Why Fee Market Design Will Make or Break L2s

Centralized sequencers act as a single-point fee auction, creating MEV leakage and unpredictable costs for users. This is the Avalanche Problem—high fees during congestion with no competitive pressure.

• Value Leakage: MEV profits flow to the sequencer, not the protocol or its token.
• Predictability: Users face volatile fees, breaking UX for stable applications.
• Centralization Risk: A single profit-maximizing entity controls transaction ordering.

Most rollups have a fixed gas limit per block, creating a zero-sum fee auction during demand spikes. This mirrors Ethereum's Pre-1559 Woes, where users overbid in inefficient first-price auctions.

• Inefficiency: Fee spikes don't efficiently clear demand, wasting user capital.
• No Schedulability: Applications cannot reliably purchase future block space.
• Congestion Cascades: One popular app (e.g., an NFT mint) can price out all others.

Heavy token incentives for sequencers and users create a fake fee market. When subsidies end, the true economic demand is revealed, often leading to a death spiral in activity and security budget.

• False Signals: Metrics like TPS are inflated, masking unsustainable economics.
• Security Erosion: Protocol revenue (fees) fails to cover data availability costs.
• Capital Flight: Apps built on temporary subsidies migrate when real costs appear.

Centralized sequencers act as a rent-extracting monopoly, capturing MEV and setting arbitrary fees. This creates a single point of failure and misaligns incentives with users.

• User Cost: Fees are opaque and non-competitive.
• Ecosystem Risk: Censorship and downtime are protocol-level risks.
• Value Leakage: Billions in MEV are captured by a single entity instead of being shared with the protocol or users.

Decoupling block building from proposing, as pioneered by Ethereum, introduces competitive markets at the L2 layer. Builders compete on fee efficiency, while proposers (sequencers) are chosen via stake.

• Competitive Fees: Builders bid for block space, driving costs toward marginal cost.
• MEV Redistribution: MEV can be captured by the protocol via auctions (e.g., a public goods fund).
• Censorship Resistance: A decentralized set of proposers prevents transaction filtering.

During network spikes, first-price auctions create wildly volatile and unpredictable fees. Users overpay, and the network fails to prioritize high-value transactions efficiently, degrading UX.

• Fee Volatility: Prices can spike 1000x in seconds.
• Inefficient Allocation: A whale's meme coin trade pays the same rate as a critical DeFi liquidation.
• User Abandonment: Unpredictable costs drive users to competing chains.

Implementing a variable base fee that burns excess and a clear priority fee for expedited inclusion. This creates predictable base costs and a cleaner market for urgency.

• Predictability: Users see a stable base fee, improving UX for 95% of transactions.
• Protocol Sink: Burning the base fee creates deflationary pressure, benefiting token holders.
• Efficient Urgency Market: Priority fees explicitly auction scarce block space during congestion.

L2s relying solely on transaction fee revenue are vulnerable. In a multi-chain future, fees trend to zero, and revenue must be decoupled from pure gas consumption.

• Race to the Bottom: Competition on cost alone is unsustainable.
• Value Capture: No mechanism to capture value from app-layer activity (e.g., DEX trades, NFT mints).
• Investor Returns: Minimal fees cannot support security budgets or R&D.

Adopting a shared sequencer network (like Espresso, Astria) or sovereign rollup model allows L2s to monetize block space as a service and capture value from dedicated app-chains.

• Recurring SaaS Revenue: Charge rollups for sequencing and data availability.
• Cross-Chain MEV: Capture value from inter-rollup arbitrage.
• Ecosystem Lock-in: Become the foundational settlement layer for verticalized app-chains.

Blob fees are a raw commodity market, decoupled from L1 gas. This introduces a new, unpredictable cost variable for L2 sequencers.\n- Sequencer P&L Risk: A sudden 10x spike in blob costs can erase sequencer profits from a full block of user fees.\n- User Experience Degradation: Sequencers must either absorb volatility (unsustainable) or pass it on, creating fee unpredictability for end-users.

Separate execution pricing from data availability pricing. Let users pay in stable, predictable units while the sequencer manages the underlying commodity risk.\n- Stable Unit of Account: Users pay a flat fee in ETH or stablecoin, while the sequencer pays variable blob costs in ETH.\n- Sequencer as Market Maker: Profitable sequencers will hedge blob exposure via futures or options, turning cost volatility into a managed risk premium.

Permissionless sequencing turns L2s into mini-ETH mainnets, where the sequencer's incentive to extract MEV conflicts with fair user ordering.\n- Adversarial Alignment: A sequencer reordering transactions for its own gain directly harms user outcomes, especially in DeFi.\n- Centralization Pressure: The most efficient MEV extractors will dominate sequencing, recreating L1 validator centralization issues on L2.

Architect the sequencer role to be trust-minimized from the start, separating block building from proposing.\n- Fair Ordering by Design: Use a commit-reveal scheme or encrypted mempool to prevent frontrunning.\n- Credible Neutrality: The protocol, not the sequencer, becomes the source of transaction ordering fairness, mirroring Ethereum's roadmap.

Most L2s are currently subsidizing transaction fees to bootstrap usage, masking the true cost of operations.\n- Ponzi Economics: When the subsidy ends (token emissions dry up), real costs are exposed, causing a death spiral of rising fees and fleeing users.\n- Misaligned Incentives: Protocols build for artificially cheap environments, creating technical debt that is unsustainable at real cost.

Treat the fee market as a core protocol-level product, not a passive revenue stream. Use it to align long-term ecosystem growth.\n- Revenue Recycling: Direct a portion of sequencer fees back into a grants pool for public goods and infrastructure that lowers costs for all.\n- Tiered Service Levels: Offer premium lanes (faster finality) and economic lanes, allowing users to self-select and creating a diversified revenue base.