Author: Jeff Dorman, Chief Investment Officer, Arca
Compiled by: Jiahuan, ChainCatcher
Chart Sources: TradingView, CNBC, Bloomberg, Messari
Crypto Protocols Are Starting to Actually Make Money
Last week, Bitwise Chief Investment Officer Matt Hougan published an article suggesting that as more protocols link revenue to token holders through value-capture mechanisms like token buybacks, crypto asset valuations could double or even reach higher levels.
We agree with this perspective. In fact, we've been waiting for a long time for the market to finally accept this logic.
For nearly a decade, Arca has believed that digital assets should ultimately be analyzed like any other investable asset—based on fundamental value and expected future cash flows. Tokens are not stocks, and the way token holders capture value differs from shareholders. But the fundamental principles of investing do not suddenly become invalid just because an asset exists on a blockchain or the issuing entity changes from a Delaware corporation to a protocol.
However, this viewpoint hasn't been easy to articulate in the past.
In July 2019, when most people still habitually lumped almost all digital assets under the term "cryptocurrency," we pointed out that this definition was not reasonable. Digital assets represent a series of different types of economic rights. Some are currencies, some are utility tokens, and others, as we said at the time, are "essentially analogous to assets tied to equity in cash-flow-generating companies."
At that time, we specifically mentioned exchange tokens. These tokens have both product utility and an economic interest link to the underlying business, such as sharing a certain proportion of revenue or profits with holders indirectly through token buybacks.
Six months later, in our December 2019 annual review, we categorized digital assets into four groups, one of which was "enterprises that use tokens and can generate real cash flows." Back then, some centralized crypto companies had started generating significant revenue, but most decentralized protocols were still in the experimental stage. We wrote that decentralized protocols might still need "5 to 10 years" to truly create economic value.
Looking back, our guess wasn't far off.
Six and a half years later, protocols like Hyperliquid (HYPE), Aave (AAVE), Aerodrome (AERO), and Maple Finance (SYRUP) have started generating real fees and revenue from real users. And in many cases, their profit margins and capital efficiency are enough to make most public companies envious.
The question is no longer whether decentralized protocols can create economic value, but rather how they should use that value. And this is where things start to get interesting.
Having Revenue Does Not Mean Tokens Have Value
A protocol generating revenue does not necessarily mean its token has value. This is crucial and one of the issues we've emphasized repeatedly since researching digital assets.
In August 2020, when analyzing the then-emerging DeFi protocol Aave, we distinguished between two things: incentives generated through token emissions and economic gains created by real users and business activity within the ecosystem. We wrote at the time: "In our view, exogenous cash flows from real business are key to long-term value growth for token holders."
Six years on, Aave is still here, and this issue remains. If a protocol generates $500 million in annual revenue, but none of those proceeds ever flow to the token, why should token holders care? This is a major difference between digital assets and stocks.
When you buy a company's stock, you own a portion of the company's residual claim. The company can reinvest profits back into the business, return them to shareholders via dividends, or use them for stock buybacks. Even if a company never directly returns a single dollar of capital to shareholders, there's another way for shareholders to realize value: the entire company might be acquired.
A startup can reinvest every dollar it earns for years because investors believe those investments will create more future profits. As the company matures, it can begin paying dividends or buying back stock.
Or, another company or private equity firm might acquire it outright at, say, 20 times earnings, with shareholders receiving the acquisition proceeds, typically at a premium to the then-current stock price.
But such a final exit typically does not exist for crypto protocols.
No one is going to acquire the Aave protocol for 20 times EBITDA and mail a check to all AAVE holders. No one is going to buy Hyperliquid and let all HYPE holders exit at a 30% acquisition premium. These protocols are decentralized networks, designed, at least in theory, to exist indefinitely. They are not like companies, which can ultimately realize value through acquisition.
Therefore, the link between protocol economics and token economics might be even more important for tokens than the link between company profits and stocks.
Because if a protocol generates billions in revenue over its lifetime, but not a single dollar flows to token holders, there may never be a final event to bridge the gap between "protocol value" and "token value."
Protocol Profits Must Ultimately Flow to Tokens
Therefore, we increasingly believe that token buybacks are one of the simplest and most direct mechanisms to directly link protocol success with token holder value. But this does not mean every protocol should immediately use all its revenue to buy back its own token. In fact, this would often be poor capital allocation.
Many leading protocols today are still essentially in a startup phase. They are growing very fast and have numerous opportunities to deploy capital. They can improve products, provide liquidity incentives, enter new markets, acquire teams or technology, build insurance reserves, subsidize new products, or invest in the entire ecosystem.
If a protocol can invest $1 today to create $5 of future value, we would clearly prefer it do that rather than use that $1 for a token buyback.
This is not a problem unique to the crypto industry.
Amazon became one of the most successful investments in history not by aggressively raising dividends and stock buybacks during its early high-growth phase. When reinvesting capital yields higher returns, good companies choose to retain profits for investment rather than returning them to shareholders.
Protocols should do the same.
But there is a huge difference between "We are not buying back tokens today because there are better uses for capital right now" and "There is no reason to believe these revenues will ever flow to token holders in any form."
The former can be an excellent capital allocation decision. The latter makes valuation nearly impossible. In other words, buybacks don't have to happen today, but investors must believe they will happen someday.
Morpho (MORPHO) founder Paul Frambot recently reignited this discussion. He argued against aggressive token buybacks, believing young, fast-growing protocols should reinvest profits back into the business rather than distributing them directly.
Last year, he expressed similar views in a blog post. We mostly agree: a protocol should be judged like a company—reinvest when the expected return on incremental capital is high enough; return capital when those returns decline.
But there is a crucial difference between Morpho and the tech companies Frambot used for comparison. Meta's shareholders own Meta. Even before Meta began returning capital to shareholders, they already legally owned the residual claim to the company's growing profits and assets.
Theoretically, they could ultimately realize this value through dividends, stock buybacks, or a company acquisition. MORPHO holders do not have the same clear path to value realization.
Therefore, reinvesting protocol revenue into the business can delay when token holders receive value, but it cannot indefinitely substitute for value capture itself. Ultimately, the economic value created by a protocol must flow to the token in some way.
And as usual, Crypto Twitter has framed this as a black-and-white debate: "buybacks are good" versus "buybacks are bad." In reality, the real issue is timing, as we discussed in March 2025. Buybacks don't have to happen today, but protocols must ultimately answer one question: What exactly do token holders own?
After Making Money, How Should Protocols Spend It?
For most of crypto history, "capital allocation" wasn't an important topic because projects didn't have much capital to allocate. Projects raised funds, burned cash, and then issued tokens to incentivize users. If they ran out of money, they raised more.
Now, this is changing.
Once a protocol starts generating significant free cash flow, its founders and governance participants suddenly face a problem that Jamie Dimon, Warren Buffett, and all public company CEOs have dealt with for decades: What should we do with this money?
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Should we reinvest it back into the business?
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Should we use it for acquisitions?
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Should we subsidize growth?
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How much should we keep in reserve?
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Should we expand into adjacent businesses?
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When expected returns on these investment opportunities start to decline, should we return excess capital to token holders?
These are capital allocation decisions. Therefore, when digital asset investors evaluate a protocol going forward, they shouldn't just look at how much revenue it generates, but also at what it does with that revenue.
Imagine two protocols, each generating $100 million in annual revenue, growing at 30% annually, with similar profit margins and competitive positions.
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Protocol A reinvests all earnings back into the business indefinitely, and there is no credible mechanism to ensure these earnings will eventually flow to token holders.
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Protocol B also actively reinvests at this stage, but its governance mechanism and tokenomics clearly state that after meeting reasonable reserve and growth investment needs, remaining cash flows will be used to purchase its own tokens.
These two tokens should not have the same valuation multiple. Protocol B has established a credible mechanism for protocol revenue to translate into token value. Protocol A has not.
Buybacks Do Not Equal Value Return
Even the term "buyback" itself requires careful analysis. Suppose a protocol generates $100 million in revenue, uses $50 million to buy its own tokens, but then reissues $50 million worth of the same tokens as incentives. This does not necessarily mean it truly returned $50 million in value to token holders. This could just be a recycling of token emissions, not equivalent to actually returning $50 million to holders.
Buybacks and burns permanently reduce token supply; buybacks followed by distributing tokens to holders or stakers more directly transfer economic value. If a protocol puts bought-back tokens into a treasury, it may also create value, but only if that treasury is ultimately managed for the benefit of token holders. The specific mechanism matters.
But the overarching principle is actually very simple. If a protocol creates economic value, there must ultimately be a mechanism for token holders to share in that value. Otherwise, so-called "protocol revenue" is just an interesting statistic.
From Revenue to Valuation
By 2021, we were already starting to see this framework operate in reality.
In July of that year, we introduced a group of digital assets, describing their underlying projects as: "real companies, real cash flows, tokens that capture economic value, and a way to measure their success." We believed these projects were finally achieving something we had long hoped digital assets would do: allow customers and users to share in the economic value created by the project.
But the problem then was that such projects were far too few. Now, the situation is different. This is precisely why Hougan's viewpoint is so noteworthy.
The truly important part of his article is not the idea that "revenue should flow to token holders." What's truly important is that just as these assets have matured and this valuation framework is finally starting to work, this framework is also coincidentally becoming mainstream. This will have a very significant impact on valuation.
The Valuation Discount Should Start to Narrow
If a protocol's revenue grows 50%, its token may naturally become more valuable because the protocol itself is becoming more profitable. But something else can also happen simultaneously: the valuation multiple investors are willing to pay for those profits may also rise.
Suppose a protocol's profits grow 50% annually, and at the same time, as investors become increasingly confident that these profits will ultimately flow to token holders, its valuation multiple increases from 8 times earnings to 16 times earnings.
In this scenario, protocol profits don't even need to double for the token price to potentially double. The reason is simply that the market is now willing to pay a higher price for each dollar of profit because investors believe the probability of those profits eventually reaching token holders has increased.
This is essentially the point Hougan made: as clearer links are established between protocol revenue and tokens, crypto asset valuations could double or reach even higher levels. We believe he is correct. For a long time, crypto protocols that generate profits have traded at a significant valuation discount relative to similar public companies. Part of that discount is clearly justified.
Stockholders have legally protected ownership, corporate governance structures are highly mature, financial statements are audited, securities laws provide investor protection, management has fiduciary duties, and after decades of practice, shareholders have a very clear institutional and legal basis for understanding what they own.
Token holders often lack many of these things. Therefore, a token likely *should* trade at some discount relative to a stock with identical economic conditions.
But the question is: How large should this discount be?
If a protocol has hundreds of millions in sustainable revenue, extremely high profit margins, rapid growth, access to global markets, minimal capital requirements, and also has a transparent mechanism to consistently use excess cash flow to buy its own tokens, should it really trade at only a fraction of the valuation multiple of a slower-growing public company?
Perhaps.
But we increasingly suspect the answer is no. This means one of the biggest opportunities in digital assets today might not merely be finding protocols whose revenue is still growing. The more important opportunity may lie in identifying those protocols whose fundamentals have changed, but the market is still pricing them using an outdated valuation framework.
Crypto Investing Is Moving Towards Fundamentals
For nearly a decade, Arca has believed that digital assets would ultimately be valued using the same fundamental investment principles as all other assets.
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In 2019, we discussed enterprises with cash flows that used token buyback mechanisms.
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In 2020, we proposed that exogenous cash flows were key to long-term value growth for token holders.
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In 2021, we began focusing on digital assets that truly generated revenue and allowed tokens to capture economic value.
This didn't mean the market back then was suitable for fundamental investing. Frankly, most assets themselves weren't ready either. The problem wasn't that the framework was wrong; it was just that the entire industry wasn't mature enough for the framework to work consistently.
Now it's different.
Protocols have customers, they generate revenue, they create profits, protocol operators are beginning to face capital allocation decisions, and more excess cash flow is being used to purchase tokens.
This means the questions digital asset investors should be asking today have become remarkably familiar:
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How fast is revenue growing?
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What are the profit margins?
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How durable is the competitive advantage?
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How much capital needs to be reinvested to sustain growth?
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What returns can these reinvestments generate?
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When high-return reinvestment opportunities diminish, how much excess capital will ultimately be returned to token holders?
In other words, crypto investing is finally becoming fundamental investing. After spending over 15 years trying to invent various new token valuation methods, the next major "innovation" in the digital asset space might precisely be the logic stock investors have long been familiar with: Make money, grow profits, allocate capital wisely, and ultimately let asset holders share in those profits.
