Revenue Distribution

Revenue distribution begins with the protocol's fee capture mechanisms. Common sources include:

• Swap fees from decentralized exchanges (e.g., 0.3% per trade).
• Borrowing interest and liquidation fees from lending markets.
• Performance fees from yield-generating vaults.
• Protocol-owned liquidity strategies that generate yield from underlying assets.

A common distribution method where the protocol uses a portion of its revenue to purchase its native token from the open market and permanently removes (burns) it. This mechanism:

• Reduces token supply, creating deflationary pressure.
• Increases scarcity and can support the token's price.
• Is often governed by on-chain treasury management parameters set by token holders.

Revenue is distributed directly to users who stake or lock the protocol's native token. This creates a direct yield for token holders, aligning incentives. Key aspects:

• Rewards are often paid in the same token (native yield) or a stablecoin.
• May require a vesting period or lock-up to claim.
• The Annual Percentage Yield (APY) is dynamically calculated based on protocol revenue and total value staked.

Protocols distribute revenue to users who provide liquidity to designated pools, compensating them for impermanent loss risk and capital commitment. This can be structured as:

• A share of the trading fees generated by the pool.
• Additional emission rewards in the protocol's token.
• Fee rebates or discounts on protocol services for active LPs.

A portion of protocol revenue is often directed to a decentralized treasury (e.g., a multi-sig wallet or DAO-controlled vault). These funds are used for:

• Protocol development grants and contributor compensation.
• Strategic acquisitions or investments.
• Insurance fund provisioning to cover smart contract risks.
• Future liquidity mining programs and ecosystem grants.

The entire distribution process is typically trustless and automated via smart contracts, ensuring transparency and predictability. Key components include:

• Revenue routers that automatically split fee streams.
• On-chain oracles that trigger distribution events based on predefined conditions (e.g., time-based epochs, revenue thresholds).
• Immutable logic that cannot be altered without governance approval, ensuring commitment to token holders.

A model where a portion of the protocol's collected fees is sent directly to token holders, often via a claimable contract. This creates a direct, tangible yield.

• Mechanism: Fees are accrued in a treasury or pool; token holders call a function to claim their pro-rata share.
• Example: SushiSwap's xSUSHI stakers receive a 0.05% cut of all trading fees on the platform.
• Key Trait: Requires active claiming by the user, separating ownership from passive yield accrual.

A model where the protocol uses its revenue to purchase its own native token from the open market and permanently destroy it, reducing the total supply.

• Mechanism: Revenue is swapped for the native token via a DEX, and the tokens are sent to a burn address.
• Example: PancakeSwap uses a portion of its fees for weekly CAKE token burns.
• Economic Effect: Creates deflationary pressure, increasing scarcity and potentially raising the value of remaining tokens proportionally.

A model where revenue is used to mint new tokens that are distributed to users who have staked or locked the protocol's token, increasing their token balance.

• Mechanism: The protocol's staking contract automatically mints new tokens as rewards, increasing the staked balance for all participants.
• Example: OlympusDAO's (3,3) staking model historically used rebasing to reward stakers of OHM.
• Key Trait: Rewards are auto-compounded, but can be highly inflationary if not backed by sufficient revenue.

A model where protocol revenue is accumulated in a decentralized treasury, which is then managed (e.g., invested in yield-bearing assets) to fund grants, development, and future distributions.

• Mechanism: A DAO treasury (e.g., managed via Snapshot) holds assets; token holders vote on capital allocation proposals.
• Example: Uniswap DAO's treasury, funded by a portion of protocol fees, holds billions in UNI and stablecoins for ecosystem growth.
• Key Trait: Focuses on long-term sustainability and strategic capital deployment rather than immediate holder payouts.

A model where revenue is directed to subsidize liquidity providers in key trading pools, improving capital efficiency and reducing slippage.

• Mechanism: Protocol fees are converted into reward tokens and distributed to LPs in designated pools, on top of trading fees.
• Example: Curve Finance's CRV emissions are directed to gauges voted on by veCRV holders to boost rewards for specific pools.
• Key Trait: Directly aligns protocol revenue with its core liquidity needs, a form of protocol-owned liquidity.

A hybrid model where users lock tokens to receive veTokens (e.g., veCRV, veBAL), granting them governance power and a share of protocol revenue, often distributed as bribes or direct fees.

• Mechanism: Token lockup creates vote-escrow tokens; these tokens grant rights to vote on fee distribution (e.g., to LP pools) and often receive a share of the fees or external bribes from projects.
• Example: Curve's ecosystem is built around veCRV, where lockers receive 50% of trading fees and direct CRV emissions via gauge votes.
• Key Trait: Aligns long-term holders with protocol growth by tying economic benefits to governance power.

Protocol Revenue (or 'net revenue') is the portion of total fees retained by the protocol's treasury after paying out incentives. Supply-Side Revenue (or 'gross revenue') is the total fees paid to service providers, like liquidity providers or validators. The difference is a key indicator of a protocol's business model sustainability.

• Example: A DEX with $1M in trading fees that pays $800k to LPs has $200k in Protocol Revenue.

Protocols generate revenue through specific on-chain mechanisms. Common models include:

• Swap Fees: A percentage taken from asset exchanges on DEXs (e.g., 0.3% on Uniswap v2).
• Borrowing/Savings Rates: The spread between interest paid by borrowers and given to lenders in lending protocols.
• Minting/Burning Fees: Charges for creating or redeeming stablecoins or other synthetic assets.
• Block Space Sales: Priority fees and MEV captured by validators or the protocol itself.

Revenue is commonly distributed to token holders via two primary models:

• Direct Staking Rewards: Revenue is used to purchase the protocol's token from the open market and distribute it to stakers (e.g., GMX's esGMX rewards).
• Buyback-and-Burn: The protocol uses revenue to buy its own token from the market and permanently destroy it, creating deflationary pressure (e.g., Binance's BNB burn).

The choice impacts tokenomics, holder alignment, and long-term value accrual.

The protocol treasury is the repository for accumulated Protocol Revenue. Its management is critical for long-term viability. Key analysis includes:

• Runway: How long can the treasury fund development and grants at current burn rates?
• Asset Composition: Is the treasury diversified or overly exposed to the protocol's own volatile token?
• Governance Control: Treasury spending is typically governed by token holder votes via decentralized governance.

Analysts use specific ratios to assess revenue distribution health:

• Protocol Revenue to Market Cap (P/MC): A 'PE ratio' analog showing how revenue-generating a protocol is relative to its valuation.
• Fee-to-Rewards Ratio: The percentage of generated fees paid out as incentives; a lower ratio can indicate stronger value capture.
• Treasury Yield: The annualized return generated by the treasury's assets, including staking and lending income.

Lido provides a clear case study in revenue distribution for a liquid staking protocol.

• Revenue Source: Takes a 10% fee on staking rewards from validators.
• Distribution: 100% of this fee revenue is directed to the Lido DAO treasury.
• Treasury Use: The DAO governs fund allocation for grants, insurance, and development. This model shows direct value accrual to the governance token (LDO) holders who control the treasury.