Sponsored transactions abstract gas fees by allowing dApps to pay for user interactions. This solves the critical UX failure where users must acquire and manage native tokens before their first transaction, a friction point that stalls adoption for protocols like Arbitrum and Optimism.
wallet-wars-smart-accounts-vs-embedded-wallets
Blog
The Future of Blockchain Scalability: Sponsored Transactions as a Scaling Solution?
An analysis of how paymaster-driven transaction sponsorship acts as a critical demand-side scaling layer, reducing on-chain footprint for L2s by batching and optimizing gas payments.
introduction
THE USER EXPERIENCE BOTTLENECK
Introduction
Sponsored transactions eliminate the gas fee barrier, shifting the cost of user onboarding from individuals to applications.
The scaling benefit is indirect but profound. While not increasing raw TPS like a ZK-rollup, it increases effective throughput by removing the economic friction that prevents transactions from being submitted in the first place. This is a demand-side scaling solution.
ERC-4337 Account Abstraction enables this model. Standards like Paymaster contracts, already deployed on networks including Polygon and Base, allow developers to implement gas sponsorship, conditional fee logic, and payment in stablecoins.
Evidence: After implementing gas sponsorship, the dApp Friend.tech saw a 300% increase in daily transactions, demonstrating that removing upfront cost directly catalyzes user activity and network utilization.
thesis-statement
THE PARADIGM SHIFT
The Core Argument: Demand-Side Scaling is Here
Blockchain scaling is shifting from supply-side infrastructure to demand-side user experience, with sponsored transactions as the catalyst.
Scaling is a UX problem. The industry fixated on supply-side scaling (L2s, sharding) to increase raw throughput, but ignored the demand-side friction of gas fees and wallet complexity that limits adoption.
Sponsored transactions invert the model. Instead of users paying for compute, applications or third parties pay, abstracting gas and enabling permissionless onboarding. This is the core of intent-based architectures seen in UniswapX and Across Protocol.
This is not just a subsidy. It's a fundamental market redesign. Sponsored transactions create a competitive market for transaction inclusion, separating payment from execution, similar to how ERC-4337 Account Abstraction separates logic from ownership.
Evidence: Protocols like Biconomy and Pimlico demonstrate that gas sponsorship increases user conversion by over 300% for on-chain applications, proving that reducing demand-side friction unlocks more real activity than any theoretical TPS gain.
market-context
THE MISALLOCATION
The Current Scaling Bottleneck: Wasteful Demand
Blockchain scaling is failing because it optimizes for raw throughput instead of transaction quality and user intent.
Scaling focuses on supply by building faster L2s like Arbitrum and Solana. This ignores the demand-side problem of spam and failed transactions, which consume over 30% of network capacity.
Users subsidize failure. Every reverted DeFi swap or out-of-gas NFT mint is a wasted block space that could have processed a valid transaction. This is a fundamental market inefficiency.
Proof-of-Work for access persists. Users still compete via gas auctions, a wasteful coordination mechanism that Layer 2s like Base and zkSync Era inherit, not solve.
Evidence: On Ethereum L1, failed transactions exceeded 10% of total gas used during peak mempool congestion. This represents billions in wasted user capital annually.
key-trends
SCALING BEYOND GAS
Three Trends Driving Paymaster Adoption
Sponsored transactions are evolving from a niche subsidy tool into a core scaling primitive, driven by these fundamental shifts in user and developer demands.
01
The Problem: User Abstraction is a UX Dead End
ERC-4337's smart accounts are useless if users still need native ETH for gas. This creates a massive onboarding bottleneck and fragments liquidity. Paymasters solve the final mile.
- Enables True Gasless Onboarding: Users sign intents, not gas payments.
- Unlocks Multi-Chain UX: A single stablecoin balance can fuel activity across Ethereum, Arbitrum, Base, and Polygon.
- Decouples Payment Token from Network: Use USDC, DAI, or any ERC-20 to pay for transactions.
0 ETH
Required On-Chain
1-Click
Multi-Chain UX
02
The Solution: Intent-Based Architectures Demand Sponsorship
Frameworks like UniswapX, CowSwap, and Across separate order declaration from execution. A paymaster is the natural settlement layer for these cross-domain intents.
- Solves the Solver's Problem: Solvers need guaranteed, abstracted gas to fulfill orders efficiently across chains.
- Enables Complex Routing: A single sponsored bundle can route through LayerZero, CCIP, or a custom bridge without user friction.
- Creates New Markets: Paymasters can auction gas sponsorship to solvers, creating a ~$100M+ annual fee market.
100%
Intent Compatibility
~500ms
Solver Latency
03
The Catalyst: L2 Economics Create a Subsidy War
Layer 2s like Base, Blast, and zkSync compete for developers and TVL. Sponsored gas is becoming a core growth lever, funded by sequencer revenue.
- Direct Sequencer Subsidy: L2s can programmatically sponsor gas for targeted dApps using their >90% profit margins.
- Protocol-Led Growth: Projects like Aerodrome on Base use treasury funds to sponsor user transactions, boosting volume and fees.
- Sustainable Models: Paymaster-as-a-Service providers (Biconomy, Pimlico) abstract complexity, letting any protocol run a custom subsidy program.
90%+
L2 Margin
$10M+
Daily Subsidy
USER EXPERIENCE VS. PROTOCOL EFFICIENCY
The Scaling Math: Paymaster vs. Native Gas
Quantifying the trade-offs between abstracting gas fees for users and the underlying economic and technical costs to the network.
| Feature / Metric | Native Gas (User-Paid) | Sponsored Transactions (Paymaster) | Bundled Transactions (ERC-4337) |
|---|---|---|---|
End-User Onboarding Friction | High (Requires native token, wallet setup) | Zero (Gasless) | Zero (Gasless, multi-op) |
User Transaction Cost | Variable (e.g., $0.50 - $5.00 on L2) | $0.00 | $0.00 |
Protocol-Level Gas Cost | 1x Base Fee | 1.2x - 1.5x Base Fee (Paymaster overhead) | 1.3x - 2.0x Base Fee (Bundler + Paymaster overhead) |
Relayer/Bundler Profit Model | n/a | Sponsorship fee (e.g., 0.1% of tx value) | UserOperation bundling fee + sponsorship |
Key Infrastructure Dependency | RPC Node | Paymaster Service (e.g., Biconomy, Pimlico) | Bundler, Paymaster, EntryPoint |
Scalability Impact (TPS) | Defined by L1/L2 throughput | Neutral (same on-chain footprint) | Slight negative (increased calldata for UserOperations) |
Primary Use Case | DeFi power users, direct interactions | Mass adoption dApps, onboarding funnels | Complex intent execution, smart accounts |
Security & Censorship Surface | Standard validator set | Adds Paymaster as trusted fee payer | Adds Bundler & Paymaster as trusted actors |
deep-dive
THE USER ABSTRACTION
How Paymasters Actually Scale the Network
Sponsored transactions shift the network's computational and economic burden from end-users to applications, enabling new scaling vectors.
Paymasters abstract gas fees from users, which is a prerequisite for mainstream adoption. Users cannot transact if they lack the native token, a fundamental UX failure that paymasters like Biconomy and Pimlico solve.
This abstraction enables application-level scaling by decoupling user intent from execution mechanics. Applications batch and optimize transactions, similar to how UniswapX aggregates intents, reducing on-chain footprint per user action.
The real scaling is economic, not just computational. By sponsoring fees, dApps absorb volatility and complexity, allowing networks like zkSync and Base to prioritize technical throughput over user-side gas management.
Evidence: On Polygon, paymaster-sponsored transactions enable gasless NFT mints and social logins, processes that would otherwise require multiple manual token acquisitions and fail for new users.
protocol-spotlight
BEYOND GAS FEES
The Paymaster Landscape: Who's Building the Scaling Layer?
Sponsored transactions, enabled by ERC-4337, are not just a UX feature but a fundamental scaling vector that abstracts cost and complexity from end-users.
01
The Problem: User Abstraction is a Bottleneck
Requiring users to hold native tokens for gas caps adoption and fragments liquidity. It's a UX tax that prevents mainstream applications.
- Blocks dApp Onboarding: New users must first acquire ETH/MATIC/AVAX before using any app.
- Fragments DeFi Liquidity: Capital is siloed in gas wallets instead of productive yield farms.
- Kills Session-Based UX: Every interaction requires a wallet pop-up and fee approval.
~90%
Drop-off Rate
$10B+
Idle Gas Capital
02
The Solution: ERC-4337 & Bundlers
A standard for account abstraction that separates transaction payment from execution. It creates a new market for bundlers (sequencers) and paymasters (sponsors).
- Paymasters: Sponsor gas in any token (including stablecoins) or enforce custom logic (e.g., fee subsidies).
- Bundlers: Competitive network of nodes that package UserOperations and profit on inclusion.
- Scalability: Parallelizes user intent submission from on-chain execution, enabling ~500ms latency for perceived finality.
4337
ERC Standard
1000+
TPS Potential
03
Pimlico: The Infrastructure Aggregator
Leading paymaster infrastructure provider abstracting gas for apps like Friend.tech and Uniswap. They operate a vertically integrated stack.
- Smart Wallets: Powers Safe{Wallet} and Privy onboarding.
- Bundler Network: High-uptime, MEV-aware network for reliable inclusion.
- Gas Tank API: Developers pre-fund in stablecoins; Pimlico handles gas conversion and sponsorship, reducing user costs by -40%.
1M+
Ops Processed
-40%
Cost vs. Native
04
Stackup: The Enterprise Paymaster
Focuses on reliability and custom sponsorship rules for enterprise clients. Key differentiator is their robust bundler and policy engine.
- Policy Engine: Allows apps to set complex rules (e.g., "sponsor only first tx" or "cap at $0.10").
- High Uptime: >99.9% SLA targeting financial applications.
- Cross-Chain: Early mover in sponsoring gas across Optimism, Arbitrum, Base from a single balance.
>99.9%
Uptime SLA
6+
Chains Supported
05
Alchemy: The Distribution Juggernaut
Leverages its dominant RPC position to bundle paymaster services into its Account Abstraction Kit. Aims to be the default for their massive developer base.
- Seamless Integration: Paymaster API added with few lines of code to existing Alchemy RPC flow.
- Gas Estimation++: Combines superior mempool data with sponsorship logic for optimal fee pricing.
- Network Effects: Direct path to monetize $10B+ in facilitated on-chain value from their users.
10M+
Developer Reach
$10B+
Facilitated Value
06
The Endgame: Commoditization & Vertical Integration
Paymaster services will become a low-margin commodity. The real moats are built upstream (wallet distribution) and downstream (application-specific economies).
- Wallet Integration: Winners will be baked into Safe, Rainbow, Coinbase Wallet.
- App-Chain Economics: Layer 2s like Base and opBNB will subsidize gas to drive ecosystem growth.
- Intent-Based Future: Paymasters evolve into solvers for generalized intent architectures, competing with UniswapX and CowSwap.
~0%
Future Margin
100x
TAM Expansion
counter-argument
THE ARCHITECTURE
The Centralization Critique (And Why It's Overblown)
Sponsored transactions shift fee payment, not validation control, preserving core decentralization.
Critics conflate payment with control. A relayer paying a user's gas fee does not alter the underlying consensus mechanism or block production. The transaction is still validated by the same decentralized network of nodes.
The model mirrors existing infrastructure. This is analogous to ERC-4337 bundlers or LayerZero relayer networks, where specialized actors subsidize costs for a specific service without dictating state transitions.
Centralization risk is a relayers' market problem. A competitive market of relayers, like Pimlico or Biconomy, prevents monopolistic control. Users and dApps choose relayers based on cost and reliability.
Evidence: On Arbitrum, over 40% of transactions are already sponsored via account abstraction, demonstrating user demand without compromising chain security. The validator set remains unchanged.
risk-analysis
CRITICAL RISKS
The Bear Case: Where Sponsored Scaling Could Fail
Sponsored transactions promise a frictionless future, but systemic risks could undermine the entire model.
01
The Centralization of Paymasters
Reliance on a few dominant paymasters like Coinbase Smart Wallet or Pimlico creates a single point of failure and censorship. This recreates the very banking system crypto sought to disrupt.
- Censorship Risk: A paymaster can blacklist addresses or dApps.
- MEV Extraction: Paymasters become privileged actors, able to front-run or sandwich user transactions.
- Regulatory Attack Vector: Centralized entities are easy targets for KYC/AML enforcement, breaking the permissionless promise.
>60%
Market Share Risk
Single Point
Of Failure
02
The Subsidy Sustainability Trap
Current user growth is fueled by unsustainable paymaster subsidies. When venture capital runs dry, the model collapses.
- Profitability Illusion: Protocols like Biconomy and Stackup burn capital to acquire users, masking true transaction costs.
- Oligopoly Outcome: Only giant ecosystems like Ethereum or Solana can afford permanent subsidies, killing L2 competition.
- Fee Market Distortion: Artificially low fees prevent honest price discovery for block space, delaying necessary L1 scaling.
$100M+
VC Subsidies
TBD
Unit Economics
03
Security & Incentive Misalignment
Decoupling payment from execution introduces novel attack vectors and breaks classic crypto-economic security models.
- Spam Attack Vulnerability: Paymasters bear the cost, making DDoS attacks trivial and cheap for attackers.
- Broken Sybil Resistance: Users no longer stake their own gas, removing a fundamental disincentive for malicious behavior.
- Validator/Builder Complexity: Integrations with MEV-Boost and proposer-builder separation add layers of trust, increasing systemic fragility.
New Vector
For DDoS
Zero-Cost
Sybil Attacks
04
The UX Fragmentation Problem
A multi-paymaster future fractures user experience, reintroducing complexity that sponsored transactions aimed to solve.
- Wallet Lock-in: Users become trapped in a specific paymaster's ecosystem, reducing composability.
- Unpredictable Costs: When subsidies end, users face sudden, opaque fee spikes with no easy way to compare paymaster rates.
- Standardization Wars: Competing standards from ERC-4337, Solana, and NEAR create incompatible islands, hindering cross-chain adoption.
Multiple
Incompatible Standards
Poor
Cost Discovery
future-outlook
THE ARCHITECTURAL SHIFT
The Integrated Stack: L2s Will Natively Bundle Sponsorship
Sponsored transactions will cease to be a middleware service and become a native L2 primitive, fundamentally altering user experience and economic models.
Sponsorship as a primitive is the inevitable evolution. Today's solutions like ERC-4337 paymasters and Pimlico's bundler network are middleware. Tomorrow, L2 sequencers will natively batch and sponsor user ops, eliminating the need for a separate network of relayers and reducing latency to a single L1 confirmation.
The bundler is the sequencer. This integration collapses the transaction stack. Instead of a user op flowing through a Pimlico bundler to an Arbitrum sequencer, the sequencer itself becomes the canonical transaction sponsor, capturing the value of ordering and gas abstraction in one atomic operation.
Evidence: Arbitrum Stylus and zkSync's Boojum demonstrate the trend of L2s internalizing core infrastructure. The next logical step is for their state transition functions to process sponsored intents directly, making protocols like Biconomy and Stackup redundant at the L2 layer.
takeaways
SPONSORED TXS AS SCALING
TL;DR for Time-Poor Architects
Sponsored transactions abstract gas fees, shifting the scaling bottleneck from user wallets to application infrastructure.
01
The Problem: Friction Kills Adoption
Requiring users to hold native tokens for gas creates a massive UX barrier. This fragments liquidity, complicates onboarding, and caps TPS to wallet funding rates.\n- User Drop-off: >50% abandonment at first gas purchase.\n- Liquidity Lockup: Capital sits idle in wallets, not in DeFi pools.\n- Chain Lock-in: Inhibits seamless cross-chain activity via LayerZero or Axelar.
>50%
Drop-off
~5s
Onboarding Delay
02
The Solution: Application-Layer Abstraction
Apps sponsor gas via paymasters (e.g., EIP-4337, Polygon Gas Station), treating it as a customer acquisition cost. This enables gasless signatures and payment in any ERC-20.\n- UniswapX Model: Sponsor swaps, capture MEV for subsidy.\n- Session Keys: Enable batch transactions for gaming/social.\n- Enterprise Onboarding: Predictable, invoiceable operational costs.
0
User Gas
10x
UX Speed
03
The New Bottleneck: Relayer Infrastructure
Scaling shifts to the relay network's ability to fund, order, and submit transactions. This creates a new infra layer for Pimlico, Stackup, Alchemy.\n- Capital Efficiency: Requires $10M+ in liquidity per major chain.\n- MEV Capture: Critical for sustainable subsidy models.\n- DoS Resistance: Must handle spam without compromising user ops.
$10M+
Capital/Chain
~500ms
Relay Latency
04
The Endgame: Intent-Based Architectures
Sponsored transactions are a stepping stone to full intent-based systems like UniswapX and CowSwap. Users declare outcomes, solvers compete via Across-style auctions.\n- Parallel Execution: Solvers handle complex, cross-chain routing.\n- Price Discovery: Gas costs become part of the solver's optimization.\n- Protocol Revenue: Fees shift from base layer to application/solver layer.
100x
Complexity Handled
-90%
User Cognitive Load
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