Token incentives are a temporary subsidy. They bootstrap liquidity and user acquisition but create no intrinsic demand; when emissions slow, activity and TVL collapse, as seen with many early DeFi 1.0 forks.
account-abstraction-fixing-crypto-ux
Blog
The Subsidy Sunset: Planning for Long-Term Factory Sustainability
A technical blueprint for transitioning account factories from unsustainable gas sponsorship to economically viable user-paid and app-paid models. We analyze the impending subsidy cliff, architect sustainable fee flows, and provide a framework for builders.
introduction
THE SUBSIDY SUNSET
Introduction: The Inevitable Burnout
Protocols that rely on token emissions for growth face an existential cliff when the free money stops.
Sustainable demand requires embedded utility. Protocols like Uniswap and Aave succeeded by becoming essential financial infrastructure, not just yield farms. Their fees are a function of real usage, not inflation.
The factory model accelerates burnout. Platforms like Arbitrum Nova and Base that spin up chains with pre-minted tokens for validators face the same decay curve unless they cultivate native applications.
Evidence: Layer 2 sequencer revenue remains dominated by airdrop farming transactions; post-airdrop, daily transaction counts on Optimism and Arbitrum fell by over 60% before native activity rebuilt.
key-trends
SUBSIDY SUNSET
The Current Subsidy Landscape: A House of Cards
Protocols built on perpetual token emissions face an inevitable reckoning; sustainable factories require new economic primitives.
01
The Mercenary Capital Problem
Yield farming incentives attract short-term TVL that evaporates post-emission, creating a boom-bust cycle. This distorts protocol metrics and delays discovery of real product-market fit.\n- >90% TVL churn post-emission in typical DeFi 1.0 farms\n- Zero-sum competition with other subsidized protocols\n- Permanent inflation dilutes long-term stakeholders
>90%
TVL Churn
Zero-Sum
Competition
02
The Uniswap V3 Fee Switch Dilemma
Turning on protocol fees risks liquidity migration to forked, zero-fee pools, demonstrating the fragility of subsidized network effects. This creates a prisoner's dilemma for sustainable revenue.\n- LPs are price-sensitive; small fee changes trigger migration\n- Forkability is a constant threat in open-source DeFi\n- Revenue vs. Liquidity is a direct trade-off without new value capture
High Risk
Liquidity Flight
Prisoner's
Dilemma
03
The Blast & EigenLayer Blueprint
These protocols use points programs and restaking to create subsidy-like incentives backed by future airdrops or shared security, deferring the monetary cost. This shifts the subsidy burden to future token holders.\n- Points create non-dilutive, deferred incentives\n- Restaking leverages existing capital (e.g., ETH) for new security\n- Long-term viability depends on sustainable post-airdrop flywheel
Deferred
Cost
Capital-Efficient
Incentives
04
Solution: Fee Abstraction & Intents
Decouple user payment from transaction execution via sponsored gas or intent-based architectures (UniswapX, CowSwap). The protocol or solver pays fees, creating a seamless UX that justifies a sustainable take rate.\n- User doesn't pay gas, removing a major UX barrier\n- Protocol embeds fee in swap price or solver bid\n- Enables sustainable revenue without direct user friction
Gasless
UX
Embedded
Fees
05
Solution: Value-Accruing Governance Staking
Move from inflationary emissions to a model where staked governance tokens capture a direct share of protocol revenue (e.g., fee switch directed to stakers). This aligns long-term holders with sustainable growth.\n- Stakers earn real yield, not new inflation\n- Creates a virtuous cycle of revenue, buyback, and distribution\n- Turns governance into a cash-flowing asset
Real Yield
For Stakers
Cash-Flow
Asset
06
Solution: Modular Revenue Stack
Factories should act as platforms selling infrastructure (sequencing, data, interoperability) to app-chains and rollups, not just end-users. This creates B2B revenue streams less sensitive to retail cycles.\n- Diversifies revenue beyond transaction fees\n- Leverages protocol's core tech stack (e.g., shared sequencers, oracles)\n- Aligns with modular blockchain thesis (Celestia, EigenDA, AltLayer)
B2B
Revenue
Modular
Stack
deep-dive
THE SUBSIDY SUNSET
Architecting for the Sunset: Fee Flow Primitives
Protocols must design native fee capture mechanisms before token incentives expire, transitioning from subsidized growth to sustainable revenue.
Token incentives are temporary capital. They create initial liquidity and user adoption but deplete treasuries. Protocols like Uniswap and Aave operate with minimal native fee capture, relying on governance token emissions that will eventually stop.
Sustainable protocols own their fee flow. This requires designing fee switches and value accrual hooks into core smart contract logic from day one. The model is not optional for long-term viability.
Compare Uniswap V3 to Trader Joe. Uniswap's fee switch remains a governance debate, while Trader Joe's veJOE model automatically directs a portion of swap fees to stakers. This creates a self-funding flywheel independent of new token minting.
Evidence: Lido's post-merger dominance. After Ethereum's Merge removed mining rewards, Lido's fee-sharing staking model captured market share because it provided continuous, protocol-owned yield. Protocols without embedded fee flows will face a similar reckoning.
THE SUBSIDY SUNSET
Post-Subsidy Model Comparison: Viability Matrix
Comparative analysis of sustainable revenue models for blockchain infrastructure (e.g., RPC providers, indexers, oracles) after token emission incentives end.
| Key Metric / Capability | Usage-Based Fee Model | Staked Service Model | Value-Capture Premium Model |
|---|---|---|---|
Primary Revenue Source | Pay-per-call API fees | Staking yield from service operators | Protocol revenue share (e.g., MEV, swap fees) |
User Cost Predictability | Variable (scales with usage) | Fixed (staking cost only) | Zero direct cost |
Protocol Alignment Incentive | Low (client can churn) | High (skin-in-the-game staking) | Extreme (revenue tied to protocol success) |
Example Implementation | Alchemy, Infura (paid tiers) | The Graph (Indexer staking) | Uniswap (LP fees), EigenLayer (restaking) |
Time to Profitability Post-Subsidy | 3-6 months | 12-18 months | Immediate (if protocol has traction) |
Critical Dependency | Enterprise sales & adoption | Tokenomics & slashing security | Underlying protocol TVL & activity |
Resilience to Market Downturns | Low (usage correlates with activity) | Medium (staking provides buffer) | High (captures base layer value) |
counter-argument
THE INCENTIVE TRAP
Counterpoint: Why Subsidies Might Never End (And Why That's Worse)
The economic design of modern rollups creates a structural dependency on perpetual subsidies that degrades decentralization.
Sequencer revenue is insufficient. The primary fee revenue for a rollup like Arbitrum or Optimism is L1 data posting costs, which are a pure cost center. MEV extraction and transaction ordering are the only real profit centers, but these are opaque and politically toxic to monetize directly.
The subsidy becomes the product. Protocols like Blast and Mode bootstrap TVL with native yield, making the subsidy the core value proposition. This creates a Ponzi-like dynamic where user retention depends on continuous new capital inflows, not sustainable utility.
Decentralization is the casualty. A perpetually subsidized sequencer has no economic pressure to decentralize its operation. The result is a system that remains under the control of a single entity, replicating the centralization flaws of Web2 but with a blockchain facade.
Evidence: Layer 2s like Arbitrum spend over $1M monthly on ETH for data blobs while generating minimal protocol revenue. The 'Endgame' roadmap for decentralization is perpetually deferred because the core business model is broken.
protocol-spotlight
THE SUBSIDY SUNSET
Builder Case Studies: Early Sunset Strategies
Protocols that bake in a subsidy sunset from day one avoid the inevitable death spiral of unsustainable tokenomics.
01
The Uniswap V3 Fee Switch: Protocol-Owned Liquidity as a Flywheel
The Problem: Protocol revenue is ephemeral, captured by LPs, leaving the treasury vulnerable. The Solution: Activate a governance-controlled fee switch on select pools, redirecting a portion of swap fees to the DAO treasury. This creates a sustainable revenue stream post-inflationary token emissions, funding development and security.
- Key Benefit: Transforms the protocol from a passive infrastructure provider to an active capital allocator.
- Key Benefit: Establishes a clear path to fee-for-security model, reducing reliance on token dilution.
$1B+
Annualized Fees
10-25%
Fee Switch Take
02
The Synthetix Staking Rewards Sunset: From Inflation to Real Yield
The Problem: High, perpetual token inflation to reward stakers is a Ponzi-like structure that devalues the token long-term. The Solution: A pre-programmed, exponential decay of SNX inflation over 8 years, forcing the system to transition to fee-based staking rewards generated from Synth trades and perpetual futures.
- Key Benefit: Aligns staker incentives with protocol usage and fee generation, not mere token emission.
- Key Benefit: Creates predictable, decreasing sell pressure from treasury emissions, allowing token price to reflect organic demand.
8 Years
Decay Schedule
>75%
Inflation Reduction
03
The MakerDAO Endgame Plan: Splitting the Protocol into SubDAOs
The Problem: A monolithic DAO with a single token (MKR) cannot efficiently scale or innovate, and its subsidy model is opaque. The Solution: Fracture the protocol into specialized, competing SubDAOs (like Spark, Scope) that must bid for funding from the core Maker ecosystem using their own tokens. Core MKR emissions sunset in favor of SubDAO token rewards.
- Key Benefit: Introduces internal market competition for capital and talent, driving efficiency.
- Key Benefit: Isolates risk and allows for modular sunsetting of underperforming verticals without killing the core system.
6+
Planned SubDAOs
Auction-Based
Funding Model
04
The Lido V2 Withdrawal Credentials: Exiting the Staking Business
The Problem: A liquid staking token (stETH) is only as good as its redeemability; a centralized gatekeeper for withdrawals creates existential risk. The Solution: Decentralize the withdrawal process by enabling stakers to set their own withdrawal credentials, bypassing the Lido DAO's multisig. This prepares the protocol for a future where its role as a mandatory intermediary can sunset.
- Key Benefit: Transforms stETH from an IOU into a truly self-custodial claim on underlying ETH.
- Key Benefit: Dramatically reduces protocol liability and regulatory surface area by ceding control.
100%
Withdrawal Autonomy
~0
Protocol Gatekeeping
future-outlook
THE SUBSIDY SUNSET
The New Factory Stack: Predictions for 2025
The era of hyper-subsidized onchain activity is ending, forcing factory models to build sustainable, user-funded economic engines.
Subsidies are a growth hack, not a business model. Protocols like Arbitrum and Optimism have spent billions on token incentives to bootstrap liquidity and users. This creates a false economy where the protocol's primary customer is its own treasury, not a real end-user. The 2025 factory must generate fees from external demand.
The winning model is a fee-for-service marketplace. The factory's core product is secure, verifiable execution. Users will pay for this directly, not through inflationary token emissions. This mirrors the evolution of AWS and Cloudflare, where developers pay for reliable infrastructure, not speculative tokens.
Sustainability requires modular fee abstraction. Factories must integrate account abstraction (ERC-4337) and intent-based systems (UniswapX, CowSwap) to let users pay in any asset while the factory captures value in its native token. This decouples utility from speculative token holding.
Evidence: The Base model is the blueprint. Base's sequencer revenue, derived from real user L2 fees and shared with Optimism Collective, proves a factory can be profitable without perpetual subsidies. Its integration of Coinbase's fiat on-ramp directly monetizes user onboarding.
takeaways
FACTORY SUSTAINABILITY
TL;DR for Protocol Architects
When the token faucet runs dry, your factory's economic engine must run on real user demand.
01
The Problem: Protocol is the Primary Customer
Your factory's revenue is dominated by your own token incentives, not external integrators. This creates a circular economy that collapses post-subsidy.\n- >70% of transactions may be self-referential.\n- TVL is a vanity metric, not a sustainability metric.
>70%
Self-Referential
$0
Real Revenue
02
The Solution: Anchor to a Killer Primitive
Your factory must be the cheapest, fastest, or most secure way to deploy a specific, high-demand application. Think Uniswap V4 hooks or zkRollup custom DA.\n- Become the default for a $1B+ vertical (e.g., RWAs, gaming).\n- Design for protocol-owned liquidity from day one.
$1B+
Target Vertical
10x
Efficiency Gain
03
The Problem: Subsidized Security is an Illusion
High staking APY from token emissions attracts mercenary capital that flees at the first sign of yield compression. Your validator set becomes unstable.\n- Real security comes from fee revenue backing the chain's native asset.\n- EigenLayer restaking only defers, not solves, this problem.
-90%
APY Drop
Instability
Validator Risk
04
The Solution: Fee Switch as a Core Mechanism
Bake a protocol fee into the factory's base layer, shared between builders and stakers. This aligns long-term incentives and funds security.\n- Model fees after EIP-1559 burn or Optimism's retro funding.\n- Transparent on-chain treasury for ecosystem grants.
2-5%
Sustainable Fee
Aligned
Staker Incentives
05
The Problem: Generic Factories are Commoditized
If you're just another EVM clone or Cosmos SDK chain, you compete on token emissions alone. Celestia's modular data availability makes launching a generic L2 trivial and cheap.\n- Your moat is zero without a unique technical or social stack.
Zero
Technical Moat
Commoditized
Market Position
06
The Solution: Own the Stack, Not Just the Chain
Vertical integration creates defensibility. Control the key infrastructure layer your factory's apps depend on (e.g., oracle, sequencer, bridge).\n- See dYdX moving to its own app-chain to control the full stack.\n- Arbitrum Stylus enables better performance for specific compute.
Full Stack
Control
Defensible
Business Model
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Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall