DeFi's Life-or-Death Choice: The Buyback Conundrum and the Systemic Crisis of Zero-Sum Games

Introduction: The Outbreak of a Trust Crisis

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 brewing for two years, to the delight of the market.

The collapse exposed systemic security, transparency, and governance problems in DeFi, and the fee switch proposal represents the industry's typical response to these issues—using financial engineering and profit redistribution to address the crisis.

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

Part 1: Defaults and Buybacks – A Battle of Two Forces Why the Force of Destruction Outweighs Efforts to Build Balancer TVL plummeted 50% in a single day, and Stream triggered the collapse of four stablecoins to zero, far exceeding the impact of direct losses. This contagion speed proves that once trust collapses, the force of destruction spreads exponentially. Meanwhile, the industry's large-scale buyback programs implemented over the past year have almost all failed. Aave continued to buy at unfavorable times, creating a high-level buying frenzy, while MakerDAO, despite its strong fundamentals, is only worth one-third of its historical high. Herein lies a profound asymmetry: building is linear, slow, and requires continuous investment; while destruction is exponential, instantaneous, and can wipe out all accumulated gains. Buybacks attempt to address demand-side issues (security, trust, user growth) through supply-side optimization (token burning), but defaults directly destroy the foundation of demand. The systemic misjudgments behind buyback failures: 1. Mistaking a symptom for the cause. Protocols assume low token prices are the problem and try to boost them through buybacks. However, low prices are merely a symptom; the real causes are business stagnation, user churn, and declining competitiveness. 2. Confusing short-term stimulus with long-term value. Buybacks may lead to short-term price increases, but without business improvement, prices quickly fall back. The market won't sustainably inflate valuations through buybacks; prices are ultimately determined by growth and narrative. These misjudgments point to the same root cause: treating DeFi as a purely financial game while ignoring its fundamental nature as a technological product that requires continuous user value creation. Hyperliquid achieved a positive flywheel effect through product optimization → user growth → trading volume growth, with buybacks merely icing on the cake. Other protocols only engage in buybacks without business growth, turning buybacks into a "Ponzi scheme using savings to prop up the price." Part Two: Uniswap's Dilemma – The Zero-Sum Game Trap The Misunderstood Fee Switch Uniswap's fee switch proposal drove its token price up by over 40%, but this optimism was built on a fundamental misunderstanding. The market perceived it as a buyback plan, but in reality, it was taking 17-25% of LP revenue for the protocol. This is a zero-sum game – every dollar of the protocol's revenue is taken from the LPs. This cognitive difference exacerbated the problems of all the previous buyback failures. The previous cases, at least theoretically, did not harm existing stakeholders. However, Uniswap's fee switch actively created a civil war between LPs and token holders—sacrificing the protocol's foundation (LPs providing liquidity) to appease protocol shareholders (UNI holders). The triple crisis: Incorrect timing: Uniswap launched the fee switch when the aftermath of its collapse was still lingering and the trust crisis was deepening. When the market needed an answer to "how to ensure fund security," it offered a solution to "how to redistribute returns." User churn: On the Base chain, Aerodrome's yield was already several times that of Uniswap; the gap would widen further after the fee switch was activated. Rational LPs only look at yield and will not stay because of brand loyalty. The Cyclical Dilemma: If the fee switch leads to liquidity outflow, it may create a negative cycle—decreased LP returns → reduced liquidity → increased slippage → worsened user experience → decreased trading volume → lower-than-expected protocol revenue → more LPs leaving. The Essence of a Zero-Sum Game: Examining Uniswap's fee switch in a broader context, it represents a dangerous trend: when the industry cannot create incremental value, it turns to a zero-sum game. Whenever innovation stagnates and user growth slows, 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. Hyperliquid's success demonstrates another path: supporting buybacks through product innovation → user growth → real revenue growth. This is an incremental game, a positive-sum game, where all participants benefit because the pie is getting bigger. Fee switching, on the other hand, represents a zero-sum game, a game of zero-sum outcomes. The pie doesn't get bigger; it's just being redistributed. This kind of game might satisfy UNI holders in the short term, but it will inevitably damage the foundation of the protocol in the long run. Part Three: The Road to Breaking the Value Creation Bottleneck From Valuation Crisis to Value Creation Crisis DeFi is currently not facing a valuation crisis (token prices are too low), but a value creation crisis (inability to sustainably create value for users). The distinction between the two is crucial. If it's a valuation crisis, financial engineering solutions like buybacks and fee switching are indeed reasonable. But if it's a value creation crisis, these operations are futile—they consume resources without solving the fundamental problem, and may even accelerate the crisis. DeFi TVL has recovered to 89% of its historical peak, but token prices have generally only recovered to 20-40%. This divergence indicates that funds are flowing back, but confidence has not. Users are willing to use DeFi to earn yields, but are unwilling to hold DeFi tokens because they do not believe these protocols can continuously create value. The collapse of DeFi protocols has deepened this skepticism. When top-audited protocols still lose hundreds of millions of dollars, when 70% of the funds in projects claiming to be "decentralized" are kept secret, and when Curator earns high commissions without taking responsibility—the problem with DeFi is not token prices, but system credibility. Transparency is a competitive advantage, not a cost. Stream's collapse provides a clear lesson: in an environment of trust crisis, transparency is a differentiating competitive advantage. While Stream attracted users in the short term by offering high yields with 70% of its funds kept secret, when the secret collapsed, it not only destroyed itself but also dragged down the entire ecosystem. This creates a market opportunity—the demand for transparency far exceeds the supply. Following the Stream collapse, demand for highly transparent stablecoins surged, even with lower yields. In an environment lacking trust, transparency itself is a product. Protocols should proactively increase transparency, rather than passively responding to regulation. Positioning it as the core of their market strategy—"We are the most transparent DeFi protocol"—is more valuable in the current environment than "We have the highest yields." A Governance Mechanism with Equal Power and Responsibility In DeFi governance, power and responsibility are often separated. Early DeFi protocols pursued "decentralization," often interpreting it as "dispersion of power," ignoring the dangers of "dispersion of responsibility." The result is a large number of "powerless" roles—they can influence protocol decisions, manage user funds, and design strategies, but bear no responsibility when problems arise. The core principle of the solution is: power must be commensurate with responsibility, and returns must be commensurate with risk. Any player wielding power must pledge a significant proportion of funds, establish an automatic forfeiture mechanism, and implement delayed profit distribution. When Curator's own funds are exposed to risk, he will more carefully evaluate each strategy. 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-sharing mechanisms. We have already seen the end of this path: Aave, MakerDAO, and Pancake have all failed to prop up their token prices simply through buybacks and deflation. The other path is to shift towards value creation—investing resources in security, transparency, user growth, and product innovation. This path is more difficult, requiring genuine technological breakthroughs and long-term investment, with a longer return cycle. But Hyperliquid has proven that this is the only sustainable path. The window of opportunity is closing. The next collapse could come sooner and be more destructive. Before trust completely collapses, the industry still has a chance to complete a paradigm shift. Ultimately, the golden age of DeFi will not belong to the protocols most adept at financial engineering, but to those that truly create value for users, respect risk, pursue transparency, and improve governance. Buybacks and fee on/off switches can be means, but should never be ends. The true purpose is singular: to build a trustworthy, usable, and sustainable decentralized financial system.