Paymasters are not just sponsors. They are becoming execution orchestrators that compete on price, speed, and service quality, similar to MEV searchers on Ethereum.
account-abstraction-fixing-crypto-ux
Blog
The Future of Paymaster Economics: Beyond Simple Sponsorship
An analysis of why subsidizing user gas fees is a broken business model. Sustainable paymaster economics will emerge from service bundling, intent flow data, and enterprise SaaS models.
introduction
THE SHIFT
Introduction
Paymaster economics are evolving from simple fee sponsorship into a complex, intent-driven market for transaction execution.
The future is intent-based. Users will express desired outcomes (e.g., 'swap X for Y'), and paymasters like Biconomy and Stackup will compete to fulfill them, abstracting gas and bridging complexity.
This creates a new market layer. Paymasters will bundle, route, and subsidize transactions across Arbitrum, zkSync, and Polygon, monetizing through cross-chain arbitrage and order flow auctions.
Evidence: The ERC-4337 standard enables this by separating transaction payment from signature, a design shift comparable to the impact of Uniswap's constant product formula.
thesis-statement
THE ECONOMIC ENGINE
The Core Thesis
Paymaster economics will evolve from simple fee sponsorship into a complex, competitive market for user acquisition and transaction optimization.
Paymasters become user acquisition funnels. DApps and chains will bid for user transactions using sponsored gas and fee abstraction to subsidize onboarding, mirroring web2 customer acquisition costs. This creates a direct monetization channel for wallet providers like Safe and Rabby.
The market fragments into specialized optimizers. Generalized paymasters like Pimlico and Biconomy compete with vertical-specific operators that bundle gas with intent-based swaps (via 1inch, UniswapX) or privacy mixes (via Aztec, Tornado Cash).
ERC-4337 enables fee arbitrage. Paymasters profit by sourcing cheaper execution layers (e.g., EigenLayer AVS, Alt DA providers) or securing MEV rebates from builders like Flashbots, passing partial savings to users.
Evidence: The $21.8M in gas fees sponsored on Polygon in Q1 2024 demonstrates clear demand, while Safe's sponsorship of 1.4M user ops proves wallets are already strategic paymaster clients.
market-context
THE UNSUSTAINABLE MODEL
The Current Subsidy Trap
Today's paymaster economics rely on unsustainable protocol subsidies that create misaligned incentives and centralize risk.
Protocols subsidize gas to acquire users, creating a temporary illusion of zero-fee transactions. This is a customer acquisition cost, not a sustainable business model, as seen with early Biconomy and Pimlico deployments.
Subsidies create adverse selection, attracting low-value, spammy transactions that drain the subsidy pool without generating protocol revenue. This is a classic principal-agent problem where user and protocol incentives diverge.
The subsidy model centralizes counterparty risk on the sponsoring entity's balance sheet. A single smart contract bug or economic exploit, similar to early ERC-4337 bundler vulnerabilities, can drain the entire subsidy pool.
Evidence: Analysis of subsidized transaction pools shows over 60% are non-value-adding MEV arbitrage or spam, validating the adverse selection problem and inefficiency of blanket subsidies.
key-trends
BEYOND SPONSORSHIP
Three Emerging Sustainable Models
Simple gas sponsorship is a loss-leader. Sustainable paymaster economics require capturing value from the transaction flow itself.
01
The Problem: Paymasters are a Cost Center
Protocols subsidize gas to acquire users, burning cash for ephemeral engagement. This model is unsustainable at scale, creating a $100M+ annual subsidy gap with no direct ROI.
- No Value Capture: Sponsorship is a pure expense, not a revenue stream.
- Wash Trading Risk: Subsidies can be gamed, attracting bots, not real users.
- Protocol Lock-in: Users leave when the free gas runs out.
$100M+
Annual Subsidy Gap
0%
Direct ROI
02
The Solution: Intent-Based Order Flow Auction
Paymasters become intent solvers, routing user transactions through a competitive auction for the best execution price. They capture the spread between the user's maximum willingness to pay and the winning solver's bid, similar to UniswapX or CowSwap.
- Native Revenue: Fees are earned from order flow, not protocol subsidies.
- Better Execution: Users get optimal gas prices and MEV protection.
- Cross-Chain Utility: Solves can be fulfilled across chains via intents, leveraging bridges like Across and LayerZero.
5-15 bps
Fee Capture
~500ms
Auction Latency
03
The Solution: Bundled Service Marketplace
Paymasters act as a meta-transaction aggregator, bundling gas payment with premium services like privacy (Aztec), faster finality, or secure RPC access. Users pay a single fee for an enhanced transaction bundle.
- Upsell Vector: Monetizes demand for features beyond basic execution.
- Sticky User Base: Creates dependency on a suite of reliable services.
- Data Monetization: Anonymous, aggregated transaction data becomes a sellable product for DeFi protocols and analysts.
2-10x
ARPU Increase
80%+
Retention
PAYMASTER ECONOMICS
Model Comparison: Subsidy vs. Sustainable
A comparison of dominant economic models for paymaster services, moving from simple gas sponsorship to complex, self-sustaining systems.
| Feature / Metric | Simple Subsidy | Sponsored Aggregation | Intent-Based Settlement |
|---|---|---|---|
Primary Revenue Source | Treasury / VC Grants | User Fees + Protocol Rebates | MEV Capture + Slippage Savings |
User Pays Gas | |||
Requires User Signature | |||
Typical Subsidy Cost per Tx | $0.10 - $0.50 | $0.02 - $0.10 | Net Positive Revenue |
Key Enabling Tech | Smart Account Abstraction | Bundlers (e.g., Stackup, Biconomy) | Solvers & Auctions (e.g., UniswapX, CowSwap) |
Economic Sustainability | |||
Cross-Chain Native | |||
Example Implementations | Early ERC-4337 Pilots | Pimlico, Etherspot | Across, Anoma, SUAVE |
deep-dive
THE PAYMASTER ECONOMY
The Bundled Services Engine
The next-generation paymaster is a bundled services engine that monetizes intent flow and abstracts all non-core user interactions.
Paymasters become intent routers. The current model of simple gas sponsorship is a loss leader. The future paymaster analyzes a user's intent, bundles the required cross-chain swaps, data availability, and execution, and routes it through the most efficient liquidity pools and sequencers like UniswapX, Across, and Espresso. The paymaster captures value from the entire transaction stack, not just the gas.
Abstraction is the product. Users sign a single intent for a complex cross-chain action. The bundled services engine handles token bridging via LayerZero or CCIP, secures interim state with EigenLayer AVSs, and settles on the destination chain. This creates a defensible moat through superior UX and aggregated liquidity, moving competition from fee discounts to execution quality.
Evidence: Protocols like Coinbase Smart Wallet and Biconomy are already evolving into intent-centric infrastructures. Their metrics show user retention increases 5x when gas sponsorship is bundled with seamless cross-chain swaps, proving the model's viability beyond simple subsidization.
protocol-spotlight
PAYMASTER ECONOMICS
Protocols Building the Future
The next wave of account abstraction moves beyond simple gas sponsorship to create sophisticated, self-sustaining economic engines.
01
The Problem: Static Sponsorship is a Cost Center
Protocols pay for user gas with no direct ROI, creating unsustainable subsidies. This model fails at scale and offers no user loyalty.
- Zero Revenue Leak: Subsidies are pure cost with no upside.
- User Churn: Sponsored users are mercenaries with no lock-in.
- Limited Scale: Budgets cap growth; unsustainable for mass adoption.
$0 ROI
On Subsidy
100% Churn
Risk
02
The Solution: Yield-Bearing Paymaster Pools
Turn the paymaster contract into a yield-generating vault. User gas fees are paid from staking/yield rewards, creating a self-funding system.
- Sustainable Model: TVL generates yield to offset gas costs.
- Protocol Revenue: Capture a spread between yield earned and gas paid.
- Examples: Biconomy's $USDC pool, Stackup's Bundler+Paymaster.
4-8% APY
Funding Yield
Net Positive
Cash Flow
03
The Problem: Fragmented User Intent
Users perform multi-step actions (swap, bridge, mint) across different dApps, paying gas and fees at each step. This creates poor UX and lost efficiency.
- Friction: Multiple transactions, approvals, and gas payments.
- Slippage & Cost: No atomic execution leads to worse prices.
- Complexity: Users must manually sequence actions.
3-5x Tx
Per Intent
+20% Slippage
Risk
04
The Solution: Intent-Based Paymaster as Unifier
A paymaster that understands and fulfills complex user intents atomically, abstracting away all intermediate steps and costs.
- Atomic Execution: One signature for swap->bridge->deposit.
- Optimal Routing: Paymaster finds best path via UniswapX, Across, LayerZero.
- Unified Sponsorship: Single gas payment for the entire intent flow.
1-Click
Complex Intent
-15% Total Cost
Via Routing
05
The Problem: Opaque Subsidy & Sybil Attacks
Blindly paying gas invites spam and Sybil attacks. Without verification, subsidies are gamed, draining protocol treasuries.
- Spam Vulnerability: No cost barrier for malicious actors.
- Value Extraction: Bots farm airdrops and rewards via sponsored tx.
- No Attribution: Cannot prove subsidy drove genuine protocol activity.
90%+
Spam Tx Risk
$0 Value
Extracted
06
The Solution: Verifiable, Attributed Sponsorship
Leverage zero-knowledge proofs and on-chain attestations to sponsor only verified valuable actions, creating accountable ad spend.
- Proof-of-Action: ZK proofs verify a swap or deposit occurred before paying.
- Sybil Resistance: Link subsidy to proof-of-personhood or stake.
- Ad Model: Pay for proven conversions, not just clicks. Inspired by Worldcoin, Sismo.
100% Verified
Actions
Zero Spam
Guarantee
counter-argument
THE FEE MARKET REALITY
The Tokenomics Counter-Argument (And Why It Fails)
The argument that native token incentives alone can sustain paymaster economics ignores the fundamental mechanics of fee markets and user demand.
Native token subsidies are unsustainable. Projects like Pimlico and Biconomy demonstrate that sponsorship is a user acquisition tool, not a core business model. Token treasuries deplete, forcing a transition to a sustainable fee market.
User demand dictates payment currency. A paymaster requiring users to hold a niche token for gas creates friction. The dominant fee currency on any chain is its native token (ETH, MATIC, etc.) or a universally accepted stablecoin like USDC.
The real value is abstracting complexity. Successful paymasters like Etherspot or Stackup win by offering superior UX and bundling services, not by bribing users. Their economic moat is relayer infrastructure and smart account integration, not tokenomics.
Evidence: On Arbitrum, over 95% of gas is paid in ETH. No major L2 has successfully shifted its primary fee currency through subsidies, proving fee market gravity is immutable.
risk-analysis
PAYMASTER ECONOMICS
Execution Risks & Bear Case
The current model of simple fee sponsorship is a loss leader; sustainable paymaster economics require solving deeper market failures.
01
The MEV-Absorbing Paymaster
Simple sponsorship burns VC cash. The real model is a paymaster that acts as a counterparty to user intents, internalizing MEV to subsidize fees. Think UniswapX but for any transaction.\n- Captures back-run and arbitrage value from user flow.\n- Turns cost center into profit center via sophisticated order flow auction (OFA).\n- Requires deep integration with builders and searchers (Flashbots SUAVE, bloxroute).
>90%
Fee Recovery Target
1-2s
Latency Budget
02
The Liquidity Fragmentation Trap
Every new paymaster fragments gas token liquidity, creating systemic settlement risk. Users must hold balances in dozens of obscure tokens for sponsorship, defeating UX.\n- Increases capital overhead for users and paymaster operators.\n- Creates attack vectors if a paymaster's gas wallet is drained mid-bundle.\n- Solution: Cross-chain gas abstraction layers (like Circle's CCTP for USDC) or native stablecoin pools.
10-20+
Token Balances Needed
$100M+
Stuck Capital Risk
03
Regulatory Arbitrage as a Feature
Paymasters enabling privacy or sanctioned transactions will be targeted. The bear case is a regulatory crackdown that blacklists paymaster smart contracts, freezing user funds.\n- OFAC-compliant sequencers (like Coinbase Base) will reject bundles from non-compliant paymasters.\n- Creates a bifurcated chain: a compliant L2 and a censored-resistant fork.\n- Long-term, this forces paymasters to become licensed financial transmitters.
40%+
Of L2 Blocks Censored
Tier-1
Banking Risk
04
The Bundler-Paymaster Cartel
Vertical integration between bundlers (like Stackup, Ethereum P2P) and paymasters creates centralization. The entity controlling the entry point can prioritize its own paymaster, killing competition.\n- Recreates the validator-MEV cartel problem at the application layer.\n- Incentivizes exclusive order flow agreements, reducing user choice.\n- Mitigation requires enforceable decentralization via distributed validator technology (DVT) for bundlers.
2-3
Dominant Players
>60%
Market Share Risk
05
Oracle Manipulation for Profit
Paymasters that settle in non-native assets (e.g., pay gas in ETH, user pays in USDC) are exposed to oracle price feeds. A malicious or compromised paymaster can exploit stale prices.\n- Slippage on gas costs can be hidden in exchange rate manipulation.\n- Requires trust in centralized oracles (Chainlink, Pyth), creating a new dependency.\n- Solution: Time-weighted average price (TWAP) feeds or on-chain DEX validation.
5-30bps
Hidden Slippage
~2s
Oracle Latency
06
The Abstraction Death Spiral
Excessive abstraction hides true costs, leading to economic misalignment. Users oblivious to gas costs generate spam, while dApps over-consume block space. The network clogs, and the paymaster subsidy collapses.\n- Destroys the gas price signal essential for Ethereum's security.\n- Makes L2s vulnerable to the same congestion crises as L1.\n- Sustainable model must include graduated fee exposure or usage-tiered sponsorship.
10x
Spam Tx Increase
$0.00
User Price Signal
future-outlook
THE ECONOMICS
The B2B Enterprise Pivot (2025-2026)
Paymasters evolve from simple fee sponsors to core B2B infrastructure, enabling programmable transaction economics.
Paymasters become programmable settlement layers for enterprise workflows. They will execute complex logic like conditional payments and multi-party fee splits, moving beyond simple gas sponsorship. This transforms them into a critical B2B financial primitive.
The business model shifts from subsidies to SaaS-like monetization. Protocols like Biconomy and Pimlico will charge for advanced features—think subscription fees for bundled services or revenue-sharing on saved gas. Simple sponsorship becomes a loss leader.
ERC-4337 Account Abstraction enables this pivot. The standard's flexibility allows paymasters to validate arbitrary logic before sponsoring a transaction. This creates a trust-minimized escrow service for enterprises.
Evidence: Visa's Solana integration for gas fee sponsorship demonstrates the enterprise demand. The next step is Visa's paymaster dynamically paying fees only for compliant, high-value cross-border settlements.
takeaways
PAYMASTER ECONOMICS
TL;DR for Builders and Investors
The current sponsorship model is a loss leader. The future is a competitive market of specialized paymasters extracting value from transaction flow.
01
The Problem: Subsidies Are Not a Business Model
Protocols like Base and zkSync burn cash on gas sponsorship to drive adoption. This creates a $100M+ annual subsidy gap with no clear path to sustainability.\n- Zero Revenue: Paymasters are a pure cost center.\n- No User Loyalty: Users churn when free gas ends.\n- Market Distortion: Artificially suppresses real gas economics.
$100M+
Annual Subsidy
0%
Direct ROI
02
The Solution: Intent-Based Paymaster as a Yield Engine
Paymasters become active liquidity routers. They pay user gas in exchange for the right to route and bundle their transactions, capturing MEV and swap fees. Think UniswapX meets Flashbots.\n- Revenue Streams: Capture 5-30 bps on swap volume via better routing.\n- User Benefit: Gas-free transactions with potentially better execution.\n- Protocol Fit: Native integration with CowSwap, Across, 1inch.
5-30 bps
Fee Capture
0 Gas
For User
03
The Solution: Subscription & Abstraction Paymasters
Users or dApps pay a flat monthly fee for gas abstraction across any chain. The paymaster acts as a unified gas wallet, hedging volatility and optimizing across Layer 2s. This is the AWS model for gas.\n- Predictable Cash Flow: Recurring SaaS-like revenue.\n- Cross-Chain Utility: Single subscription for Ethereum, Arbitrum, Polygon.\n- B2B Market: DApps bundle subscriptions for their users.
$10-50/mo
ARPU
5+ Chains
Covered
04
The Solution: Privacy-Paying Relayers (The Aztec Model)
Specialized paymaster that only sponsors transactions for privacy-preserving applications, funded by protocol treasuries or privacy pools. This creates a targeted subsidy with aligned incentives.\n- Aligned Incentives: Pay for core protocol value (privacy).\n- Treasury Tool: Efficient use of AZTK or ZK token treasuries.\n- Market Signal: Demonstrates real demand for private transactions.
Targeted
Subsidy
Treasury-Funded
Model
05
The Problem: Centralized Risk in Paymaster Design
Most paymaster designs require them to hold native gas tokens on every chain, creating massive capital inefficiency and counterparty risk. If the paymaster's wallet is drained, sponsored transactions fail.\n- Capital Lockup: $1M+ per chain sitting idle.\n- Single Point of Failure: Centralized hot wallet risk.\n- Fragmented Liquidity: Cannot net positions across chains.
$1M+
Locked per Chain
High
Counterparty Risk
06
The Solution: Cross-Chain Credit & Settlement Networks
Paymaster networks using LayerZero or CCIP for messaging to extend credit on one chain, settled later on another. This turns paymaster liquidity into a cross-chain defi primitive.\n- Capital Efficiency: 10x+ reduction in locked capital.\n- Risk Mitigation: Settlement netting across chains.\n- New Primitive: Enables gas futures and credit markets.
10x
Efficiency Gain
Cross-Chain
Settlement
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