Why Sibling Chains Are Sabotaging Their Own Fee Markets

Subsidized transaction fees create a false demand signal. Chains like Arbitrum and Optimism historically covered user gas costs with their treasuries, which inflated transaction volume metrics without building sustainable economic activity.

The user acquisition trap prioritizes short-term growth over long-term stability. This strategy, used by zkSync Era and Base, trains users to expect free transactions, making future monetization politically and economically difficult.

Fee market cannibalization occurs when the chain's native token has no utility. Without a clear burn mechanism or priority fee auction, the token becomes a purely speculative governance asset, decoupled from network security.

Evidence: The 'OP Stack' ecosystem demonstrates this; Base's sequencer revenue is a fraction of its subsidized cost, creating a structural deficit that must be funded by Coinbase or future airdrop speculation.

Subsidized transactions destroy fee markets. Protocols like Arbitrum and zkSync Era pay for user gas via sequencer revenue or token treasuries. This removes the natural price discovery between users and block space, creating a false economy.

The subsidy creates a toxic dependency. Users expect free transactions, making future monetization politically impossible. This is the Avalanche Subnet playbook failure, where initial zero-fee models collapsed under their own operational costs.

Sequencer revenue becomes a mirage. Without a real fee market, the primary L2 revenue stream relies on capturing MEV and cross-chain messaging fees from protocols like LayerZero and Axelar. This revenue is volatile and insufficient.

Evidence: Optimism's Bedrock upgrade explicitly designed a 1543-style fee market to avoid this trap. Chains without one, like many Polygon CDK instances, are building on an economic time bomb.

Sequencer revenue is subsidized. Chains like Arbitrum and Optimism use L1 gas as their primary cost, but pass only a fraction to users. This creates a hidden subsidy that inflates native token value but starves the protocol's fee market.

The subsidy is unsustainable. The current model relies on sequencer profit compression. As L1 gas prices spike or transaction volume grows, the chain's treasury must cover the deficit, creating a long-term liability.

Real revenue is anemic. Analyze any major L2's financials: user-paid fees are a fraction of L1 settlement costs. This gap is filled by MEV extraction and token emissions, not sustainable protocol economics.

Evidence: Arbitrum's 2023 sequencer covered ~30% of its L1 costs via user fees. The remaining 70% constituted an implicit subsidy, a model replicated across the Optimism Superchain and other rollup stacks.

Subsidized fees create artificial demand. Chains like Arbitrum and Optimism use token incentives to pay user gas, which inflates transaction volume without generating real protocol revenue.

This is a direct subsidy attack. It's a race to the bottom where the chain with the deepest treasury wins, not the one with the best technology or most sustainable model.

The result is a broken security budget. Validator/staker rewards become decoupled from actual network usage, mirroring Ethereum's pre-EIP-1559 problems but without its fee-burning mechanism.

Evidence: Layer 2 sequencer profit margins are often negative after subsidies. A sustainable chain's fees must ultimately cover its data availability costs on Ethereum or Celestia.