Revenue Sharing

DEXs use revenue sharing to distribute a portion of trading fees to liquidity providers (LPs) who supply assets to trading pools. This model, central to Automated Market Makers (AMMs), compensates LPs for impermanent loss risk and capital lock-up. Some DEXs also share fees with veToken holders who lock governance tokens to direct emissions.

• Examples: Uniswap, Curve Finance, Balancer.

Protocols like Lido and Rocket Pool generate revenue from validator rewards on Proof-of-Stake networks. They share this revenue with users who stake their assets, issuing a liquid staking token (e.g., stETH, rETH) that accrues value. A portion of the revenue is also often directed to a protocol treasury or governance token stakers to fund development and operations.

Derivatives platforms (e.g., GMX, Synthetix, DyDx) employ sophisticated revenue sharing to sustain their ecosystems. Mechanisms include:

• Sharing a percentage of trading fees with liquidity providers in vaults.
• Distributing fees to stakers of the platform's native token who act as counterparties or backstops.
• Using fee rebates or escalating reward tiers based on user volume or stake size.

Marketplaces facilitate revenue sharing through creator royalties, automatically sending a percentage of secondary sales back to the original artist or project. While optional on some chains, this model is a key value proposition for generative art and PFP projects. Platforms may also share a portion of platform fees with governance token holders or stakers.

Protocols like Yearn Finance and Convex Finance automate yield farming strategies. They capture yield from underlying protocols and distribute it to depositors, minus a performance fee and a management fee. These fees are then frequently shared with holders of the protocol's governance token (e.g., YFI, CVX) or locked veToken holders, creating a flywheel for protocol-owned liquidity.

Base-layer networks and scaling solutions implement revenue sharing at the protocol level.

• Transaction fee burning: A portion of gas fees is permanently removed (burned), effectively benefiting all token holders by reducing supply.
• Priority fee auctions: In systems like Ethereum post-EIP-1559, block proposers (validators) receive priority fees, sharing block space revenue directly.
• Sequencer fees: On Optimistic Rollups and ZK-Rollups, sequencer profits from bundling transactions can be shared with stakers or a DAO treasury.

Revenue sharing directly links a protocol's financial success to token value, creating a value accrual mechanism. This is often achieved through:

• Fee Distribution: A percentage of transaction fees, trading fees, or subscription revenue is sent to a treasury or distributed directly.
• Buyback-and-Burn: Using profits to buy tokens from the open market and permanently removing them, increasing scarcity.
• Staking Rewards: Distributing revenue as additional rewards to users who stake their tokens to secure the network. This transforms tokens from speculative assets into instruments with cash-flow-like characteristics.

Revenue sharing is frequently gated by staking, requiring users to lock tokens to qualify for distributions. This serves dual purposes:

• Security: Locked tokens (stake) secure the network in Proof-of-Stake systems or act as a commitment mechanism.
• Alignment: Ensures rewards go to long-term aligned participants rather than short-term traders. Often, the right to vote on governance proposals (like adjusting the revenue share percentage) is also tied to staked tokens, creating a flywheel where economic and governance power are aligned.

Protocols often route revenue to a decentralized treasury managed by token holders. This fund ensures long-term sustainability by financing:

• Development Grants: Funding core developers and new initiatives.
• Ecosystem Incentives: Bootstrapping liquidity or user adoption.
• Insurance Funds: Covering potential shortfall events or smart contract exploits. A robust treasury model, funded by sustainable revenue, is critical for a protocol's resilience beyond initial token emissions.

Structuring revenue sharing requires careful legal analysis to avoid creating a security under regulations like the U.S. Howey Test. Key factors regulators examine include:

• Expectation of Profit: Is the primary motivation for participation financial return?
• Efforts of Others: Does the profit depend predominantly on the work of a central team? Many projects use staking rewards framed as compensation for network services (validation, liquidity provision) rather than direct dividend payments to navigate this landscape.

A fee switch is a governance-controlled parameter that activates or adjusts the protocol's revenue-sharing mechanism. Famous examples include:

• Uniswap: Governance can vote to turn on a protocol fee, diverting a portion of pool fees from LPs to UNI stakers.
• SushiSwap: Historically used a fee switch where 0.05% of swap fees were converted to SUSHI for xSUSHI stakers. Activating the fee switch is a major economic event, balancing increased value accrual against potential liquidity provider (LP) migration.

A critical distinction is between real yield and inflationary token emissions.

• Real Yield: Rewards are paid directly from protocol-generated fees (e.g., trading fees, loan interest). This is sustainable value transfer.
• Inflationary Emissions: Rewards are paid by minting new tokens, diluting existing holders. This is not true revenue sharing. Protocols like GMX and dYdX have been highlighted for distributing real yield to stakers, sourced directly from user fees.