The Cyclical Evolution of Token Utility

The role of tokens has gone through cycles of boom, disillusionment, and iterative progress.

On June 12, Binance Research released a report on the evolution of token models. Recently, crypto influencer Stacy Muur condensed this report. This article expands on ten key points from the condensed version to provide a comprehensive overview. Here are the details:

1. ICO Era: Only 15% of Projects Made It to Exchanges

During the ICO era, only 15% of projects managed to get listed on exchanges. Among these, a staggering 78% were outright scams. The remainder either failed or became insignificant.

The ICO era demonstrated that retail investors had a strong appetite for participating in the financing of startups. It represented a new type of funding channel, functioning like a free market—permissionless and intermediary-free. Although many projects did not succeed, it paved the way for the future, making the remaining investors savvier and more cautious when choosing companies to invest in. This ultimately gave rise to more resilient projects such as Aave, 0x, Filecoin, and Cosmos.

Key Takeaways:

• ICOs presented founders with an incentive dilemma that could hinder protocol development.

• ICOs also attracted a wave of developers drawn by the intense retail interest, although not all projects were built with long-term sustainability in mind.

• Overall, ICOs represented a new form of capital formation accessible to everyone and showed the strong interest of retail investors in participating in startup financing.

2. Liquidity Mining as a Driver of Protocol Growth

Liquidity mining began with Synthetix in July 2019 and quickly gained popularity in the DeFi space. Compound Finance further refined the concept of liquidity mining by endowing its token with governance rights. Yield aggregation platform Yearn Finance built on the concepts of governance and liquidity mining, iterating further. Similar to Synthetix and Compound, the YFI token was used to bootstrap liquidity through liquidity mining and held governance rights over the protocol. Yearn Finance also used liquidity mining as a fair launch mechanism.

3. Governance as Token Utility Failed to Sustain Demand

However, the idea of using governance as a token utility did not create a sustained demand for tokens. Take Uniswap as an example: after the airdrop, only 1% of UNI wallets increased their holdings, with most airdrop recipients selling off their tokens. A staggering 98% of wallets never participated in the governance process (voting).

Despite the good intentions behind these experiments aimed at fairly and targeted token distribution, governance rights ultimately did not provide token holders with a compelling enough reason to continue holding.

Key Takeaways:

• Liquidity mining was the first iteration of token distribution, rewarding users to bootstrap the protocol's user base and later experimented with as a fair token distribution method.

• Retroactive airdrops were also introduced as another form of token distribution, aiming to reward organic protocol usage and achieve a broader distribution of governance participants.

• Governance was the first form of token utility, allowing token holders to participate in protocol-level decision-making. However, given the reflexivity when prices began to fall, governance could not sustain demand in the long term.

4. Multi-Token Models Struggle to Separate Speculative and Native Economies

The novelty of liquidity mining extended beyond DeFi's summer. The ability to use protocol tokens for free as a tool to access resources enabled Web3 games like Axie Infinity and DePIN networks like Helium to achieve massive success in a short period. Neither Axie Infinity nor Helium adopted a single-token model; instead, they used multi-token models to distinguish between speculation and utility. One token was for value accumulation, while the other was for network usage. However, in both cases, this distinction did not work. Speculators flocked to buy the wrong tokens, causing incentive misalignment and value disconnection. Eventually, both reverted to simplified models.

Key Takeaways:

• The concept of liquidity mining was further extended to become a bootstrapping tool for other use cases like gaming and DePIN.

• Distinguishing speculative demand from native economies through multi-token models is difficult to execute and often fails due to the lack of utility in one of the tokens.

• Token economics is an iterative process, and only when a product gains attention do the interests and needs of stakeholders become clearer.

5. Private Funding Floods In: A Shift to Valuation Games

The years 2021 - 2022 witnessed an explosive growth in private funding, raising $41.46 billion and $40.12 billion respectively. To put it in perspective, the funding amount in 2021 alone was almost double that of the combined funding from 2017 - 2020 ($22.6 billion). This pattern of growth has not been seen since.

To accommodate the influx of funds, projects began conducting multiple rounds of financing to accommodate more investors and extend their development timelines. Given the increase in pre-TGE funding rounds, private investors would typically extend token lock-up periods, resulting in a lower proportion of circulating supply at the time of token issuance. Combined with airdrops and points mining, this could lead to inflated metrics, thereby helping to boost the initial FDV. Private funding inadvertently shifted the focus from token utility to optimizing valuation.

6. Bridge Activity Declines After L2 Platform Airdrop Snapshots

However, after airdrops, it is common to see a decline in protocol metrics (see figure below) as well as market valuation. This has led to a negative perception of the "low circulating supply, high FDV" issuance model that was common over the past two to three years.

All well-known L2 platforms experience a drop in bridge activity after announcing the completion of snapshots.

7. Tokens with Higher Circulation and Lower FDV Perform Better Post-Launch

Compared to the analysis conducted in May 2024 (gray), the circulating supply of recently issued tokens (yellow) has steadily increased. This means that users can "vote with their wallets," opting out of tokens with unfavorable token economics. As a result, projects must adapt to community demands, leading to healthier circulating supplies across all projects.

The circulating supply of recently issued tokens is on an upward trend compared to last year.

Similarly, comparing recently issued tokens with the previous analysis, it can be seen that the fully diluted valuation at issuance has decreased. The average FDV of recently issued tokens is $1.94 billion, down from an average of $5.5 billion in the previous analysis.

Compared to TGEs a year ago, the average FDV of recent TGEs has dropped by over 50%.

Tokens issued recently with higher circulation and lower FDV have shown stronger price performance compared to the tokens analyzed in May 2024 (see figure below).

8. Token Buybacks Are on the Rise

In 2025, token buybacks are trending upward, with projects such as Aave, dYdX, Jupiter, and Hyperliquid implementing such programs, using protocol revenue to purchase and burn tokens from the market.

Projects that can successfully conduct token buybacks should be seen as positive, as only financially robust projects can afford to do so. The reality is that many crypto projects have failed to find product-market fit, and those that have still need to find the best way to foster organic demand for their tokens. Buybacks may serve as an interim measure, allowing projects to focus on growth while avoiding token price distractions.

9. Hyperliquid Leads Token Buybacks

Hyperliquid is currently at the forefront of the token buyback trend, having burned over $8 million worth of $HYPE tokens. What sets Hyperliquid apart is that buybacks are an integral part of its economic model. A full 54% of perpetual trading fees, spot trading fees, and HIP-1 auction fees are all allocated to token buybacks. As of May 28, 2025, the Hyperliquid Assistance Fund held 23,635,530.65 $HYPE tokens, valued at approximately $786 million.

However, with no revenue flowing to token holders, buybacks merely support the price. Critics argue that these funds could be better utilized than just artificially creating scarcity. For example, Hyperliquid could consider distributing the USDC fees generated from trades to reward $HYPE stakers. In this case, there would be a closer link between the $HYPE token and protocol growth (and fees). Tokens with revenue can better align incentives.

10. ICM Remains Speculative, with Issued Tokens Mostly Resembling Memecoins

Believe is an emerging player in the ICM movement, allowing users to easily create tokens on the Solana blockchain by posting in a specific format (e.g., "$TICKER + @launchcoin") on X, thereby triggering automatic token deployment through a Bonding Curve model.

This streamlined process enables creators and founders to issue tokens without technical expertise or traditional funding barriers. The platform then equally shares transaction fees between the creator and itself, with tokens reaching a market cap of $100,000 being transferred to deeper liquidity pools on platforms like Meteora.