls, which removes them from circulation forever. The total supply falls with each round. If demand stays the same, each remaining token represents a larger share of the protocol. Token holders gain without receiving a direct payment, which can also matter for tax and legal reasons.
Use it when
- You have real revenue and want to return value to token holders without paying dividends.
- Reduce a token supply that grew too fast during early distribution.
Watch out for
- Buying at market price can hand revenue to sellers who exit, not to long-term members.
- Regulators may treat a token that returns value this way as a security.
Example
MakerDAO. MakerDAO used surplus DAI from stability fees to buy MKR at auction and burn it from 2019, until the Smart Burn Engine changed the design in 2023.