The Cost of Sovereignty: Who Pays for Digital Public Goods?

Layer 2s and app-chains capture billions in value while relying on the security and decentralization of underlying Layer 1s like Ethereum. This creates a classic economic misalignment where the value extractors don't proportionally fund the base layer.

• L2s generated ~$2B+ in sequencer revenue in 2023, while Ethereum's core protocol development is funded by a non-profit.
• App-specific rollups (e.g., dYdX, Aevo) privatize profits from a shared public good.
• The result is chronic underfunding for core R&D (e.g., Verkle trees, single-slot finality).

Maximal Extractable Value has become a hidden, regressive tax that funds core infrastructure in lieu of sustainable mechanisms. Validators and builders are incentivized by MEV, not protocol health.

• ~$1.5B in MEV was extracted from Ethereum in 2023, indirectly subsidizing staking yields.
• This creates perverse incentives for centralization (e.g., dominant block builders like Flashbots).
• Reliance on MEV makes network security volatile and tied to predatory financial flows.

Application-layer tokens (e.g., UNI, AAVE) massively outperform infrastructure tokens (e.g., ETH) in market cap growth, despite being wholly dependent on the latter. Value accrual is inverted.

• Top DeFi tokens often trade at higher P/S ratios than the L1 they run on.
• This disincentivizes capital allocation to long-term, low-yield protocol work.
• The solution requires novel cryptoeconomic primitives (e.g., enshrined revenue sharing, L1 burn mechanisms) to realign incentives.

Sovereign chains must fund core infrastructure (RPCs, indexers, explorers) without a native token or a pre-existing treasury. Relying on validator altruism is unsustainable and creates centralization pressure.

• Free-Rider Problem: Public goods are consumed by all but paid for by few.
• Security Trade-off: High validator fees to fund development can price out users.
• Example: Early Celestia rollups faced this before ecosystem funding pools emerged.

Restaking transforms Ethereum's economic security into a monetizable public good. Sovereign chains (AVSs) pay ETH stakers for security, creating a clear fiscal model.

• Creates a Budget Line: Security becomes a predictable ~10-20% APY cost paid to operators.
• Unlocks Capital Efficiency: The same staked ETH secures multiple chains.
• Fiscal Precedent: Establishes a template for funding other digital public goods via restaked services.

Modular design turns chain sovereignty into a pay-as-you-go service. Rollups pay TIA or other tokens for data publishing, directly funding the DA layer's infrastructure.

• Clear Unit Economics: Fees scale with usage (~$0.01 per kB), not speculation.
• Sovereignty with Subsidy: Enables low-cost experimentation; chains only pay for the resources they consume.
• Ecosystem Incentives: A portion of fees fund public goods grants via the Celestia Foundation.

Sovereign chains often lack sophisticated MEV capture mechanisms, letting value extraction flow to searchers and cross-chain arbitrage bots instead of the chain's treasury.

• Lost Treasury Revenue: Billions in MEV annually fund external actors, not chain development.
• User Experience Tax: Inefficient ordering leads to worse prices for end-users.
• Example: Early Cosmos app-chains lost significant value to back-running bots.

Provides sovereign chains with a turnkey, treasury-generating MEV marketplace. Chains can auction block space, capture revenue, and enforce fair ordering rules.

• Direct Revenue Stream: Converts MEV from a leak into a primary treasury inflow.
• Customizable Policy: Chains decide their MEV stance (capture, redistribute, mitigate).
• Integration: Live on Sei, Neutron, Injective, demonstrating a viable fiscal model.

Proposes a cryptoeconomic system where contributing to network resilience (running light clients, proving data) earns rewards, funded by chain fees. This formalizes a merit-based public goods funding mechanism.

• Aligns Incentives: Pays users and developers for strengthening the network.
• Sustainable Loop: Fees from sovereign chains fund the contributors that secure them.
• Vision: A circular economy where usage directly finances infrastructure and decentralization.

Sovereign chains replicate core infrastructure (bridges, oracles, indexers) without a sustainable funding model. Each new chain fragments liquidity and security budgets, creating systemic risk.

• Replicated Costs: Each chain must fund its own security, often via inflationary token emissions.
• Collective Risk: A failure in a shared dependency (e.g., a major bridge) can cascade across the ecosystem.
• Free-Rider Problem: Chains benefit from shared R&D (e.g., Ethereum's client diversity) without contributing back.

Sovereign rollups and app-chains outsource sequencing, creating a hidden tax. Validators capture value that could fund public goods.

• Revenue Leakage: ~10-20% of transaction fees can be extracted via MEV, flowing to sequencers/validators, not the protocol treasury.
• Centralization Pressure: Profitable sequencing encourages validator cartels, as seen in early Ethereum and Solana epochs.
• Missed Opportunity: Protocols like Uniswap on Optimism demonstrate that captured MEV can be redirected to fund grants via mechanisms like the Optimism Collective.

Platforms like Celestia, EigenLayer, and AltLayer abstract chain deployment, but create vendor lock-in and rent extraction for critical services.

• Recurring OPEX: Chains pay perpetual fees for data availability, shared security, and interoperability.
• Vendor Risk: Centralization of core services (e.g., a single DA layer) becomes a systemic single point of failure.
• Capital Inefficiency: $1B+ in restaked ETH on EigenLayer could be capital that's not directly funding application-layer innovation.

Initial funding from ecosystem foundations (e.g., Polygon, Arbitrum) creates a boom-bust cycle. Projects fail to transition to sustainable, protocol-native revenue.

• Temporary Lifeline: $500M+ in major ecosystem grants funds initial development but not indefinite maintenance.
• Misaligned Incentives: Builders optimize for grant criteria, not product-market fit or sustainable tokenomics.
• Post-Grant Collapse: When funding dries up, essential tools (explorers, RPC nodes) degrade, as seen in earlier Cosmos ecosystem phases.

Every sovereign chain or rollup running its own validator set creates a new, isolated MEV market. This fragments liquidity and forces users to pay for security redundantly.

• Cost: Validators extract $500M+ annually from fragmented chains.
• Solution: Shared sequencing layers like Astria or Espresso pool security and batch execution, reducing the MEV surface area per chain.

Bootstrapping liquidity with token incentives is a $10B+ annual subsidy across DeFi. Sovereign apps must pay this tax themselves, draining treasury reserves.

• Problem: Incentives create mercenary capital; liquidity flees when rewards stop.
• Solution: Abstracted liquidity layers like UniswapX and intents-based systems (Across, CowSwap) separate execution from liquidity provisioning, turning a fixed cost into a variable, competitive fee.

Sovereignty creates interoperability debt. Every new chain must fund bridges and messaging layers (LayerZero, Axelar, Wormhole), passing ~30-100bps fees to users.

• Cost: Security assumptions and fees compound with each hop.
• Solution: Native asset issuance (e.g., Circle's CCTP) and shared security models for light clients reduce the trust and cost overhead of cross-chain activity.

Protocols cannot pre-fund all public goods. Optimism's Retroactive Public Goods Funding demonstrates a sustainable model: profit from ecosystem success is distributed back to critical infrastructure builders.

• Mechanism: $50M+ distributed across 3 rounds to fund core dev tools, education, and infra.
• Takeaway: Design treasury mechanisms with a >20% allocation for retroactive ecosystem grants to ensure long-term composability.

Monolithic chains (e.g., Solana) internalize all costs. Modular stacks (Celestia, EigenDA, Arbitrum) externalize execution, data availability, and settlement to specialized providers.

• Trade-off: Lower upfront capital for chain builders, but introduces coordination overhead and profit leakage to external networks.
• Result: Builders must model $0.001-$0.01 per transaction in hard DA and sequencing costs that were previously opaque.

Foundation grants are not a sustainable funding model. They create misaligned incentives where builders optimize for grant criteria over product-market fit.

• Evidence: >500 dApps built on grant funding with <5% sustainable TVL.
• Alternative: Focus on protocols with clear fee-on-transfer or revenue-sharing mechanisms (e.g., Uniswap's fee switch, Lido's staking fees) that directly fund their own public goods.