# Key Takeaways

The Buyback & Burn model serves as a democratic approach that elevates token value while allowing small holders to enjoy proportional gains. By reinvesting protocol revenues directly back into the tokens, value that might be lost through dividends is instead reinvested into the ecosystem, enhancing scarcity automatically.

In line with the Hyperliquid example, a mere buyback is insufficient; actual demand, a robust community base, and market suitability are essential for success.

# Fee Distribution: A Double-Edged Sword

Fee distribution models, often termed “real yield,” may appear attractive at first glance, but they also offer a convenient liquidity route for foundations or early investors. Foundations can convert dividends into Ethereum (ETH) or USD Coin (USDC), thus cashing out without directly selling their tokens, which could otherwise leave on-chain evidence and shock the market.

However, from the community standpoint, the funds that should return to the protocol exit as dividends, leaving small token holders with a minuscule share. What seems like a fair revenue model can quickly become a channel for insiders to exploit the protocol’s value.

# Buyback & Burn: Favoring Small Holders

Hyperliquid ($HYPE) has introduced the Buyback & Burn mechanism to overturn these dynamics. Instead of distributing revenues as dividends, the protocol buys $HYPE tokens on the open market and burns them permanently. This method creates democratic profit distribution. Every time Hyperliquid conducts a buyback and burn, it places upward pressure on the token price, allowing all holders, including small ones, to realize gains by selling at an opportune moment.

The foundation, however, faces restrictions in large-scale sales. A market dump by the foundation would be immediately noticeable on-chain, damaging investor trust and the project’s reputation. Critics argue that the foundation might sell the tokens right after buyback to inflate prices artificially, but serious projects would avoid such self-destructive tactics. A post-buyback sale would undermine the foundation’s credibility and significantly devalue their tokens.

Moreover, large-scale dumping nullifies the core value proposition of buyback and burn, rendering it counterproductive. Conversely, a buyback sends a strong signal of confidence from the team, reassuring investors of the protocol’s ongoing growth intentions. This leads to the ‘follow-the-leader’ effect, where investors are more likely to trust and follow the team’s actions.

Ultimately, the foundation also benefits if the token’s price rises, but small holders can capitalize on the price increase without facing the reputational risks tied to large sales. Unlike dividend models, which favor substantial shareholders, the buyback and burn model distributes profits more equitably across participants.

# Value Retention and Recycling

The fundamentals of token value lie in supply, demand, and future value expectations. While dividend tokens can be attractive to investors, the value generated within the protocol often exits the ecosystem in this model. When dividends are paid in ETH or USDC, significant holders can build cash reserves without selling their tokens, while the protocol’s growth funds shrink accordingly.

For instance, Hyperliquid currently has approximately 422.6 million $HYPE staked, with the foundation holding about 64% (272.7 million). Had Hyperliquid selected dividends over buybacks, the foundation could theoretically claim dividends worth 14 million $HYPE (approximately $352 million based on May 9, 2025 data, applying 64% of AF buyback volume). Without institutional guarantees, it’s challenging for small investors or the community to track where these funds flow, posing a substantial risk of value leakage from the network.

Conversely, the Buyback & Burn model reinvests proceeds into the token. Each buyback decreases the circulating supply, naturally increasing each holder’s relative share value. This generates an anticipation of reduced future supply, delaying sales and placing additional upward pressure on the token price.

At Hyperliquid, spot trading and new listing fees contribute to $HYPE burns. Increased transaction volumes lead to continuous supply reductions. Unlike dividend models, where holders must reinvest received dividends to maintain scarcity, Hyperliquid’s automatic burn mechanism directly links network activity and token value, emphasizing sustained scarcity.

# Hyperliquid’s Community-First Philosophy

Hyperliquid chose buyback and burn over dividends to prioritize community benefits. The project commenced without allocating tokens to venture capitalists, distributing approximately 310 million $HYPE (then worth $1.6 billion) to 90,000 users via a massive airdrop at launch. This broad distribution prevented insider sell-offs and encouraged community participation while supplying substantial liquidity to the entire ecosystem.

Over 70% of the total $HYPE has been distributed to the community through airdrops and incentives. The foundation has staked significant portions of its holdings for network security, essentially precluding sudden sales. Future governance votes will determine whether to use future trading fees for additional buybacks, reaffirming the project’s commitment to avoiding exploitative models. Thus, protocol revenues feed directly into token value appreciation, allowing even small investors to seize sell opportunities driven by buybacks.

# In Conclusion

Following the decline of the “real yield” trend in 2022, the focus has shifted to protocols becoming their best buyers by 2024-2025. Projects like dYdX illustrate this trend by adopting the buyback model to capture revenues for their tokens. Market sentiment suggests that active buybacks bolster confidence that tokens are more than mere speculative playthings.

Hyperliquid has adhered to this model from inception. By channeling protocol revenue into buybacks, the project mitigates insider profit imbalances, avoids the legal complexities tied to dividends, and ensures fair profit distribution as token value rises.

However, not every project thrives with a buyback strategy alone. Failures of buybacks to sustain token value often result from lacking genuine demand, stable revenue structures, or loyal communities. The model alone cannot revive a weak protocol; it requires a clear use case, product-market fit, and a supportive community.

Nevertheless, the Buyback & Burn remains effective for sound token economies. It prevents profit monopolization by foundations or large stakeholders, assures traders of smooth transactional experiences akin to centralized exchanges, and aligns fees with user benefits. Consequently, strong support builds around the project, driving token prices higher, and establishing a reward structure proportional to network activity.

# Appendix: Overview of $HYPE Buyback & Burn Mechanism

Hyperliquid’s buyback loop is already significant. As of May 10, 2025, the Assistance Fund (AF) has repurchased 22 million $HYPE (worth about $5.56 billion). An additional 226,000 $HYPE has been burned through trading fees.

## Listing Auctions & Fee Burn (HIP-1)

– Conduct 31-hour spot listing auctions to raise USDC, which is then used to buy and burn $HYPE.
– Increased listing demand results in consistent $HYPE buybacks, ensuring stable supply reduction.

## AF (Assistance Fund) Buyback

– A portion of spot trading fees flows into the on-chain AF, used partially for $HYPE buyback and burn, as decided by community votes.
– Higher trading volumes increase the fund size, enabling larger burn orders, further driving volume.

## Builder-Staked Perpetuals (HIP-3)

– Opening a new futures market requires staking 1 million $HYPE as collateral, removed from circulation.
– Violation of rules, such as oracle manipulation, results in slashing part or all of the bond, which is then burned.
– Up to 50% of futures trading fees go to the builder, with the remainder potentially used for buybacks or staking rewards based on governance decisions.