Why Paymaster Subsidies Are a Ticking Time Bomb

Chainlink avoided the subsidy trap by anchoring its economics to real-world data demand. Node operators are paid in LINK for fulfilling external API calls, creating a circular economy.\n- Revenue is tied to utility, not token speculation.\n- Decentralization is incentivized through staking slashing for poor performance.\n- Contrast with paymasters where the subsidy (e.g., protocol token) is decoupled from the service's cost (gas).

Multichain (formerly Anyswap) relied on emission incentives to bootstrap cross-chain liquidity pools. When token rewards dried up, liquidity evaporated, revealing the protocol's zero-fee revenue model as fundamentally broken.\n- TVL is not revenue. Subsidies create phantom TVL that flees at the first sign of trouble.\n- Parallel: Paymaster subsidies mask the true cost of user onboarding, creating a similar liability on the balance sheet.

Protocols like CowSwap and UniswapX monetize intent-based order flow through competitive auctions, turning a cost center (MEV) into a sustainable revenue stream for users.\n- Value capture is aligned: Solvers pay for the right to execute, funding user gas subsidies from profits.\n- This is the antithesis of a pure token subsidy, which is a one-way capital outflow with no attached revenue logic.

Ethereum's fee burn (EIP-1559) creates a deflationary pressure that funds network security by removing ETH from circulation, increasing the stake's value. A paymaster subsidy does the opposite: it inflates the token supply to pay an external cost (gas), diluting holders.\n- Sustainable security requires value accrual, not dilution.\n- A protocol subsidizing gas is essentially conducting a continuous, opaque token sale to pay Vitalik's miners.

dYdX v3 built its own Cosmos appchain primarily to avoid Ethereum gas costs for users, funded by massive token incentives. This revealed the true operational cost of running a chain—validators, RPCs, indexers—which far exceeds simple gas.\n- Subsidizing L2 gas is a gateway drug to the heavier cost of full stack sovereignty.\n- Many protocols will discover their token cannot fund both.

The viable model is Sponsored Transactions as a premium feature, paid for by dApps from real revenue, not token inflation. Starknet's native account abstraction and Pimlico's bundler/paymaster stack show the way.\n- User pays with ERC-20, dApp covers gas in ETH as a customer acquisition cost.\n- Sustainability comes from converting subsidized users into profitable ones, not hoping for token appreciation.

Paymaster subsidies concentrate transaction ordering power. The entity paying the gas fee becomes the ultimate transaction sequencer, creating a single point of failure and censorship. This undermines the credibly neutral base layer.

• MEV Explosion: A centralized paymaster can front-run, censor, or extract maximal value from user flows.
• Protocol Capture: DApps become dependent on a single sponsor's treasury, risking sudden policy changes.

Subsidies are a customer acquisition cost funded by token treasuries or VC rounds. At scale, this burns $1M+ per month for top chains. When funding dries up, user activity collapses, revealing the artificial demand.

• Unsustainable Burn: Models relying on new user subsidies ignore unit economics.
• Death Spiral: Protocol token devaluation reduces treasury value, accelerating the subsidy cliff.

Account Abstraction's promise of sponsored transactions creates a systemic risk layer. Widespread paymaster reliance makes the entire ecosystem vulnerable to a coordinated subsidy withdrawal or a bug in a major paymaster contract.

• Systemic Contagion: A failure in Pimlico, Stackup, or Biconomy could halt millions of smart accounts.
• Complexity Risk: Adds a critical, often opaque, dependency layer to the security model.

Shift from paying for gas to fulfilling user intents. Protocols like UniswapX and CowSwap use solvers who compete to bundle and execute orders, internalizing costs. The user never holds gas; the relay is a service, not a subsidy.

• Market Efficiency: Solvers absorb gas volatility and compete on net outcome for the user.
• Sustainable: Cost is baked into the service fee, creating a real business model.

Fund gas from protocol revenue, not token emissions. Use a portion of swap fees or marketplace royalties to run a permissionless, open paymaster. This aligns long-term sustainability with user growth.

• Real Economics: Subsidies are a marketing line item funded by profitable operations.
• Decentralized: Anyone can top up the paymaster contract, preventing capture.

Build on rollups with inherently low, stable gas fees. When base cost is <$0.01, the need for subsidies vanishes. Focus on architectural efficiency (e.g., Ethereum with EIP-4844 blobs, zkSync, Arbitrum).

• Eliminate the Problem: Make gas irrelevant for most transactions.
• Real Scaling: Subsidies are a band-aid for high fees; true scaling removes the wound.