Is Revenue Share any good?
A closer look at what drives demand
GMX is quite a success: the easy UX, the value prop, and even the token price.
The tokenomics consists of a revenue share that increases the longer one stakes (you can read the full breakdown here).
Sharing revenue with token holders is a good way of creating demand for a token. You buy the token, hold it, and get revenue.
Contrast this to purely holding a token for speculation, and you get why a project would implement a mechanism like that into their tokenomics.
It’s been a while since I went on to compare shares to tokens here, so in this piece, I want to investigate further what is driving demand and the role a revenue share mechanism might play.
A practical example: GMX
What triggered the whole thought about demand through revenue share was this:
Here, GMX tells us on their earn site that for every US Dollar you invest, you get an annual return of 3.3%.
3.3% does not seem super tempting to me.
GMX is a crypto startup with a lot of risk in holding the token. For that, I feel 3% isn’t much.
Compare it to top-rated US corporate bonds (long-term average lies around 4% annual return):
Bond yield isn’t the same as a crypto token with APR, but I can’t find a lot of startups that even pay dividends.
This is what makes the idea of revenue-sharing even more interesting.
Here’s my take: Nobody buys a growth stock for dividends. Few regular growth companies even pay dividends. They reinvest their profits into growth, hence growth stocks.
In crypto, however, this seems to be a popular way of attracting demand for a token.
Why?
Do people buy the token for the revenue share?
When we talk about demand drivers, we typically think of the part of the tokenomics that makes people interested in buying the token. The idea here is simple.
Sharing revenue with token holders turns the token into a yield-bearing asset. You hold it and get some pay for it. In theory, it could convince you to buy and hold the token.
Getting back to GMX, however. 3.3% per year isn’t much if we consider what the money could earn elsewhere.
At most, this yield can be seen as a tiny little bonus, but the main reason must be something different.
Speculation?
Speculating on the price appreciation of a token that represents a great product?
That seems more like it.
Speculation the biggest demand driver?
If revenue share isn’t why you’re buying a token, it might be something more akin to the stock market.
Let’s compare.
I’d see GMX as a startup or an early-stage growth company. They typically don’t pay dividends, and most investors buy their stock to speculate on its growth potential.
Buy —> hope that you have discovered something that isn’t priced in yet —> wait for the market to catch up, i.e. stock price to go up —> sell.
In the case of GMX, most investors will probably think the product is cool and hope to sell their tokens for a profit later on.
I doubt revenue share will play a significant role at all.
There's nothing bad about speculation. Nothing new, either. People speculate in growth stocks in just the same way.
In my Shares vs. tokens piece, I’ve highlighted that people buy growth stocks because they assume they can collect a dividend at some point. This potential can form the foundation of speculation.
Let’s get back to GMX and dig a bit deeper. Maybe the GMX boosting mechanism can help us assess people's interest in revenue sharing.
Stake for a boost!
The theory: People buy the token for yield.
This is hard to measure.
We could look at the boost stats since GMX incentivizes stakers to keep staking by giving them a yield boost (via multiplier points).
I created a basic dashboard to gain insights into stakers.
It clearly shows that people stake for a long time, but that doesn’t mean they do it for the revenue share. They could also just like the project and take the revenue share as a bonus.
In the high-risk, high-reward scenario GMX is in, I can’t imagine people buying the token just for a 3% APY.
The fundamental question to me then is this:
If most people are more interested in a 10x than a small APY, why do projects pay out their revenue to holders? Wouldn’t it be better to reinvest the funds into growth or keep them in the treasury until a good growth opportunity arises?
Why do crypto projects go through all this to offer average returns to people? Why not reinvest in the project as any good growth company would and try to grow 10x?
Is the token part of the product?
I’m personally much more interested in a really good project. A well-designed token is important, too, but if the product executes well and grows, I’m not sure if revenue share is the godsend solution that everyone is using right now.
Many protocols use revenue sharing as a marketing tactic to attract customers. You throw investors a bone. It makes them feel like you’ve thought about your demand drivers. It helps with their investment thesis.
Someone will buy the token because of revenue share, right?
People can build an investment thesis around the demand for the token being covered by a mechanism like this.
I don’t want to disregard revenue share completely. It can be useful.
But, I also think there are alternatives that projects can implement:
Accumulate profits in treasury and reinvest profits via governance to drive growth. Governance then becomes the demand driver for your token.
Just grow. Why not cut fees even more to attract even more volume and liquidity, building out the moat? This would resemble aggressive growth companies. Governance could still be a demand driver as, with sufficient growth, the project could start paying a dividend.
Buyback and reinvest or buyback and burn. This is a more direct mechanism and is also very similar to stocks. The demand driver is owning an asset that gets more scarce over time.
Great stuff!