DeFi Life-and-Death Decision: The Buyback Dilemma and the Systemic Crisis of Zero-sum Game

Introduction: The outbreak of a Crisis of Confidence

In November 2025, the DeFi industry experienced a rare “perfect storm.” Within a week, Balancer lost $128 million, Stream triggered $285 million in bad debts, four stablecoins went to zero, and the entire stablecoin market shrank by $2 billion. Almost simultaneously, Uniswap launched a fee switch proposal that had been in the works for two years, and the market erupted in cheers.

The暴雷事件 exposed systemic security, transparency, and governance issues in the DeFi system, while the fee switch proposal represents a typical response from the industry to these issues—addressing the crisis through financial engineering and interest redistribution.

Is this response effective? The core argument of this report is: the current challenge facing DeFi is not a crisis of valuation, but a crisis of value creation. When the fundamental issue in the industry is the inability to continuously create value for users, capital operations such as buybacks and fee switches not only fail to address the problem but may actually accelerate the crisis.

Part One: Thunderstorm and Buyback - The Clash of Two Forces

Why the Forces of Destruction Outweigh the Efforts of Construction

Balancer TVL plummeted 50% in a single day, and Stream triggered four stablecoins to drop to zero, far exceeding the direct loss's impact range. This speed of contagion proves: once trust collapses, the destructive power spreads exponentially.

At the same time, the buyback plans that the industry has aggressively promoted over the past year have almost all failed. Aave has continued to buy at unfavorable times, resulting in high-level takeovers, while MakerDAO, despite having a strong fundamental, is priced at only 1/3 of its historical high.

There is a profound asymmetry here: Construction is linear, slow, and requires continuous investment; while destruction is exponential, instantaneous, and can wipe out all accumulations. Buybacks attempt to address demand-side issues (security trust, user growth) through supply-side optimization (token burning), while crises directly destroy the foundation of demand.

Systemic Misjudgment Behind Repurchase Failure

1. Treating Symptoms as Causes. The protocol believes that the low token price is the problem, so it tries to boost the price through buybacks. However, the low price is merely a symptom; the real cause is stagnation in business, loss of users, and declining competitiveness.

2. Confusing Short-Term Stimulus with Long-Term Value. Buybacks may lead to a short-term price increase, but if there is no improvement in the business, the price will quickly fall back. The market will not sustain elevated valuations due to buybacks; prices are ultimately determined by growth and narrative.

These misjudgments point to the same root: treating DeFi as a purely financial game while ignoring that it is essentially a technology product that needs to continuously create user value. Hyperliquid forms a positive flywheel through product optimization → user growth → trading volume growth, and buybacks are just the icing on the cake. Other protocols only have buybacks without business growth, making buybacks a “Ponzi scheme protected by savings.”

Part Two: The Predicament of Uniswap - The Trap of Zero-Sum Games

Misunderstood Fee Switch

The Uniswap fee switch proposal has driven token surges of over 40%, but this optimism is based on a fundamental misunderstanding. The market sees this as a buyback plan, but in reality, it takes 17-25% from LP income to give to the protocol. This is a zero-sum game — every dollar of protocol revenue is taken from LPs.

This cognitive dissonance has pushed all the previous issues of failed buybacks to the extreme. The earlier cases theoretically did not harm existing stakeholders, while the Uniswap fee switch actively created a civil war between LPs and token holders—sacrificing the foundation of the protocol (LPs providing liquidity) to please the protocol shareholders (UNI holders).

The Overlap of Three Crises

Timing is off: Uniswap launched the fee switch amidst the aftermath of the crash and deepening Crisis of Confidence. When the market needed answers on “how to ensure fund safety,” what was offered was a plan on “how to redistribute profits.”

User Churn: On the Base chain, Aerodrome's yield is already several times that of Uniswap, and the gap will widen further once the fee switch is activated. Rational LPs only look at the yield and will not stay due to brand loyalty.

Vicious Cycle: If the fee switch leads to liquidity outflow, it may create a negative feedback loop—LP earnings decline → liquidity decreases → trading slippage increases → user experience worsens → trading volume declines → protocol revenue falls short of expectations → more LPs leave.

The Essence of Zero-Sum Game

Putting the Uniswap fee switch in a larger context reveals a dangerous trend: when the industry fails to create incremental value, it turns to stock games.

Whenever innovation stagnates and user growth slows down, protocols tend to “optimize” through financial engineering—adjusting fee structures, designing complex token economics, and introducing various buyback and burn mechanisms. The common characteristic of these operations is: redistributing existing value rather than creating new value.

The success of Hyperliquid proves another path: supporting buybacks through product innovation → user growth → real revenue growth. This is an incremental game, a positive-sum game, where all participants can benefit as the pie grows.

The fee switch represents a stock game, a zero-sum game. The cake hasn't gotten bigger; it has only been re-sliced. This kind of game may satisfy UNI holders in the short term, but it will inevitably harm the foundation of the protocol in the long run.

Part Three: The Breakthrough Path of Value Creation

From Valuation Crisis to Value Creation Crisis

What DeFi is currently facing is not a valuation crisis (token prices being too low), but a value creation crisis (the inability to continuously create value for users).

The distinction between the two is crucial. If it is a Crisis of Confidence, financial engineering such as buybacks and cost switches is indeed a reasonable approach. But if it is a value creation crisis, these operations are akin to fishing for a rabbit in a tree - they consume resources but cannot solve the fundamental problem, and may even exacerbate the crisis.

DeFi TVL has recovered to 89% of its historical peak, but token prices have generally only recovered by 20-40%. This divergence indicates that funds are flowing back, but confidence is not. Users are willing to use DeFi to earn yields, but are reluctant to hold DeFi tokens because they do not believe these protocols can continue to create value.

The暴雷事件 deepened this suspicion. When protocols that have undergone top-tier audits still lose hundreds of millions of dollars, when 70% of the funds in so-called “decentralized” projects are in a black box, and when Curators earn high commissions without taking responsibility—the problem with DeFi is not the token price, but the credibility of the system.

Transparency is a competitive advantage, not a cost

The collapse of Stream provides a clear lesson: in a Crisis of Confidence environment, transparency is a differentiated competitive advantage. When Stream attracted users in the short term by offering high returns with 70% black-box funding, the collapse of the black box led not only to its own demise but also dragged down the entire ecosystem. This created a market opportunity – the demand for transparency far exceeds supply. After the collapse of Stream, the market saw a surge in demand for highly transparent stablecoins, even if the yields were lower. In an environment of mistrust, transparency itself is the product.

Protocols should proactively enhance transparency rather than passively respond to regulation. Positioning it as the core of market positioning - “We are the most transparent DeFi protocol” - is more valuable in the current environment than “We are the highest yielding.”

Governance Mechanism of Equal Rights and Responsibilities

In DeFi governance, power and responsibility are often separated. Early DeFi protocols pursued “decentralization,” often interpreting it as “power dispersion,” while neglecting the dangers of “responsibility dispersion.” The result has been a large number of roles with “power without responsibility” — they can influence protocol decisions, manage user funds, and design strategies, but when problems arise, they are not obligated to bear the losses.

The core principle of the solution is: Power must be commensurate with responsibility, and benefits must be commensurate with risks. Any role that holds power must stake a significant proportion of funds, establish an automatic forfeiture mechanism, and implement delayed distribution of benefits. When the Curator's own funds are exposed to risk, he will evaluate each strategy more cautiously. This alignment of interests is more effective than any moral constraint.

Conclusion: The Moment of Choice

The DeFi industry is now at a crossroads.

One path is to continue the capital game—more buybacks, more complex token economics, and more sophisticated profit distribution mechanisms. We have already seen the endpoint of this path: Aave, MakerDAO, and Pancake have not been able to support coin prices solely through buybacks and deflation.

Another path is to turn towards value creation - investing resources in security, transparency, user growth, and product innovation. This path is harder to walk, requiring genuine technological breakthroughs and long-term investment, with a longer return cycle. But Hyperliquid proves that this is the only sustainable path.

The time window is closing. The next crash may come faster and be more destructive. There is still an opportunity for the industry to complete the paradigm shift before the Crisis of Confidence completely collapses.

Ultimately, the spring of DeFi will not belong to the protocols that are best at financial engineering, but to those that truly create value for users, respect risks, pursue transparency, and improve governance. Buybacks and fee switches can be means, but they should never be the end goal. There is only one true purpose: to establish a trustworthy, usable, and sustainable decentralized financial system.

This report's data is compiled and organized by WolfDAO. If you have any questions, please contact us for updates.

Author: Nikka / WolfDAO( X : @10xWolfdao )