Gas abstraction is the wedge. The primary barrier for Web2 users is not seed phrases, but the cognitive load of acquiring and spending native tokens for fees. Platforms like Privy and Dynamic solve this by paying gas on behalf of users, making the first transaction feel like a Web2 login.
wallet-wars-smart-accounts-vs-embedded-wallets
Blog
Why Embedded Wallets Are Betting on Subsidized Gas
An analysis of how embedded wallet platforms use subsidized transaction fees as a strategic loss leader to capture developer market share and control the future of user transaction flow.
introduction
THE BET
Introduction
Embedded wallets are subsidizing gas to convert Web2 users by abstracting the blockchain's most hostile UX.
This is a CAC arbitrage play. The cost of subsidizing a user's initial gas (often via account abstraction and ERC-4337 paymasters) is lower than traditional Web2 customer acquisition costs. The bet is that user lifetime value from on-chain activity will exceed the upfront subsidy.
Evidence: Coinbase's Smart Wallet reports a 12x increase in successful transaction rates after implementing gas sponsorship, demonstrating that removing the fee hurdle directly drives engagement and protocol revenue.
thesis-statement
THE USER ACQUISITION PLAY
The Core Bet
Embedded wallet providers are subsidizing gas fees to abstract away the blockchain's most persistent user friction point.
Subsidized gas is a user acquisition cost. Protocols like Privy, Dynamic, and Magic treat gas fees as a marketing expense, not a technical hurdle. They absorb the cost to onboard users who would otherwise abandon a transaction at the paywall.
This strategy targets the mainstream, not degens. The bet is that gas abstraction drives conversion rates more effectively than any other onboarding flow. It directly competes with Web2's free-to-start model.
The subsidy model requires deep infrastructure integration. Providers must manage gas sponsorship via Paymasters (ERC-4337) or Layer 2 partnerships. This creates a moat, locking in users and developers to their stack.
Evidence: Coinbase's Smart Wallet, powered by Base's gas sponsorship, reports a 3x increase in successful transaction completion for first-time users compared to traditional EOAs.
market-context
THE USER ACQUISITION PLAY
The New Onboarding Funnel
Embedded wallets are subsidizing gas fees to convert web2 users into on-chain customers, treating transaction costs as a customer acquisition cost.
Gas is a CAC line item. Traditional web2 apps spend $50-$200 to acquire a user. Embedded wallet providers like Privy and Dynamic now treat the first $5 in gas fees as a superior, performance-based marketing expense that directly translates to on-chain activity.
The funnel is deterministic. A subsidized transaction is a completed conversion event. Unlike a web2 sign-up, a user who pays gas for a swap on Uniswap or mints an NFT has demonstrably connected a wallet, funded it, and executed a contract—proving intent and capability.
Counter-intuitive economics. This model inverts the traditional L2 subsidy play. Instead of a protocol treasury funding general network usage, the application developer pays for specific user actions, creating a direct ROI loop tied to their own product's growth.
Evidence: Coinbase's Smart Wallet, powered by the ERC-4337 standard, offers gasless transactions sponsored by dapps. This reduced the onboarding time for their new Base L2 ecosystem from minutes to seconds, directly driving developer adoption and user activity.
key-trends
THE USER ACQUISITION WAR
The Subsidy Playbook
Gasless transactions are the new sign-up bonus, subsidized by wallets to capture the next billion users.
01
The Problem: The $5 Onboarding Tax
Asking a new user to fund a wallet with ETH just to try your app is a >90% drop-off event. This is the primary barrier to mainstream adoption, killing conversion before the first meaningful interaction.\n- User Friction: Requires understanding of gas, native tokens, and seed phrases.\n- Acquisition Cost: Traditional web2 user acquisition costs are often lower than the gas fee to mint an NFT.
>90%
Drop-off
$5+
Barrier to Entry
02
The Solution: The Paymaster Proxy
Wallets like Safe{Wallet}, Biconomy, and ZeroDev abstract gas by acting as a relay. The user signs a meta-transaction, and the wallet's paymaster contract pays the fee in the background, billing the dApp later.\n- Sponsorship Models: DApps pay for user gas (customer acquisition), or wallets subsidize it (platform growth).\n- ERC-4337 Standard: Account Abstraction's entry point enables this at the protocol level, making it portable across chains.
0
User Gas Cost
ERC-4337
Standard
03
The Strategy: Subsidy as a Moat
This isn't charity; it's a calculated land grab. The entity controlling the gas subsidy controls the user relationship and the resulting data layer.\n- Wallet Lock-in: Users onboarded via a subsidized embedded wallet (e.g., Privy, Dynamic) are sticky.\n- Data Advantage: The subsidizer sees all transaction intents, enabling superior MEV capture and user profiling for targeted services.
L1
Data Layer
High
User Stickiness
04
The Endgame: Programmable Sponsorship
Subsidy logic becomes a competitive feature. Think "gas rebates for high-volume traders" or "free mints for community members." Protocols like Gelato and Stackup are building relay networks to optimize and route these sponsored transactions.\n- Conditional Logic: Pay gas only if the trade succeeds (removing failed tx cost).\n- Bundling: Aggregate multiple user ops into one batch for ~30-50% gas savings, splitting the benefit between user and sponsor.
30-50%
Gas Saved
Conditional
Logic
GAS ABSTRACTION STRATEGIES
The Embedded Wallet Subsidy Matrix
A comparison of primary models for subsidizing user transaction costs, showing the trade-offs in cost structure, user experience, and protocol dependency.
| Key Dimension | Paymaster Sponsorship | Bundled Fee Model | L2 Native Gas Tokens |
|---|---|---|---|
User Pays Gas Fee | |||
Protocol Subsidy per Tx | $0.10 - $0.80 | 5-20 bps of swap volume | ~$0.001 (L2 rate) |
Primary Cost Driver | Transaction count & complexity | Protocol revenue & volume | L2 sequencer costs |
Requires Native Token | |||
UX Abstraction Level | Full (gasless) | Partial (fee bundled) | Partial (needs L2 gas) |
Relayer Dependency | |||
Integration Complexity | High (ERC-4337/AA) | Medium (custom logic) | Low (standard RPC) |
Example Implementations | Base's Onchain Summer, Biconomy | Uniswap, 1inch Fusion | Arbitrum, Optimism, zkSync |
deep-dive
THE STRATEGIC PIVOT
The Slippery Slope: From Loss Leader to Flow Control
Embedded wallet providers are using subsidized gas as a wedge to capture and direct the most valuable transaction flow in Web3.
Subsidized gas is a loss leader that eliminates the primary UX friction for new users. This initial subsidy is a customer acquisition cost, not a sustainable business model. It directly targets the onboarding bottleneck that has stalled mainstream adoption for a decade.
The goal is transaction flow control. Once users are locked into a seamless, gas-free experience, the wallet becomes the default transaction router. This positions providers like Privy or Dynamic as the gatekeepers deciding which DEX, bridge, or NFT marketplace receives the user's intent and fees.
This mirrors the playbook of intent-based protocols. Projects like UniswapX and Across abstract complexity by solving for user intent, not specific steps. Embedded wallets abstract the entire Web3 stack, making the wallet the single point of flow aggregation and monetization.
Evidence: The bundling is already happening. Platforms like Coinbase's Smart Wallet don't just pay gas; they natively integrate their own L2, Base, and preferred DEX aggregator. The subsidy creates a closed-loop system where the provider captures value across the entire stack.
risk-analysis
THE SUBSIDY TRAP
The Bear Case: When Free Gas Backfires
Gasless transactions are a powerful user acquisition tool, but they create systemic risks and misaligned incentives that can undermine protocol health.
01
The Sybil Attack Vector
Free gas invites spam and wash trading, artificially inflating protocol metrics and draining the sponsor's wallet. This is a direct subsidy to bots, not users.
- Cost Amplification: A single botnet can drain a $100k subsidy pool in hours.
- Data Pollution: Inflates DAU/TVL, making protocol health impossible to gauge.
- Network Impact: Can congest the underlying L1/L2, raising gas for everyone.
>90%
Bot Traffic
Hours
Drain Time
02
The Unsustainable CAC Model
User acquisition cost (CAC) becomes a direct, volatile gas expense. A successful marketing campaign can trigger a financial crisis when ETH gas spikes.
- Volatility Risk: A 10x gas spike turns a $1 CAC into a $10 loss per user.
- P&L Opacity: Marketing spend is hidden in engineering budgets, obscuring true unit economics.
- Winner's Curse: The most aggressive subsidizer wins users but burns the most capital.
10x
CAC Volatility
$0 P&L
Visibility
03
The Centralization of Risk
The sponsor (app or wallet) becomes a single point of financial failure and censorship. This recreates the custodial risks web3 aims to eliminate.
- Censorship Power: Sponsor can blacklist user transactions.
- Financial Single Point of Failure: If the sponsor's wallet is drained or hacked, the service halts.
- Regulatory Target: Acting as a 'money transmitter' for gas payments attracts scrutiny.
1
Failure Point
High
Regulatory Risk
04
EIP-4337 & The Abstraction Illusion
While ERC-4337 Account Abstraction enables gas sponsorship, it doesn't solve the economic model. Paymasters are still vulnerable to the same subsidy traps.
- Delegated, Not Solved: Paymaster logic is still a centralized arbiter of what gets paid for.
- Bundler Dependence: Introduces reliance on a new actor (the bundler) for transaction inclusion.
- Complexity Cost: Adds ~42k extra gas per UserOperation, making subsidies more expensive.
+42k gas
Overhead
New Middleman
Bundler Risk
05
Killing The Fee Market Signal
When users don't pay gas, they have no incentive to demand efficiency. This removes the core economic pressure that drives L2 innovation and dApp optimization.
- Blind Users: Cannot discern between a $0.01 and a $1.00 transaction cost to the protocol.
- Stagnant Tech: Removes demand-side pressure for cheaper rollups or more efficient smart contracts.
- Resource Misallocation: Developers optimize for sponsor cost, not network efficiency.
0
Price Signal
Stagnant
Innovation
06
The Zero-Value User Onboarding
Acquiring users who cannot or will not ever pay for their own gas creates a phantom user base with zero lifetime value (LTV).
- False Positive Growth: Metrics show adoption, but the economic foundation is hollow.
- No Conversion Path: Users trained on free transactions resist ever paying gas, making monetization impossible.
- Protocol Drain: These users still consume RPC calls, storage, and compute, costing the protocol real money.
$0 LTV
User Value
High
Protocol Cost
future-outlook
THE SUBSIDY MODEL
The Endgame: Bundled Transaction Layers
Embedded wallets are not just UX tools; they are the gateway to a new business model where transaction fees are a loss leader for higher-margin services.
Subsidized gas is the acquisition cost. Embedded wallet providers like Privy or Dynamic absorb gas fees because the lifetime value of a user exceeds the initial onboarding expense. This model mirrors Web2's free shipping.
The bundling creates lock-in. By owning the transaction layer, platforms like Coinbase's Smart Wallet or Rainbow embed their user experience and revenue streams directly into the transaction flow, making switching costly.
This shifts competition to infra margins. Winners will be the rollup sequencers and bundlers (e.g., Optimism, Arbitrum, Starknet) that offer the cheapest bulk transaction processing, as wallet providers become their largest B2B clients.
Evidence: Privy's integration with Base demonstrates this, where gas sponsorship via Paymaster contracts reduces user onboarding friction to zero, directly increasing protocol adoption metrics.
takeaways
WHY EMBEDDED WALLETS ARE BETTING ON SUBSIDIZED GAS
Key Takeaways for Builders
Gas fees are the primary UX killer for mainstream adoption. Here's how subsidization becomes a strategic moat.
01
The Problem: The Signup Friction Cliff
Every new user faces a $10-$50 upfront cost to fund a wallet with native gas tokens. This kills conversion.\n- 99% drop-off occurs at the "fund wallet" step for non-crypto natives.\n- Zero-click onboarding is impossible when users need to bridge or buy ETH first.
99%
Drop-off
$10-$50
Upfront Cost
02
The Solution: The Paymaster as a Growth Engine
ERC-4337 Paymasters let dApps sponsor gas in stablecoins or even absorb costs entirely, turning a cost center into a CAC tool.\n- Acquire users for $0.10-$2.00 in gas instead of $50 in education and bridging.\n- Enable session keys for seamless gaming and trading UX, abstracting gas from every micro-transaction.
$0.10-$2.00
CAC via Gas
ERC-4337
Enabler
03
The Moats: Data & Subsidy Arbitrage
Subsidization isn't charity; it's a data play. The sponsor captures granular on-chain behavior to optimize L2 sequencing and MEV.\n- Predictable gas budgets allow for batch processing and L2 sequencer arbitrage (see Starknet, zkSync).\n- Intent-based flow control emerges, steering sponsored transactions to the most cost-effective settlement layer (Optimism, Arbitrum, Base).
10-30%
Batch Savings
Intent-Based
Flow Control
04
The Endgame: Wallets as Platforms
The wallet that pays becomes the platform. Gas sponsorship is the wedge to own the user session and monetize through premium services.\n- Dynamic fee markets: Offer subsidized gas for high-value actions (e.g., a swap) while charging for others.\n- Bundled services: Embed staking, lending, or bridging with gas covered, capturing fees downstream (Circle, Aave, LayerZero).
Platform
Business Model
Dynamic
Fee Markets
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall