Whether we like it or not, most of the “intrinsic” value of DeFi governance tokens in the long-run should rely on their governance powers, and rights on protocol revenues. In the end, DeFi protocols are a new type of companies that still need to generate some kind of revenue and be profitable.

Analyzing how much revenue a protocol generates, and how it redistributes is far from obvious.

Today, we will look at a few protocols, see how they generate revenue, and the impact it has on their token holders. Hopefully, you will get a clear idea of how this works within Angle, and its potential future revenue generation.

Most protocols generate revenues, but it’s very difficult to know how that impacts the protocols themselves, and their token holders.

In general, a business revenues serve three purposes:

• paying costs (operational, growth, community …)

• building reserves

• redistributing a profit

In a DAO, this is supposed to be decided by token holders. However, revenue distribution can be very difficult to calibrate because of misalignment between different token holders, and protocol stakeholders (private team, short-term buyers, long-term buyers, users, …)

Additionally, some protocols rely on their token for needs that others fulfill using protocol revenues: CRV paying versus Uniswap.

There doesn’t seem to be a winning standard yet, but it’s interesting to look at what exists already and see their advantages and disadvantages.

• How much revenue is generated by the protocol

• How much needs to be spent to maintain the protocol functioning

• How much is kept by the protocol as reserves and/or redistributed to token holders

We won’t go into the details of each protocol here, but will try to get a broad idea of how some of them do this.

In most stablecoins protocols, revenues come from interest rate, liquidation fees, and minting or burning fees.

Other stablecoin protocols performing a lot of algorithmic market operations like Frax also earn revenue in other protocols governance tokens incentivizing those pools, like CRV or CVX.

Total 1y protocol revenue: ~ $76M, mainly coming from borrowing interest and liquidation fees.

In Maker’s case, the revenue is shared between:

• operational costs (team paychecks)

• surplus buffer

• MKR buybacks which are burned

In Maker’s case, there are very small operational costs outside of oracles maintenance, meaning that the protocol can function normally with very little financial support.

It’s interesting to note that the token holders decided to pay a hefty price to have a very large number of contributors (12 Core units) working continuously to maintain the protocol. The teams and their operations cost around ~50M DAI /y, close to this year’s protocol revenue.

After funds are put aside in Maker’s surplus buffer, MKR token holders get the remainder of the profit through tokens buybacks which are burned. However, a drawback of buybacks is that it rewards present and future token holders with past revenues equally.

Maker & MKR summary

• Important operational costs for growth, but not much for daily protocol operations

• No token holders dilution

• Token holders rewarded with profit through buybacks

In my opinion, buybacks are not a good way to redistribute a share of profits to token holders as they reward present and future token holders with past revenue. MKR price history also shows that it hasn’t been very effective so far.

AMMs like Curve or Uniswap charge trading fees to users, which are redistributed in different ways.

Total 1y protocol revenue: ~ $56M

Curve charges a fee on each trade. This revenue is shared 50/50 between:

• LPs

• locked token holders

Additionally, an important cost is incurred by token holders through new token emissions distributed to LPs as incentives for their liquidity. This can be considered as growth expenses for the protocol, though not covered by revenue but by token holders. In my opinion, it is not clear yet if Curve could attract as much liquidity and volume without these incentives.

This is a key aspect, as an increasing supply distributed like that gives a constant sell pressure on the token. This could limit Curve’s ability to finance LPs in the future depending on the token price action.

Curve and CRV summary:

• protocol growth cost (liquidity) paid with new token emissions

• 50% of revenue redistributed to locked token holders

  

  Uniswap

  Uniswap redistributes all the revenue generated to LPs. We can interpret that as using 100% of revenues for operational costs (i.e. paying suppliers, which LPs are). There is a potential “fee switch” that hasn’t been activated yet.

  The Uniswap team chose a very different trade-off than Curve. UNI token holders don’t have any recurrent operational cost to pay, as it is self-maintained by protocol revenue. On the other hand, they don’t receive any revenue generated from trading fees. As such, they are a lot less diluted by operational costs than CRV holders.