Over the past year, there’s been a heightened focus on sustainable protocols that generate revenue via real usage. GMX is a notable example, having created significant organic yield for its LPs and for GMX token stakers.
People are on the hunt for protocols that fit the magical bill of having a healthy degree of PMF, real usage, and revenue generation capabilities. After all, token emissions will only take a protocol so far. At some point, these pieces of software need to start being self-sustainable.
Some protocols are taking what they believe is a more long-term oriented approach by disregarding revenue (given how young they are) and focusing on growing their market share. On the surface, this is exactly right. The goal in the early days should be to achieve PMF and find traction — not purely optimize for revenue. But in practice it’s a bit of slippery slope where users could get hooked on the nil or minimal fees. Eventually, when fees are introduced, it could cause the protocol’s usage to suffer.
But the real contentious question today comes down to distributing revenue. And I think we’re definitely in an early enough stage to say the vast majority of protocols should not be distributing revenue to stakers.
In the case of Sushiswap, stakers provide no real service to the system. xSUSHI yields are the closest incarnation of rent-seeking with no value add. The same can be said of most staking programs.
That revenue could be used to double down and build better/more products into the protocol suite. And if a DAO is able to fund its needs and distribute some of the take to stakers, then all is well and good.
Lido is a good example of the market trying to value a protocol based on its cash inflow without the protocol actually distributing that to its token holder base. It makes a lot of sense because it allows Lido to build up a balance sheet and fund its development organically. And perhaps one day, the token base gets their take.
In the end, crypto protocols with liquid tokens suffer from being a mix of two well understood asset classes. They are, in essence, young startups — which tend to be illiquid investments. But their control-instrument (gov token) has liquidity and trading activity like a mature, listed company. As a result of having that liquidity, there’s a view in the market that they need to be fairly valued based on the upside of owning the crypto asset. But, in reality, they are still just young startups.
Focusing on revenue optimization makes sense irrespective of where we sit in the business cycle. But the distribution of said revenue is where things start to become iffy. Many expected crypto to follow the standard growth playbook of heavy reinvestment till a large scale is achieved. But the nature of the holder base and the emergence of a new ecosystem that draws parallels from both public and private markets means a new playbook has to established.
And that’s what all this experimenting is for.