The ETHFI Buyback Catch

On our August 13th Analyst Hours call, I explained why I was bullish on ETHFI after the token had sold off due to the Ethereum staking proposal. The market was valuing EtherFi as a staking business, even though Cash, its neobank, was already generating the majority of protocol revenue. The missing piece was tokenholder value accrual. EtherFi’s investor call earlier that same day addressed it with programmatic buybacks starting in September, with the team providing initial guidance of about $1.33M a month.

Six weeks after launch, it’s worth checking how the program is tracking against that guidance, and why it can’t be compared with a typical buyback that takes tokens out of circulation.

Since the week of September 7, Labs has sent $1.48M to the Foundation to be used for buybacks, including another $225k yesterday, the third straight week at exactly that amount. Through October 18, the Foundation had bought 1.81M ETHFI at an average price of $0.692. At $225k a week, contributions are running at about $975K a month, roughly 27% below the $1.33M guidance.

The fixed $225k raises some questions, since the proposal was framed as if buybacks would scale directly with Cash spend. Over the past eight weeks, weekly Cash spend rose from $27.6M to $31.0M, yet contributions have stayed flat. If buybacks scaled directly with card spend, you would expect them to have increased, or at least fluctuated in value.

Not your typical buyback

Most token buybacks fall into one of two models. Buyback and burn, like PUMP or UNI, permanently removes tokens from supply. Buyback and retain, like Hyperliquid’s Assistance Fund, does not burn tokens but still takes them out of circulation. Either way, buybacks have the desired effect of shrinking the token’s float.

EtherFi’s buyback program works differently. The proposal said half of the ETHFI bought would be held in the Foundation treasury and half paid out as cashback. But based on the team’s dashboard, it looks like nearly all of it is going to cashback. EtherFi’s distributor contract has paid out 1.83M ETHFI over the past six weeks, basically everything that was bought. Recipients have since moved 1.28M of it, or 70%, out of their Cash accounts, and only 548k has been retained.

The result is that users converting ETHFI back to dollars offset much of the buyback pressure. Cumulatively, ETHFI bought is still 42% higher than ETHFI exited. Week over week, though, the margin has disappeared: in the week of October 12, exits outpaced buybacks by 7%, and the net flow turned negative for the first time. 

EtherFi’s buyback works more like a customer acquisition cost paid in ETHFI than a supply reduction mechanism. That isn’t necessarily bad, but it can’t be compared directly with buybacks from PUMP, UNI or HYPE, where tokens are simply taken out of circulation. The positive side is that rewards are funded by revenue rather than emissions, and the accounts receiving ETHFI each week have grown from about 3.8k to 6.82k since late September. However, the program won’t drive a re-rating through float reduction the way a burn would.

Over the next few months, I’m watching two things:

1. Contributions catching up to guidance, or the team clearly stating what share of spend goes to ETHFI buybacks. At $225k a week, the buyback is flat while spend keeps growing, and it’s not yet clear how the program matches what the proposal described.

2. Borrow revenue joining the buyback. This kicks in once Cash loans on EtherFi’s Aave V4 instance reach $50M. Loans stand at $42.1M today, up 78% since mid-August, though borrow revenue is still small at about $31k a week.

EtherFi’s neobank keeps growing, and ETHFI remains, in my view, the best way to get exposure to the onchain banking theme. The buyback doesn’t take tokens out of circulation, but it’s an interesting design: it rewards users while funding growth, and it’s paid for by revenue rather than emissions. I’ll dig into this further in my upcoming report on EtherFi and the onchain banking stack.

— Carlos

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