The Unintended Cost of Subsidized Transactions

Arbitrum's 2022 NFT campaign subsidized transaction fees to drive user activity, but it backfired. The predictable subsidy created a perfect environment for airdrop farmers to spam the network with low-value transactions, crowding out real users.

• Network fees spiked 300%+ as gas arbitrage bots competed for block space.
• ~90% of transactions during the peak were identified as farming activity.
• The team was forced to pause the campaign, demonstrating the unsustainability of fee-less models under load.

Polygon's historically low, subsidized gas fees made it a prime target for maximal extractable value (MEV) bots. The cost to execute a sandwich attack was negligible compared to the profits, turning the chain into a playground for predatory arbitrage.

• Sub-1 cent transaction costs allowed bots to profitably front-run trades as small as $100.
• User slippage increased significantly as MEV activity became the dominant force in mempool dynamics.
• This created a hidden tax on all users, negating the benefit of the nominal subsidy.

Solana's lack of explicit transaction fees for consensus messages (via the original Turbine protocol) was an implicit subsidy. Bot networks exploited this by spamming consensus traffic, repeatedly crashing the network.

• Each outage required validator intervention and cost an estimated $10M+ in lost productivity and emergency engineering.
• The fix involved implementing priority fees on all messages, moving from a subsidized to a market-based fee model.
• This proved that 'free' core infrastructure is the most expensive kind.

Avalanche's C-Chain initially used a static, low-fee model to compete with Ethereum. This led to chronic state bloat and underfunded validator incentives as transaction volume grew.

• Static 470 nAVAX fee became economically irrelevant, failing to regulate demand or fund security.
• The protocol was forced to implement dynamic fees based on EIP-1559 to properly price block space.
• The case shows that subsidies prevent the fee market from performing its essential functions: rationing and security funding.

Subsidizing gas with sequencer profits or token emissions creates a hidden tax on users and centralizes execution. This model is exploited by PBS builders and leads to censorship vectors when subsidies dry up.

• Hidden Cost: Users pay via worse execution (e.g., frontrunning, sandwiching).
• Centralization Risk: Reliance on a single profitable sequencer creates a single point of failure.
• Unsustainable: Model collapses when token incentives end or MEV revenue declines.

Design systems where the base layer's economic security is the foundation, not an afterthought. This means paying for security directly and using mechanisms like EIP-1559 for fee predictability.

• Direct Security Funding: Transaction fees should primarily fund L1 security (e.g., via rollup DA or settlement fees).
• Fee Market Isolation: Prevent L2 congestion from spilling over to destabilize L1 fee markets.
• Long-Term Alignment: Ensures the protocol's security budget scales with its usage, not its marketing budget.

Shift from subsidizing simple transactions to facilitating declarative user intents. Protocols like UniswapX and CowSwap demonstrate that users will pay for better execution, moving the cost from the protocol to the solver network.

• Efficiency Gain: Solvers compete to fulfill intents, absorbing complexity and gas optimization.
• User-Pays Model: Cost is bundled into execution quality, eliminating need for protocol-side subsidies.
• Resilience: Decentralized solver networks are less prone to centralization than single sequencers.

Subsidies that bypass the validator/staker reward pool undermine Proof-of-Stake security. If profitable execution is captured off-chain by sequencers, the security budget for the underlying chain stagnates.

• Staker Attrition: Low yields from base rewards make the chain vulnerable to attacks.
• Sequencer Capture: Value accrues to a centralized intermediary, not the decentralized validator set.
• Protocol Design Fix: Mandate a minimum fee share (e.g., priority fees) be directed to validators/stakers.

Isolate subsidizable components (like social recovery, session keys) from core settlement and data availability. Follow the Celestia and EigenLayer model of separating security from functionality.

• Explicit Budgeting: Subsidies become a defined, opt-in application-layer feature.
• No Contagion: A failed subsidy in one app doesn't compromise the chain's economic security.
• Developer Clarity: Builders choose their subsidy model without creating systemic risk.

Treat protocol subsidies like venture capital: a runway, not a revenue model. Conduct stress tests assuming zero subsidies to evaluate true economic viability and decentralization.

• Breakpoint Analysis: Model the TVL and transaction volume needed to become self-sustaining.
• Centralization Metrics: Monitor sequencer market share and validator/client diversity.
• Sunset Planning: Have a clear, phased plan to transition to a sustainable fee model before launch.