In an effort to kickstart a conversation about JTO utility and tokenomics, I put together a research doc that I hope will help frame some of the possible opportunities and decisions the DAO can make going forward regarding JTO.
I hope this thread can serve as a public forum for discussing tokenomics, which has already begun to percolate naturally, and look forward to seeing how the community believes the DAO should proceed.
Great article Andrew, one of the best overviews of fee utilisation for demand side value accrual I’ve seen and some really excellent ideas for where this can go.
I’m relatively new here, but I’ve been in the DAO trenches for years now and I’ve been blown away by how strong a position that Jito DAO is in. It’s one of the most stable and impressive economic value generating systems I’ve seen (anywhere). We have not one, but multiple mechanisms that generate real REV feeding the DAO and generating economic alignment across validators and stakers. It’s rare that you get a genuinely sustainable fee generating system in crypto (full stop), but even more so one that doesn’t extract that value into a centralised entity where it’s ruthlessly dumped into the market. Super impressive and it’s exciting that we can have the conversation in public about what we do with that value.
I think there’s real merit to all of the mechanisms you’ve outlined. The reality is that, yes no one really knows what they’re doing, but that’s both a function of a) this all being totally new frontier crypto economics (so it’s understandable) b) the volatility in crypto makes it incredibly difficult to know whether these things work or not. In bull markets even blindly stupid mechanisms can work (or at least look like they are) and in bear markets even good mechanisms flop.
A few thoughts on a few of the mechanisms discussed that immediately come to mind. Buy backs are the thing to do in bear markets, not bull markets. I’ve seen several buy back strategies effectively buy the top of their own token and simply provide quick exit liquidity for opportunist degens and arbitrageurs. Hard to get right especially in a decentralised fashion since you essentially have to telegraph the trade into the market in advance. As you said though, some kind of programatic ‘sink’ for the token is definitely something to explore.
The prospect of a ‘real yield’ liquidity mining system is incredibly exciting. Generally LM schemes are hyper inflationary and hard to balance right without over paying since the yield is generally endogenous collateral, which can be profitable but can eat you alive on impermanent loss so no one really knows how to price it and consequently most will dump. So a real yield version of that, and potentially a mix of that with JTO could be serious rocket fuel for boosting JitoSOL liquidity. Which does feel like it should be a high priority spend of DAO capital. As you know I like the gauge idea, mainly because it’s a governance minimised DAO action that can drive buy-side demand into JTO if executed right. I’ve never really thought the veTOKEN mechanism is an optimum though, it needs some iteration.
I’m with you on skepticism around standard ecosystem grants stuff, they’re a nightmare to administer and attracts grifters like moths to the flame. Having said that, one of the things I’ve always wanted to see is a DAO do is be ‘pro-active’ and actively find ways of pursuing strong opportunities. As in, not waiting for people to hawk around the grant tap, but empowering the DAO to go and attack good opportunities and bring in high quality builders to the ecosystem. Done right, a DAO is a way to activate the kind of human capital that doesn’t necessarily want long term salaried work (or perhaps needs some persuading to jump from somewhere else).
Your buy back and barter idea definitely falls into ‘pro-active’ DAO action, I love it honestly. One of the true DAO dreams in my mind was that we’d have DAO-to-DAO deals go down, kind of like feudal kings doing deals for weapons and riches. This is truly in the “no one knows what they’re doing” realm, but it’s definitely on my would love to see it happen list.
On POL, I do think DAOs should be liquidity providers of last resort (DAOs don’t care if they eat impermanent loss) and they most certainly should be bullish on their own token and as you’ve said it’s revenue generating. Definitely worth exploring.
Some kind of DAO holdings in stable / non protocol assets is a good idea, that’s what unlocks the deep bear market buyback possibility. Generally, also some kind of surplus reserve is a good idea before doing distributions and yield boosting exercises. On that front, it’s worth measuring up the impact of the action. If you distribute $10m, to 10k people they get $1k each, but $10m well spent could be an ecosystem game changer. Also a matter of timing, in IRL trad world switching on dividends too early can kill you and as in the previous example you can throw out tonnes of money without making anyone seriously happy. I think optimising for growth at this early stage of the protocol is more of an optimum, but that’s just me.
What you’ve effectively landed on at the end is a framework for a kind of “meta-mechanism” that invites the DAO to be able to play a number of those potential strategies. Potentially switching between modes at different phases of the protocol lifecycle, or even market phases e.g. buy backs in a bear, yield boosting when running for growth, liquidity incentives when we want to minimise JitoSOL slippage and attract new asset pairs etc.
As a side note, i’m one of the people that still cares about decentralisation in the space so I’d have a preference for these mechanisms to be actually be mechanisms and maintain the governance minimised efficient machine vibe that Jito has already. So worth noting that done properly some investment in the “meta” aspect of this would be required e.g. augmenting the governance to be able to switch between mechanisms for example and building the mechanisms themselves (if they don’t already exist).
Super interested to hear other people’s thoughts!
These are my totally independent thoughts and opinions produced without consultation with anyone.
Andrew deserves a ton of credit for putting in the work to lay out all these options for how the fees being generated could be used. His post should be turned into a treatise for future reference by any project.
I firmly believe that, in this case, the simplest answer is the best answer: the TipRouter fees should primarily be used to buy and burn JTO.
The real question is how much of the fees should be used for this purpose, vs for some other purpose. Or to rephrase – what alternative provides so much value to the Jito Network and JTO holders that it warrants diverting funds from buying and burning JTO.
That’s a very high bar! Dollar-for-dollar, buying and burning JTO provides the most direct and sustained support for the strength of JTO, which is central to the governance and decentralization of the Jito Network.
Imagine every other option framed as follows: “Should the DAO sell millions of its JTO in the open market to finance [insert alternative here]?” Personally, I don’t think the community would support the idea of market selling JTO to fund any of the alternatives (with the exception of supporting the restaking business).
If you wouldn’t pay for something by selling JTO, you shouldn’t pay for it by diverting funds that could be used to buy (and burn) JTO. It’s two sides of the same coin, no pun intended.
With that said, I also firmly believe big decision are best made incrementally, so the consequences can be observed and that additional information can be used to help improve implementation details over time.
As such, I have drafted a JIP (link below) that proposes using half of the TipRouter’s fees (1.5% of the 3%) to buy and burn JTO. That would still leave 1.5% to potentially be used for some other purpose, like the various alternatives outlined in Andrew’s post. I think when the community sees the impact of using fees for the buy and burn program, it will be obvious how high the bar is for judging any other alternative, and ultimately I believe the only other purpose that will meet this standard is further supporting the restaking business (which is already being supported with 0.3% of the 3%; perhaps that should be increased).
As is often said, action produces information. Debate and discussion is important, and I don’t want to appear to be cutting off debate by formally submitting my proposal as a JIP. But I want to motivate debate to action, so I have submitted a draft JIP and welcome input on the implementation details. If after reading about potential alternatives, others want to submit their own draft JIP advocating for an alternative, then hopefully we can focus our attention on the couple of best options and move forward to a vote expeditiously. Accelerate
Chapeau bas andrewt for that– well– actual research.
Two quick questions:
"I don’t think the Jito DAO has the same structural need for an insurance fund as the stablecoin projects, but there’s multiple circumstances under which having a reasonably big pot of stables in the DAO treasury would be useful.”
In the context of Jito, do you have any specific scenarios in mind?
“These types of alignment deals are arguably the direction the space is headed. Both Arbitrum and ZKsync are spending lots of tokens on exclusivity deals with DeFi projects.”
What initiatives do you exactly refer to?
Hello Jito Community & thank you Andrew for kicking off this conversation.
My name is Marlowe, I’m Head of Onchain Integrations at M^0 Labs. We’re currently in the process of deploying our infrastructure to Solana and are looking for the best ways to participate in the ecosystem and build with the community.
As Jito has begun the commentary process for how to manage the fee switch and tip distribution and create utility and value for JTO, we at M^0 wanted to present what we believe the optimal path for fee distribution is: to recycle it and to reward holders of the JTO governance token in the form of a native stablecoin for the Jito ecosystem. The stable would be minted from fees and thereafter earn a proxy for the risk free rate, making it attractive to retain and/or utilize in DeFi to further enhance the ecosystem.
About M^0
M^0 is a platform allowing builders and developers easily embed and control their own stablecoins, called $M-extensions, into their applications.
These extensions are built atop a permissionless, immutable wholesale stablecoin called $M that is (currently) exclusively backed by short term t-bills (0-180 day maturity). The M^0 protocol is capable of passing protocol yield to governance-approved parties, as a function of the underlying collateral yield and governance parameter, currently at a rate of 4.15 % APY.
High-Level Proposal
Building on top of this, Jito could quickly deploy a robust, custom, purpose-built stablecoin (referred hereafter as jitoUSD) to absorb the distribution from fees and tips and provide value and consistent yield to JTO holders.
Our guideposts are that the process is i). beneficial to JTO holders and ii). recycles value into the ecosystem.
Our high-level proposal is as follows:
jitoUSD would be a fully functional stablecoin on Solana that would accrue the full Earner Rate from t-bills (currently 4.15%). Working with the Jito team, we would drive integrations for jitoUSD to Solana venues where we can unlock additional utility — as margin collateral, as deposits to lending markets, for looping and leverage strategies. Alternatively jitoUSD can function as a store of value for holders, simply accruing the base rate.
If the community finds this to be of interest, we will proceed to a full proposal and technical scope. Please find additional information on M^0 below:
One further thought coming out of the call yesterday - there was this idea that Jito is “too young” to start a programatic buy program for JTO. Essentially the idea was that this use of fees being earned is something that older, more mature projects do when they “run out of” ways of reinvesting fees to continue growing the project.
I think this is a fundamentally flawed way of looking at the situation. By way of example, take Uniswap. They launched the UNI token in Sept. 2020. That token peaked in May 2021, and has been down only ever since (currently about 85% below that peak 4.5 years later, they’ve never even gotten to 50% of their prior value in the past few years). Uniswap the product is awesome and constantly improving, but UNI the token has been a failure thus far IMO.
When UNI launched, there were many attempts to turn on a “fee switch” so that value could start accruing to the UNI token. Time and again, that was shot down, likely for perceived legal reasons (though no reason was ever given).
I don’t believe that Uniswap the product/project would be any less awesome if UNI tokenholders did end up implementing a fee switch 2/3/4 years ago. The fee switch and the awesome things Uniswap shipped are not connected to one another. I.e., Uniswap V4 would not have been inferior, nor taken longer, if the fee switch were flipped years ago. Uniswap X and Unichain would not have been slowed down by the implementation of the fee switch.
Uniswap was more than able to fund all of the awesome things it wanted to do with the funds it had (at Uniswap Labs), and the fee switch was completely irrelevant. I’m fairly certain that with legal clarity, UNI tokenholders would absolutely have voted to implement the fee switch many years ago, UNI’s price would be much much higher, and the Uniswap products would not be any worse for it. In fact, I would venture to say that the tanking token price probably hurt Uniswap unnecessarily, as it likely affected their ability to recruit/retain top talent (since comp packages often include token grants).
So bringing this all home, if there’s some awesome project(s) Jito Labs (or others) want to do, and Jito Labs doesn’t really have the funds to do it, I completely understand and support not implementing a programmatic buy program at this time and having the DAO pick up the project(s). I think the reality is Jito Labs has plenty of funding to keep shipping awesome stuff, and there’s no real plan for what to do with fees accumulating in the DAO. The one exception I believe is the restaking product, which I believe could use an increase in fees to support continued growth, and I have another JIP in the works on that topic, but that doesn’t interfere with this JIP at all (since this only affects 1% of the 3% of fees).
Do we really need to knee cap JTO the token for the next few years, like Uniswap knee capped UNI by not implementing some sort of fee switch, just because the project is “too young”? As I mentioned yesterday, there are a number of benefits to having a strong token, including things like recruitment, marketing/PR, “nerd sniping” etc all easier with a strong token. Even the DAO itself would have more resources available to it for “special projects”, given how much JTO it holds. As I mentioned yesterday, having a programmatic buyer constantly hitting the figurative “buy” button doesn’t guarantee a strong token, but it’s certainly better than not having such a buyer, and just the message that value does accrue to JTO is invaluable IMO - just ask UNI holders
Thank you, Andrew, for putting together such a detailed document. Your breakdown of Jito’s current utility and revenue mechanisms, along with the exploration of recycling versus rewards strategies, provides a great starting point for community discussions. Your framing of the choice between ‘recycling value within the network ecosystem’ and ‘rewarding value to ecosystem participants’ is particularly interesting.
We really like the JitoSOL subsidy strategy. It seems like the most straightforward and effective approach within the ‘rewards and recycle’ framework. Subsidising JitoSOL yields could help maintain its leading 45% market share in Solana’s liquid staking space, especially, like you mentioned, with competition from the likes of jupSOL. Higher yields will naturally attract more stakers, boosting protocol revenue and strengthening the DAO’s treasury. It would be helpful to see thoughts from you and others experienced in onchain financial modelling on how to frame an optimal yield subsidy. One option could be a dynamic adjustment based on the amount of SOL staked - this could create a more efficient system.
Another idea we thought was great was the Real Yield Gauges - incentives based on real yield that are consistently given out without inflating token supply can be thought of as a form of a “marketing budget”, and can make user retention stickier. This could also be used to incentivize key user actions that align closely with the DAO’s priorities, similar to the approach taken by Aave’s Merit program, one of the rare examples in DeFi where incentives are based on real revenue.
We’d love to hear your perspective on the essential avenues and functions that should be prioritised for the DAO at this stage. Aligning on key priorities will provide a clearer understanding of which strategies are most suitable.
At Areta, we focus on sustaining a growing ecosystem while allocating resources wisely to ensure every token spent generates real value. Protocols like JitoSOL and TipRouter offer unique opportunities for builders, and we believe supporting top-quality teams early with targeted, consistent funding can drive exponential value as these protocols mature. With the network still in its early days, preparing now for these initiatives will lay the groundwork for long-term success.
This is a solid start to the discussion, and we’re excited to hear more perspectives soon.
The UNI ecosystem is an interesting one. I wouldn’t call that token a failure tbh, it’s a kind of marvel to me that it does so well. It currently sits at a $7bn valuation (it was $20bn in December), despite having next to no material control over the protocol at all (apart from the un-switched fee switch). The DAO wasn’t consulted about Unichain at all (they had no idea it was happening in fact) and Uniswap Labs decided to extract hundreds of millions of dollars from front end fees from the economy instead reflowing that economic bandwidth back into the ecosystem. If anything it’s a text book principle agent problem, where token holders are actively sidelined at the expense of a centralised entity. It’s a useful example mainly because we’re in a very different scenario here.
I think the ‘too early’ point is rational. There are plenty of examples of entities paying out dividends or executing buy backs when there were vastly better uses of the money. My current favourite example is Thames Water in the U.K (since my water bill has trebled in 3 years) they paid out £3bn in dividends instead of investing in their infrastructure and are now in £20bn of debt and begging for a government bailout. Kodak, Blackberry and Radio Shack all paid out dividends and did buyback schemes to the tune of billions instead of adapting to the market context and died.
Having said that, totally agree with your point that crypto systems are entirely different and it is possible here to have programmatic mechanisms that are tied to the economic bandwidth and REV of the system. And in fact unlike the systems I’ve mentioned, the financials and performance of the system are transparent and open.
I take your point “UNI was different” - I wasn’t implying UNI and JTO would be the same, I was using UNI as an example of the price dynamics when an ecosystem has zero value accrual to a token. There are many such examples, but I thought UNI was a good one because it would have been so simple and easy to have value accrue to the token (fee switch), and I don’t think it would not have affected Uniswap the product(s)’ development at all.
To your many examples of companies paying dividends/doing buybacks and dying - there are countless more examples of companies not paying dividends/not doing buybacks and dying. For many/most of the examples you gave, the dividends and buybacks did not cause the eventual death. Kodak didn’t die because it paid dividends, it died because of the Innovator’s Dilemma - i.e., it’s very hard for incumbents to disrupt themselves, NOT because they don’t have the money to disrupt themselves (they often have plenty), but because the social institution is not suited for disrupting itself. Kodak holding more cash in its Treasury would not have saved Kodak.
Similarly, as I said in my prior post, nothing about implementing the proposed programatic buy-and-burn would make Jito’s the project’s success less likely. There’s nothing Jito may want to do that it is incapable of doing if the programatic buying program is implemented. On the contrary, as I said, the positive impact from this program on the price of JTO could have numerous helpful impacts on Jito the project (see prior post).
One final request/plea - I still haven’t seen anyone draft an alternative JIP to the one I put forward. If folks feel strongly about an alternative, please carpe diem and put forward a proposal. The worst alternative in my opinion is just “do nothing” - that’s where the Kodak analogy really comes into play.
There’s a lot of great ideas here. Of all the options, I’m generally in favor of a JTO token buyback since I think its the simplest and cleanest approach. I get that people are worried about buying the token back at an “expensive” price. One good way to approach this would be to pre-set some valuation multiples of market cap to revenue where x% of the fees would go to buybacks. For example if the JTO market cap/revenue multiple is:
-3.0x JTO rev multiple:25% of fees buyback
-2.0x JTO rev multiple: 50% of fees buyback
-1.0x JTO rev multiple: 75% of fees buyback
-0.5x JTO rev multiple: 100% of fees buyback
The exact parameters could be more deeply researched and agreed upon but you all get the point.
The other consideration you want to think about is what happens to the assets that don’t go to buybacks and stay with the DAO. If you keep those assets that would have bough JTO in SOL instead, SOL could go down more than JTO and you would have been better off simply buying back JTO even though it was “expensive” on some USD revenue to JTO market cap basis.
One way to solve for this would be to make the JTO market cap to SOL market cap ratio part of the equation. You could say 50% of the buyback formula will be applied to the JTO market cap to revenue multiple approach above and the other 50% would go to the
-4.0% of SOL Mkt Cap: 25% of fees buyback
-3.0% of SOL Mkt Cap: 50% of fees buyback
-2.0% of SOL Mkt Cap: 75% of fees buyback
-1.0% of SOL Mkt Cap: 100% of fees buyback
There’s no perfect solution but these may address some of the concerns around buybacks.
The other thing Jito could do, and I think this would be the most impactful value driver, would be to give validators a larger share of the MEV fees if they hold a certain amount of JTO. You still want the MEV to flow into the DAO and pass it back as a rebate to Solana validators who hold x% of JTO. This is different than restaking via the TipRouter. Notably, this isn’t value extractive to validators, its the opposite. You give them the option to collect a larger share of the MEV. It would create buy demand for JTO from validators since JTO value as a capital asset would be even more closely tied to MEV on the network. Currently SOL gets all this value since staked SOL is the only asset that validators need to hold to get MEV. This could be a nice balance that’s good for the whole community and JTO’s value accrual/demand flows.
Key Takeaways on Jitonomics
State of Jito Today
In order to figure out Jito’s value capture mechanism, the DAO must think deeply about the end goal Jito aims to achieve. To Blockworks Advisory, Jito is a twofold business (liquid staking and MEV) branching into a tertiary territory (restaking).
Today, Jito’s success is largely attributed to its MEV product, and thus it stands to reason that prioritizing innovation there may be the best. The reality is Jito’s dominance in the MEV business through the block engine today is not promised tomorrow. As Solana’s scheduler becomes more optimized over time, we foresee Solana REV coming increasingly from priority fees and less-so tips through the block engine. Today, Jito tips make up just over 50% of total REV, with priority fees hovering around 35-40%. Additionally, competition in this vertical is growing, with teams like Temporal, Bloxroute, Raiku, etc all wanting a piece of the pie.
As for the LST business, while Jito commands a decent lead at 36% market dominance of all liquid staked Solana, in our view the job is not finished. When looking at other ecosystems, leading LSTs have anywhere from ~70% market share, in the case of Lido and Stride, to 90%+ market share in other ecosystems.
With the restaking business, while it is too early to gauge success, Jito was a later entrant into this vertical and has already distributed over $330k in real yield via the Tip Router (a first-party NCN built by the Jito Labs team).
Due to possible future optimizations decreasing Jito’s dominance of the MEV business, then Jito may want to allocate more revenue to pushing itself deeper in the Solana stack and innovating within this area to further entrench its moat in Solana MEV. We give some potential first party product ideas that both dogfood the restaking business and/or leverage Jito’s MEV positioning, but would like to hear Jito Labs’ thoughts on the MEV business and a potential future roadmap. Additionally, there is certainly an opportunity for Jito to pull the ladder up and have JitoSOL cement itself as the stETH of the ecosystem as it grows. These aren’t mutually exclusive and of course a balance should be sought.
Balancing Growth vs Returning Capital
When discussing buybacks, we’d like to point out the important difference between programmatic buybacks vs. strategic buybacks. This discussion at large is a strategic buyback, which we are more in favor of today over a programmatic buyback. The endgame should be a programmatic buyback once all else has been saturated because this would be automated and consistent. A programmatic buyback could also be executed with some PID controlled method where there would be dynamic adjustment to how much/when to buy tokens based on certain market signals/internal protocol conditions. Though, of course parameter tuning for this would be difficult and could be gamed for vulnerability (a governance attack would be a nightmare here).
Generally speaking, Blockworks Advisory is against programmatic buybacks structured similarly to Raydium’s, which was indiscriminate and has led to over $82M in unrealized losses as of March 13th. As we alluded to above, we view this as an endgame decision that evolves throughout a protocol’s lifespan. It was too early for Raydium to initiate these buybacks, especially when competent competitors are still building and incentivizing growth (PumpSwap, etc). There’s also a paradox to a buyback program where if it stops then it may signal something negative to the market. Buybacks are an assertion that capital cannot be more effectively allocated to maximize future value.
With respect to the yield subsidy idea, we believe this could be a better use of Jito’s revenue in order to grow the dominance of JitoSOL. Jito must continue to cement jitoSOL as the dominant asset in the Solana ecosystem, especially as ETF staking conversations continue to move forward on the regulatory front. This means more than competing on yield, but competing on liquidity, utility, and peg-stability. Big investors prioritize avoiding loss over yield maximization. In the Ethereum ecosystem, we’ve seen Lido’s stETH maintain dominance over the existing liquid staking products because of the sheer liquidity it maintains. Staked Frax ETH historically has achieved higher yields than stETH, yet stETH maintains market dominance.
To deepen jitoSOL liquidity, it may be worth building a reserve of protocol owned liquidity (POL) so the DAO becomes the liquidity provider of last resort. The DAO could find prospective opportunities to deploy SOL or stablecoins to create deep JitoSOL-JTO or JITOSOL-SOL pools where needed. These pools could generate revenue for the DAO and deepen the liquidity for all users, especially institutions.
Jito DAO could either launch a liquidity committee or use veTokenomics to keep watch of utilization ratios of JitoSOL across the Solana ecosystem and provide additional liquidity in markets accordingly. There have been many experiments using veTokenomics to incentivize liquidity with emissions or real yield, but another option is to use this same mechanism to deploy POL (which is something the Cosmos Hub has been experimenting with).
As for VRT yield boost, while we think Jito DAO could use revenue and/or treasury JTO to bootstrap demand for NCN ecosystems, we don’t believe artificially boosting supply side VRT yield is the best use of funds. Restaking has shown to have a demand-side problem thus far, not a supply-side problem.
New Product Lines
To diversify Jito DAO’s revenue streams, we should start to consider other business lines that the DAO could fund the buildout of. Example: can the DAO fund new first party NCNs, similar to the Tip Router? In our view, there are still multiple opportunities on the table for Jito to potentially venture into:
Jito DAO’s Treasury and Bartering
Another goal for the DAO should be to diversify and grow its treasury holdings. With a treasury of ~$12.8M largely denominated in jitoSOL, the treasury must be prioritized. Importantly, Blockworks Advisory does not view JTO as assets on the DAOs balance sheet - they are unissued tokens that require tokenholder dilution to realize their value.
Generally speaking, we like bartering, but we are against buying JTO on the open market via protocol revenue with the sole purpose of bartering. If the DAO is in favor of experimenting with bartering, we would propose the use of treasury JTO. We believe this is a powerful tool to supercharge growth for the DAO as Jito is one of the few protocols capable of owning a significant portion of the float for another token. For this to be successful, the DAO should give authority to the Foundation or a DAO-owned committee to execute deals of this nature in private to ensure the public markets don’t front run. Additionally, these bilateral deals should require vesting schedules that have KPI milestone targets agreed upon by both parties for longer term alignment. With other protocol tokens in the DAO’s hands, it could give Jito preferential treatment for jitoSOL or other first party products that are eventually built.
Interestingly, Aave recently executed something similar with Fluid, where Aave made a $4M investment into INST tokens (now FLUID). This was a low-lift strategic play that:
Options for what to do with Jito revenues fall into four broad categories:
Options 3 & 4 are the most appealing for Jito today. However, Jito should not adopt a prescriptive policy on what to do with its revenues. Rather, Jito should adopt a dynamic policy to alternate between options based on which generates the highest return.
1. Buyback. The only benefit of a buyback today is the signal it sends to the market that Jito is returning capital to token holders. Although that is a valuable immediate signal, I think disciplined capital allocation is better in the long run. A buyback today has limited value beyond the signal. A buyback, in of itself, won’t impact JTO price. Jito is currently generating ~$80k/day in revenues. JTO token trades ~$5m/day of “real” volumes on legitimate exchanges. An $80k JTO buy order on $5m of volume, which is 1.5% of “real volume,” won’t impact JTO price.
2.Subsidizing jitoSOL to grow jitoSOL adoption, which is of strategic importance to Jito, is valuable. However, the subsidy is unlikely to yield material benefits. There is 16.7m jitoSOL worth $2.3b. Jito’s ~$80k/day and ~$29m annualized of revenue implies an incremental 1.2% yield on the $2.3b worth of jitoSOL. An incremental ~1% yield is probably not enough for other LSTs holders to rotate into jitoSOL or for native SOL stakers to move into jitoSOL.
3.Incentivizing JTO hodling is a worthwhile endeavor because there is no direct cost to doing so. @David_Grid outlined a clever mechanism to incentivize JTO buying by validators. Implementing something like what he outlined above should be strongly considered.
4.Reinvestment. Jito Labs and Foundation have built a phenomenal business routed in ingenious tech. Allowing Jito revenues to accrue to the treasury is fine, as long as Labs and/or Foundation are directly involved in determining how the accumulated capital is to be reinvested. Labs and Foundation are best placed to make this assessment and so far, they’ve exhibited good judgment. Reinvesting the accrued revenue sitting in treasury should be weighed against a token buyback. If a buyback is a higher return option, then a one-time larger buyback should occur.
If it was deemed that the signal of a constant buyback was valuable enough, then a buyback should be done based on specific valuation parameters like the ones @David_Grid laid out above.
However, the biggest signal that could be sent is if Labs and token holders became fully aligned. Currently Labs and the DAO each get 3% of fees. Proper alignment means 6% of fees accrue to the DAO, and ultimately token holders, and zero to Labs. The cost of running Labs should be absorbed by the protocol. Thereafter everyone would be aligned that the JTO token is the only medium of monetization. There would be no value leak to Labs. Misaligned incentives is the biggest issue plaguing Jito.
The quality of the discussion here has rapidly improved, thanks to everyone who has contributed thus far! It’s been especially valuable to hear insights from key investors like David & Sam, as well as the consistently insightful team at Blockworks Research.
In general, there seems to be agreement around several key points:
With these points in mind, I’d like to propose an idea that not only complements the protocol and its key stakeholders but also integrates many of the concepts discussed in the forum thus far.
Implementation of an Epoch-Long English Auction for Redirected Tip Fees
Currently, MEV is accumulated as Tips each epoch and subsequently distributed via TipRouter. For this idea, I propose that during each epoch, an English auction is held where bidders compete exclusively in JTO tokens to secure the right to a share of Tips collected by the protocol. Bidders compete by spending JTO tokens to acquire SOL denominated Tips, creating persistent epoch-based demand for JTO and structurally linking its value directly to the network’s primary revenue stream.
The existing structure allocates a 3% protocol fee on all Tips: 2.7% to the DAO treasury, 0.15% to JTO restakers, and 0.15% to JitoSOL restakers. I propose modifying this allocation as follows:
This adjustment creates a structural incentive that directly links the largest revenue stream (Tips) to JTO’s market dynamics. Additionally, given the interest in protocol owned liquidity, the DAO could deploy substantial liquidity via JTO/SOL and/or JTO/USDT pools, capturing significant trading volume from searchers bidding throughout the auction duration. Further, if Jito can establish an onchain liquidity moat vs CEXs, this would lead to more onchain JTO trading volume, benefitting the protocol itself in multiple ways.
A similar mechanism could also be explored for StakeNet. While StakeNet’s current design is notably elegant, validator competition is increasing. Adopting an auction-based approach similar to Marinade’s, where bidders must use JTO, could introduce an effective market-driven dynamic. This would represent a significant shift from the current model, but testing could initially involve a small segment of validators entering the stake pool through such a market mechanism each epoch. For instance, StakeNet currently hosts roughly 200 validators; what if 10 of these were selected each epoch based on a market-based bidding mechanism? Alternatively, flexibility could be introduced by determining the bottom X% of validators through this mechanism while maintaining StakeNet’s current criteria around MEV commission %, block reward commission %, priority fee share, etc.
The “incentivized holding” idea brought up by David is intriguing, though it would still need to be derived from the protocol’s overall Tip revenue. Currently, validators individually set MEV commission rates ranging from 0% to 100%, averaging around ~5%. While the incentivized holding concept has merit, I believe an auction-based mechanism could enhance it by creating consistent, epoch-based net-new demand for JTO as long as Tips are being present.
For my proposed idea, when annualizing the 30, 60, and 90 Moving Averages for Tips, a 2% take rate on tips equates to $8.8m, $21.8m, and $36.8m.
I look forward to everyone’s feedback on this proposal and to continuing our collaborative effort to refine these ideas into actionable outcomes.
It’s great to see so much high-quality discussion. Thanks @andrewt for kicking things off with the detailed framework.
Othman from @Chainflow and I were at The Port this week in Miami, and had a great time collaborating on this post:
Revenue Allocation Summary (very approximate, pending feedback)
The primary objective of the Jito foundation is to facilitate the growth of the Jito network. We should be building for the long term health and sustainability of the network. When considering the allocation of network revenue, we should be heavily favoring ‘recycle’ vs. ‘rewards’.
The Jito network is a large protocol within a complex ecosystem, and putting resources towards strategic growth will pay dividends in the future. That being said, it is important to maintain trust amongst holders and investors. Some community members have advocated for a reasonable 3% of tiprouter revenue being put towards buybacks. This 3% (or any low single digit percent) seems reasonable, with the understanding that this metric will not be revisited in the very near future. For rewards options: buybacks vs. buyback and burn vs. fee-switch, buybacks seem the most sustainable, and give the foundation the most optionality in the future.
When considering how to allocate revenue in the ‘recycle’ category, we first have to decide which objectives we are trying to optimize. There are several possibilities:
JitoSol - LST TVL
JitoSol is the largest LST, currently at around 4% of the network, or 40% of LST market share. There is ample room for growth here, and impact per dollar may be one of the best uses of network revenue. Control over directed stake has many benefits: choice of validator client, optimized REV by choosing highly performant validators, and Solana governance vote weight. JitoSol subsidy and Real Yield Gauge could both help to boost LST market share.
Treasury Growth
The JitoDAO treasury sits at an impressive ~$550m, 97% of which is JTO. Active management for a treasury this large is a necessity. The foundation should pursue tactical incentives, and treasury diversification.
Transaction landing & Tip Revenue
There are many factors that contribute to the ability of the protocol to quickly land transactions, and generate tip revenue. Many of these factors are technical and product improvements, but some of these could be influenced by foundation support. Specifically, buyback and barter could benefit the protocol in certain instances, for example: using the DoubleZero optimized network connections could help reduce validator<->block-engine<->block-engine latencies. This may or may not be feasible, depending on their product offerings, but is directionally the type of collaboration that could be beneficial.
Validator Client Market Share
The Jito client is currently used by ~90% of validators. This is an impressive amount of saturation, and improvements in market share from this point are likely marginal. It’s worth keeping an eye on new market entrants, and ensuring that Firedancer is fully Jito-enabled. Resources allocated to this category would be defensive in nature.
TL;DR
Framing The Discussion
I find walking through the P&L and Cash Flow instructive in capital allocation decision making. Demand is the lifeblood of any protocol/business. You can choose to do a few things with demand:
The goal of a protocol/business should be to maximize value to its tokenholders, which usually means maximizing both (A) the future stream of cash flows available for #6-7 and (B) the desirability of those cash flows (as represented by a discount rate or multiple).
#1–5 are usually classified as reinvesting in the business to increase (A) and (B). #6 Buybacks are misunderstood, because it too is another way to reinvest in the business (if you like your future cash flows, then you should buy more of it). An allocator should optimize for the highest ROIC (return on invested capital) decision. ROIC is hard to measure, but it is reasonable to assume that the incremental ROIC on some ideas for “reinvestment” (#1-5) are lower than the incremental ROIC on buybacks (#6), or owning more of the core business. Management teams often have a hard time seeing that reality when they are deep in the day-to-day trenches of running the business. Vice versa, investors have a hard time seeing the opposite when looking outside-in.
#7 Dividends makes more sense than #6 Buybacks when a business is more mature and can no longer find incremental investment opportunities (#1-6) that meets the return hurdle for its stakeholders. This is not the case for Jito so we can set that aside.
Applying this to JTO
Jito’s overarching mandate should be clear: invest first in areas that directly strengthen the core MEV and validator business, then choosing buybacks if no higher-ROIC opportunities remain. By focusing on critical infrastructure, targeted partnerships, and other strategic “must-win” investments, Jito can build and protect its competitive moat. If there are high ROIC ways to invest in the business, it should pursue them, and once that is satisfied—meaning it has adequately funded R&D, operations, and any clearly synergistic expansions—excess funds can be deployed to buybacks or dividends to tokenholders (serving the ultimate constituents of the protocol). Jito has plenty of capacity to do both today.
On “Buyback & Barter”: this conflates two different and independent concepts. The first question is does it make sense to buyback tokens, and the second is whether striking partnerships with tokens makes sense. Using tokens as a form of partnership currency (e.g., joint ventures or equity swaps) is an interesting strategic consideration that we should be open minded about. Each such strategic partnership should be considered independently based on its strong business case. The decision of whether to use cash or “barter” with tokens should be driven by clear ROI analyses and synergy potential, and I believe Jito DAO’s core team is best positioned to decide whether or not to pursue these, while appropriately soliciting the DAO’s opinion for large enough decisions. Tokens in Jito’s treasury can be used.
On incentivizing JitoSOL growth: In that vein, some argue for expansions like JitoSOL to help Jito capture more stake, bolster governance influence, or land transactions more effectively. While that can be powerful if it tangibly supports Jito’s MEV business, it should not become empire building for its own sake. The burden is on management to articulate a credible strategic rationale — one that goes beyond general arguments and shows a clear path to increasing Jito’s core profitability (quantitative) or improving its competitive position (qualitative). Our observation is that the profit potential from JitoSOL alone makes it hard to quantitatively pencil out a good ROI on using token incentives, but we would welcome arguments that say otherwise. Otherwise, it’s more prudent to keep the business lean: invest where there is obvious product-market fit and defensibility, then return excess capital.
On buyback policy: Disciplined, valuation-aware repurchases can add significant value when tokens trade below intrinsic worth. Programmatic buybacks — automatic and untethered to valuation — are currently the standard because of the desire for systematic processes and less human discretion, but (without making a comment on Jito today) it can be uneconomic if a protocol is overvalued relative to its future cash flows and relative to other opportunities to return capital. The right approach is to add nuance: repurchase tokens when the price is clearly undervalued, not merely to satisfy a preset schedule. We think it makes sense for the DAO to set a certain framework, updated periodically, that sets big picture parameters but permits some degree of human discretion to add much needed flexibility.
It is inaccurate to say that “all buybacks destroy value” – plenty of companies and protocols have demonstrated the opposite. It is also shortsighted for a long-term investor to judge buybacks in isolation on a short lookback period. The key is to treat buybacks as a situational tool rather than a perpetual formula, ensuring the cost of capital and alternative uses of cash are constantly reevaluated.
Potential Methodology for JTO to Consider:
We welcome feedback and are openminded about the other great ideas mentioned so far, such as staking incentives or buyback and distribute.
I don’t follow. It seems like you’re suggesting that as a JTO holder you’d have to spend your JTO to get a share of SOL denominated Jito Tips. If that’s correct, JTO holder would be swappingJTO for SOL, which creates JTO sell pressure. Additionally, I don’t see much incremental benefit to doing this because the Jito Tips already accrue to the DAO.
It’s great to see the conversation occurring here! In line with the recent Twitter spaces, we share many of the views expressed above and think there’s tangible value in reinvesting revenue in Jito’s continued growth, both through expanding new products and opportunities and contributing to deeper moats and integrations for Jito’s existing products.
Investing in JitoSOL Dominance via Liquidity and Integrations
To date, it’s clear that wrapped liquid tokens eventually resolve into a power law dynamic. Blockwork’s comment covered our view on this.
Central to Lido’s dominance has been its ability to invest in widespread liquidity (across multiple Ethereum chains), but more importantly, it is leveraged as a composable token in advanced DeFi strategies. Currently, 35% of all stETH is being utilized as collateral across over 20 DeFi protocols. This added utility is leagues ahead of other LST providers and provides a meaningful moat and sticky deposits for users, generating additional yield on top of staking rewards. Jito’s DeFi guide is a nice start, demonstrating utility on Kamino and Drift. Still, we believe there is a greater opportunity to grow JitoSOL liquidity on Solana lending markets and DEXes, potentially expanding JitoSOL liquidity beyond Solana onto external ecosystems. Further, JitoSOL can be integrated into more advanced distribution via one-click looping strategies and vaults. Alternative frontend integrations (such as CEXes and wallets) via SOL earn programs backed by Jito also represent a massive market opportunity and future moat for the DAO to consider.
Buy Backs/Burn
At this time, we remain unconvinced that buybacks are an attractive use of DAO revenue compared to reinvestment in protocol growth. If the growth strategy includes incentives, buyback and distribution of JTO via incentives are an option. Still, there is not a convincing benefit to buyback and burn (or dividends) at this time, given the opportunity cost of re-investment in growth.
Treasury Diversification
Treasury diversification is a staple of operations that should be conducted regardless of the intent of revenue re-investment. We strongly recommend a runway analysis and diverting some revenue to the Jito Treasury, converting it to USDC, and holding it as an operational buffer against market volatility. An organization with service providers, employees, contractors, etc., often has assets in a volatile token while liable for dollar-denominated contracts and payments.
On the more exciting side, we believe there is a massive opportunity to invest in JitoSOL and JTO liquidity via POL. This could help siphon JTO trade volume away from CEXs to Solana and enable strategic integrations (as mentioned above) via ownership of revenue-generating liquidity for JitoSOL/SOL pairs in both AMMs and Lending.
Conclusion
In the comments above, it does seem like there is some consensus that the revenue generated should be reinvested into Jito’s growth and that some of it should be diverted toward the treasury. Moving forward, it might be helpful to hold a working group with the Foundation or a third party to understand the strategic focus for the Jito team in more depth. Understanding the product roadmap and priorities would help accelerate consensus around experiments that leverage revenue to invest further in protocol and product growth. We currently believe a thesis-driven and KPI-driven approach to reinvestment in growth is the most suitable use of DAO revenue.
Hey @samandrewNIV,
Thanks for the feedback. For clarity, I am suggesting a mechanism which I believe acts as a true “value capture” moment for the Jito protocol.
Currently, the Jito protocol “captures” value primarily via a take rate on Tips (denominated in SOL). The value “captured”, in its current form at least, presents FX risk to the protocol, whereas Jito will be/is valued in its “cashflows” that are all denominated in SOL, which is then ultimately denominated in USD. As you can see in the charts below, the two assets are increasingly becoming more intertwined in their respective price action, with JTO notably missing out mostly on the upside, but conversely showing lower overall volatility recently.
For Jito to truly capture the value it creates, and to then accrue that value back to the token itself, the protocol must implement a mechanism that drives market demand to the JTO which is reflective of the “real time” value it creates. Therefore, I believe the auction mechanism of selling SOL accrued via Tips for JTO on a per epoch basis is the best way to drive real demand and value capture for the Jito protocol and its token.
Sam, in your current mental framing you seem to be viewing yourself, or JTO holders, as the key economic agents purchasing the auctioned SOL, which is not how I believe this would function in reality. For clarity’s sake, put yourself in the shoes of a searcher bot or arbitrager. You’re scouring the chain seeking profitable opportunities. With this auction based mechanism as long as the dollar amount of JTO is less than the dollar amount of SOL you are able to purchase, you’ve got yourself a profitable arbitrage opportunity. Thanks to onchain transparency, bidders will always be able to see how many Tips have been accrued throughout the duration of the epoch, allowing them to easily evaluate the efficacy of their personal strategy.
How Would This Impact JTO Market Structure?
I acknowledge past data is imperfect, but when examining the last year of Tips data, this mechanism would have seen $21m+ worth of JTO denominated demand for SOL. The average Epoch had $118k of SOL Tips, and the median epoch had $61k. When projecting forward using the MAs i mentioned previously in my post above, the overall amount of JTO accrued to the protocol would be $8.6m, $16.85m, and $35.32m using the 30, 60, and 90 day MAs respectively.
When examining onchain liquidity for JTO, it’s actually quite lack-luster to where it should be. The largest JTO pool is the JitoSOL/JTO Orca pool which has $5.8m of TVL, approximately 69% of which is JTO, and 31% is JitoSOL. The goal should be to bring as much JTO trading volume and liquidity as possible onchain. If another core goal of the protocol is to expand the supply of JitoSOL, and Jito’s Vault Restaking Tokens (VRTs), which are all inherently onchain products, why should JTO be any different? Remember that all of these product’s growth incentives are denominated in JTO as well.
Additionally, the actual CEX float is not that great either, and there is a very appealing opportunity for the majority of trading to occur onchain. Through Arkham Intel & SolScan tagged wallets, it appears the top 14 CEX wallets holding JTO have an aggregate float of 3.64% of the total supply ($64m). Note I could not find any Coinbase tagged wallets, and onchain flows show they facilitate roughly 50% of the deposit/inflow volume Binance sees on a 30-day basis for JTO. The addition of that information could provide further color to the true liquid CEX float.
| Wallet | JTO Amount | USD Value | % of Total Supply |
|---|---|---|---|
| Binance Cold | 14,739,737 | $34,196,190 | 1.47% |
| Binance Hot | 3,712,365 | $8,612,687 | 0.37% |
| ByBit Hot | 2,353,773 | $5,460,753 | 0.24% |
| Bithumb Hot | 1,502,363 | $3,485,482 | 0.15% |
| Kraken | 964,719 | $2,238,148 | 0.10% |
| Kraken Cold | 943,888 | $2,189,821 | 0.94% |
| Kraken Cold 2 | 692,400 | $1,606,368 | 0.07% |
| Gate.io | 684,877 | $1,588,915 | 0.07% |
| Binance Cold | 583,799 | $1,354,414 | 0.05% |
| MEXC | 562,508 | $1,305,019 | 0.06% |
| Bitget | 526,292 | $1,220,997 | 0.05% |
| Crypto.com Hot 3 | 261,877 | $607,555 | 0.03% |
| Crypto.com Hot 1 | 244,105 | $566,324 | 0.02% |
| KuCoin Cold | 242,977 | $563,707 | 0.02% |
| Orca Pool | 1,749,946 | $4,059,875 | 0.17% |
| Jito DAO Treasury | 222,665,030 | $516,582,870 | 22.26% |
| Jito Foundation Treasury | 136,586,765 | $316,881,295 | 13.65% |
Framing my Thinking / Conclusion
JTO is at a bit of a crossroad. Jito roughly owns the entire MEV supply chain for Solana. Payment for priority access to state changes is an incredible business to be in for the blockchain facilitating the majority of crypto’s economic activity, but Jito does not currently capitalize on this in the way it should. Also, there is no guarantee that this dominant level of market share persists. There’s plenty of well-articulated arguments both for, and against buy-backs, but I would invite everyone to suspend their existing beliefs and consider that this initial framing may be self-limiting for realizing the Jito protocol’s full potential of value accrual.
Most future product developments originate from Labs, which is both lean, and well-capitalized given its existing take rate on Tips. Therefore, the DAO should be the one experimenting on facilitating and ensuring a controlling share of JTO, which it already has a considerable share of via the treasury. By creating a robust mechanism that drives market demand to JTO, the DAO can do exactly that. And through this, the protocol can mechanically capture value in real time, while thoughtfully incentivizing its ancillary products growth (JitoSOL + VRTs) via sustainable token emissions.
Risks & Considerations
The auction could clear at a price which allows SOL to be sold at a deep discount to its true market value. To avoid this, there could be a function where it clears only at >= 95% market value, otherwise the SOL accrued just goes to the DAO treasury. However, this infringes on free market structure, potentially introducing entropy. Other auction types, such as Dutch auctions could also be considered.
The protocol is set to derive its highest revenue stream from Tips, implementing a change from a 2.7% to 0.7% take rate to the treasury on fees could impact the DAOs financial well-being with regards to treasury diversification. To mitigate this, auctions could be run in USDT/USDC or any other suitable equivalent stablecoin, and continue operating auctions where SOL tips are sold for USDT/USDC until a pre-determined threshold is reached. For example, if the protocol was looking to have $5m USDT/USDC to cover expenses, etc. then, following this goal being reached, auctions switch to being denominated in JTO.
If the auction proves successful, sourcing liquidity for JTO may become challenging amongst searchers/solvers/arbitragers who don’t have access to source JTO inventory via prime brokerages, OTC desks, etc. This could lead to price discrepancies on a CEX<>DEX basis which would be up to market-makers, or other actors to close. From viewing onchain flows, it appears Wintermute and GSR are the primary market-makers for JTO. It is clear that Wintermute has the mandate to operate onchain, but GSR appears to be focused more on CEX<>CEX liquidity management. A singular entity responsible for both liquidity provisioning of JTO and one that may also be interested in participating in SOL Tip auction could present key man risk. This can be monitored by examining the onchain flows of auction bidders to see how diverse the bidders are, entity wise (if possible). It would also be useful to get input from key market makers on a idea like this if anything were to move forward.
I welcome additional feedback on all the ideas I’ve outlined here!
Great Job Andrew. Had a good read of the “JTO Utility And Tokenomics” document. In particular, I appreciate the honesty of the following statement: “No one knows what they’re doing.” There’s a lot of experimentation going on and it’s important to keep evaluating the impact of decisions made by different DeFi protocols pertaining to revenue decisions.
With regard to buybacks - I lean closer to repurposing them to rewards (targeted growth) than to burn. With high risk assets (crypto), price discovery is too irrational to justify such a measure. A few years back, I was keen to see the impact of burn mechanisms, but the outcome seems far from the desired one. (e.g. look at the most recent JUPDAO burn).
I’m going to steer a bit away from most of the comments and follow a more TradFi approach: Capital Allocation directed at 1) new business (organic growth), and 2) M&A (inorganic growth). A few ideas to repurpose Jito’s revenue:
.1 Venturing into the stablecoin business.
.2 Expanding the MEV business to other ecosystems (e.g. Monad or Fogo chain) - this could be done organically (growing the team) or inorganically (acquiring Fastlane Labs).
.3 Growing the restaking business - e.g. by acquiring a stake in Fragmetric.
As a side note, I saw comments to MakerDAO burn mechanism attempts. But also worth highlight the investments they perform outside of crypto (RWAs).
Long-term, would be great to see Jito allocate a percentage of revenue towards Financial Literacy programs - this would have a generational impact (“do good intitiative / giveback to the community”) and help spread awareness of DeFi.
