What is Buyback and Burn (BnB)?

BnB involves using funds to buy tokens on the open market and then burning them to reduce supply. It is an indirect way for protocols to distribute revenue to users.

From a holder’s perspective, there is actually no difference between intrinsic yield (price of token goes up as float reduces from BnB) and extrinsic yield (revenue sharing). Some may prefer intrinsic yield over extrinsic yield due to tax reasons (capital gains tax < income tax). Extrinsic yield should also be split between inflationary yield from token emissions and real yield (revenue sharing).

Crypto Valuation and Revenue Do Not Always Scale Together

The effectiveness of BnB is dependent on the revenue token valuation ratio, where a higher number implies a greater burn per dollar spent. When prices are high, the capital used for buybacks acquires fewer tokens, resulting in minimal supply reduction and decreased impact on token value. Conversely, low prices allow for more tokens to be burned, which is great in the long run. However, as external market forces exist, the price at which the BnB is executed cannot be controlled and the effect of the mechanism diminishes when BnB occurs at high prices.

In most protocols, revenue does not always scale with the increase in valuation, resulting in the ratio decreasing and lesser tokens being bought back and burned. This phenomenon is inherent in most crypto protocols, posing significant challenges to the effectiveness of BnB mechanisms when prices are elevated.

The table above highlights the impact of BnB mechanisms on several specific protocols. These protocols use their revenue to conduct BnB campaigns. A static analysis of the burned supply of the different protocols does not result in a comparable conclusion as each protocol started their BnB programs at different times. However, looking at it using the annualised revenue/Market Capitalisation (MC) and $ amount burnt/MC might give us a better picture of how optimistic the market is about a project’s growth prospects.

For instance, a lower MC/Annualised Revenue Ratio means that the markets pay less for every dollar of revenue a project earns. This also means that said project would have more capital to purchase its tokens from the open market at a lower value if they decide to do so, making BnBs more effective. In contrast, tokens with higher ratios (e.g. $10M revenues and $100M MC with a 10x ratio) imply lower capital efficiency if they decide to conduct BnBs. Moreover, Shuffle's excess revenues can be channelled towards additional growth initiatives or ecosystem development, options often unavailable to projects with tighter financial constraints.

Why Is Buyback and Burn Less Impactful These Days?

BnB alone does not seem to be sufficient in crypto markets even though it could make sense through a TradFi lens. The bull thesis for buying cash flow-positive altcoins is usually dependent on a multiple expansion, and the time horizon and expected returns for most growth investors may not match what is provided by a project with real revenues. We believe that the majority of crypto market participants prefer attention and narrative driven speculative assets over fundamentals-driven tokens.

Bad Price = Bad Tech?

The market regime has clearly shifted with investment horizons significantly shortened. Compared to other tokens with higher volatility, a real business with real (realistic and slow) growth priced off its fundamentals will likely consistently lag in price rallies and volatility of other coins.

This becomes a problem when market participants get an overly optimistic view of valuations and bid a BnB token up to unrealistic multiples before reality catches up to valuations. This drawdown sometimes causes an excessive correction below fundamental value, providing for great entries into quality projects.

Why Does Buy and Burn Work for Shuffle?

The effects of BnB is at its greatest during a market downturn, where tokens can be bought back at a lower valuation. Therefore, we view that BnB is a good fit for protocols with less cyclical revenues as it will not embark on a reflexive downward spiral during bear markets.

We define cyclicality here as the sensitivity of change in revenues in relation to market prices. For instance, fees derived from trading activity, management of Total Value Locked (TVL) and taxes on buys/sells are all incredibly cyclical due to their highly speculative nature. On the other hand, fees that are backed by product utility (i.e. platform fees and casino revenues) are less cyclical as there are demand drivers beyond market forces (i.e. entertainment purposes for casino activity).

In the case of crypto casinos like Shuffle.com during a bear market, we believe that decline in revenues < decline in token price, given the following reasons:

• Diversity of player base: Not all players are crypto natives and the state of crypto markets may be irrelevant to them. Decision making may be driven by other intrinsic factors such as user experience.
• External drivers of demand: Wager activity can be driven by factors such as boredom, a “solution during tough times”, major sporting events, promotions, etc.

The longer term thesis of BnB would be the concept of positive convexity in the % burn/supply ratio. Assuming that the team committed to a consistent BnB, BnB could theoretically create exponential scarcity in circulating supply over time. The chart above illustrates the increasing convexity in BnB relative to its circulating supply, showing that under a scenario of consistent buying pressure over 24 weeks, the percentage of circulating supply purchased rises progressively each week as the float decreases - even if the price varies. The gradual BnB process that permanently removes tokens from the circulating supply results in a higher % of float purchased each time, creating convexity in the supply.

However, while we recognise the merits that BnB can bring over the long term, it should not be the only mode of value accrual. Sinks from compelling token utilities have a more lasting effect in minimising sell pressure from a wider range of holders.

Shuffle.com Pivoting Away From BnB

A common rebuttal against BnB from the protocol's perspective is that it may not be the most efficient use of capital. Expressing this example quantitatively:

• Assuming $1M used for BnB per month = $12M spent a year to create value accrual for the token and manage the expectations of token holders
• Assuming $1M used for marketing per month ($200 Customer Acquisition Cost (CAC)/player) = $12M spent to acquire 60,000 new players annually
  • If each player’s lifetime value (wager volume * house edge) = $1000, Shuffle.com would obtain $60M per year in revenues from this initiative

We can see from this example that there exists an opportunity cost for utilising revenues for the BnB campaign. After several months of conducting BnB, the Shuffle.com team concluded that while it benefits token holders, it falls short of driving new engagement or adding intrinsic business value which is crucial for a growing company. To enhance SHFL’s utility and attract new customers, Shuffle is introducing the Shuffle Lottery with enticing prize pools which ultimately serve as a token sink that keeps SHFL sticky. We are excited to see Shuffle.com take a bold step forward in the BnB token landscape.

About Fisher8

Founded in 2020, Fisher8 started as a family office operating in the digital asset space. Fisher8 is a trading desk and venture studio. We execute automated and discretionary strategies across global markets. At the same time, we build—supporting innovative early-stage companies with the potential to disrupt the norm, representing #TeamFisher8.

Report Disclosures

Shuffle.com is incubated by Fisher8 Capital.

As of the publication date of this report, Fisher8 Holdings Limited and its affiliates (collectively “Fisher8”), others that contributed research to this report and others that we have shared our research with (collectively, the “Investors”) own tokens of the project covered herein and stand to realise gains in the event that the price of the token increases or decreases. Following publication of the report, the Investors may transact in the tokens of the project covered herein. All content in this report represents the opinions of Fisher8. Fisher8 has obtained all information herein from sources they believe to be accurate and reliable. However, such information is presented “as is,” without warranty of any kind – whether express or implied. This document is for informational purposes only and is not intended as an official confirmation of any transaction. All market prices, data and other information are not warranted as to completeness or accuracy, are based upon selected public market data, and reflect prevailing conditions and Fisher8’s views as of this date, all of which are accordingly subject to change without notice. Fisher8 has no obligation to continue offering reports regarding the project. Reports are prepared as of the date(s) indicated and may become unreliable because of subsequent market or economic circumstances. Any investment involves substantial risks, including, but not limited to, pricing volatility, inadequate liquidity, and the potential complete loss of principal. This report’s estimated fundamental value only represents a best effort estimate of the potential fundamental valuation of a specific token, and is not expressed as, or implied as, assessments of the quality of a token, a summary of past performance, or an actionable investment strategy for an investor. This document does not in any way constitute an offer or solicitation of an offer to buy or sell any investment or token discussed herein. The information contained in this document may include, or incorporate by reference, forward-looking statements, which would include any statements that are not statements of historical fact. These forward-looking statements may turn out to be wrong and can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors, most of which are beyond Fisher8’s control. Investors should conduct independent due diligence, with assistance from professional financial, legal and tax experts, on all tokens discussed in this document and develop a stand-alone judgement of the relevant markets prior to making any investment decision.