ERC-4337's success is not technical. The standard's architecture for account abstraction is sound, but its bundler incentive model is fundamentally broken. Bundlers perform critical work—simulating, ordering, and submitting UserOperations—without a guaranteed, sustainable revenue stream, creating a systemic risk.
wallet-wars-smart-accounts-vs-embedded-wallets
Blog
Why ERC-4337's Success Hinges on Solving the Bundler Incentive Problem
ERC-4337's promise of decentralized smart accounts is undermined by its bundler economics. Without a sustainable fee market for permissionless operators, the network will centralize around a few subsidized entities, recreating the mining pool problem. This is the core vulnerability in the wallet wars.
introduction
THE INCENTIVE MISMATCH
Introduction
ERC-4337's adoption is bottlenecked by an unresolved economic flaw in its core infrastructure.
The bundler is a loss leader. Unlike Ethereum validators who earn priority fees and MEV, a bundler's primary fee source is the user's gas payment, which is often minimal. This creates a perverse incentive to censor transactions or exit the market, undermining network reliability.
Compare to successful relayers. Infrastructure like Flashbots' SUAVE or cross-chain bridges like Across and LayerZero embed explicit fee markets and value capture. ERC-4337's paymaster-centric model currently externalizes this cost, leaving the bundler as a weak, exploitable link.
Evidence: The dominant pimlico and stackup bundler services operate at a strategic loss, subsidized by venture capital. This is not a scalable, decentralized solution. Without a native incentive layer, ERC-4337 remains a feature for whales, not a utility for the masses.
key-trends
THE INCENTIVE MISMATCH
The Current State: Subsidies and Centralization
ERC-4337's user-centric design currently rests on a fragile economic foundation where bundler incentives are misaligned with long-term network health.
01
The Problem: Unprofitable Public Goods
Bundling is a commoditized, low-margin service. Without explicit fees, bundlers rely on MEV extraction or protocol subsidies to be profitable. This creates a classic public goods funding problem where the network's security depends on unsustainable incentives.\n- Core Service: Transaction ordering & submission\n- Revenue Source: MEV or grants, not user fees\n- Result: Centralization pressure on a critical layer
<$0.01
Avg. Fee per Op
~90%
PPLNS Share
02
The Solution: Intent-Based Architecture
Frameworks like UniswapX and CowSwap demonstrate that expressing user intent, rather than a specific transaction, unlocks efficient off-chain solving. This creates a natural fee market for solvers (bundlers) to compete on fulfillment quality.\n- Key Shift: From executing transactions to fulfilling outcomes\n- Incentive: Solvers profit from optimization, not just ordering\n- Precedent: CoW Protocol's batch auctions and solver competition
$1B+
Intent Volume
10-100x
Fee Potential
03
The Threat: Bundler Cartels & MEV
Without a robust fee market, the most profitable bundlers will be those with the best MEV extraction capabilities (e.g., Flashbots-aligned searchers). This leads to centralization and potential censorship. The bundler role risks becoming an extension of the validator/block builder cartel.\n- Risk: Censorship-resistant design, but centralized execution\n- Vector: Exclusive order flow agreements (OFA)\n- Outcome: Recreating L1 problems at the bundler layer
3-5
Dominant Bundlers
>60%
MEV-Derived Revenue
04
The Blueprint: Stake-for-Access & Reputation
Networks like EigenLayer and AltLayer are exploring cryptoeconomic security for AVS (Actively Validated Services). A staked bundler network with slashing for liveness/censorship failures can decentralize the layer. Reputation scores based on performance can drive user and paymaster selection.\n- Mechanism: Stake to become a bundler, get slashed for misbehavior\n- Model: Chainlink-style decentralized oracle network\n- Goal: Trust-minimized execution layer for 4337
$1M+
Stake per Node
24/7
Liveness SLA
deep-dive
THE INCENTIVE MISMATCH
The First-Principles Flaw: Bundler Economics 101
ERC-4337's success is not a technical problem but an economic one, where the protocol's core actors have misaligned financial incentives.
Bundlers are not validators. Validators in L1/L2 networks earn block rewards and MEV; bundlers in ERC-4337 only earn user-paid fees. This creates a fee market dependency where bundler profitability is purely transactional and volatile.
The MEV backstop is missing. Unlike in Ethereum's base layer, there is no protocol-enshrined reward for bundlers. Projects like Etherspot's Skandha or Stackup must compete on thin margins, making the role economically fragile compared to running an L2 sequencer.
Paymasters distort the model. When a paymaster (like Circle for USDC gas) sponsors transactions, it centralizes fee payment and removes the bundler's direct relationship with the end-user, further compressing their economic leverage and creating single points of failure.
Evidence: The dominant bundler infrastructure, Pimlico and Stackup, often run at a loss or rely on grant funding to bootstrap networks, proving the base economic model is not yet sustainable without subsidy.
INCENTIVE MISALIGNMENT
Bundler Centralization Risk Matrix
Comparing bundler incentive models and their impact on decentralization, security, and user experience for ERC-4337.
| Critical Metric | Paymaster Subsidy Model | MEV-Auction Model | Staked Reputation Model |
|---|---|---|---|
Primary Revenue Source | Paymaster kickbacks | MEV extraction (e.g., arbitrage, liquidations) | Staking rewards + base fee |
Incentive for Censorship | High (Paymaster dictates tx order) | Medium (Order flow auction to highest bidder) | Low (Slashing for malicious ordering) |
Barrier to Entry for New Bundlers | Requires paymaster partnerships | Requires sophisticated MEV infrastructure | Requires stake & reputation bootstrapping |
Typical Profit Margin per UserOp | 0.5-2% of gas cost | Variable, can exceed 100% of gas cost | Fixed 0.1-0.3% of gas cost |
Time to Finality for User | < 15 seconds | 1-30 seconds (subject to auction delay) | < 15 seconds |
Resilience to OFAC Compliance Pressure | Low (Centralized paymaster control) | Medium (Auction can filter) | High (Decentralized validator set) |
Example Implementation / Research | Early Pimlico, Biconomy | Ethereum Builder API, SUAVE vision | EigenLayer AVS, AltLayer |
Long-term Viability for Mass Adoption | ❌ | ✅ | ✅ |
counter-argument
THE INCENTIVE MISMATCH
The Optimist's Rebuttal (And Why It's Wrong)
ERC-4337's adoption is bottlenecked by a fundamental economic flaw in its decentralized bundler model.
Bundlers are not validators. Their role is pure execution, not consensus, creating a fee market with zero stake. This misalignment means bundlers optimize for short-term MEV extraction over network health, mirroring the issues seen in early Ethereum block builders.
Paymasters subsidize complexity, not security. While projects like Biconomy and Etherspot use paymasters for gas sponsorship, this creates a centralized cost center. The system's security relies on a competitive bundler market that doesn't yet exist at scale.
The 'sufficient decentralization' argument fails. Proponents claim bundlers will emerge naturally like miners. This ignores that mining has block rewards; bundling has only volatile priority fees. Without a reliable base reward, the network fragments into private mempools.
Evidence: The P2P Pool Problem. The reference @account-abstraction/bundler implementation shows the issue. A public mempool for UserOperations is trivial to censor. Real adoption requires a liquid bundler marketplace, which protocols like CowSwap's CoW AMM solve for trades but not for generalized intent execution.
protocol-spotlight
BUNDLER INCENTIVE ARCHITECTS
Who's Trying to Fix This?
ERC-4337's promise of a decentralized user operation mempool is broken without sustainable bundler economics. These are the key approaches to aligning incentives.
01
The Problem: PVP Bundling & MEV Leakage
Bundlers compete in a zero-sum game, racing to extract maximal value from user operations. This creates toxic incentives, front-running, and unreliable service for non-profitable transactions.
- MEV extraction becomes the primary revenue, not service fees.
- User experience suffers as non-MEV transactions are ignored.
- Centralization pressure favors sophisticated, capital-heavy players.
>90%
Revenue from MEV
~0%
Fee Priority
02
The Solution: Enshrined Proposer-Builder Separation (PBS)
Formalizing the separation between transaction ordering (proposer) and execution (builder) at the protocol level. This is the endgame for credible neutrality.
- Decouples profit from censorship, ensuring all valid ops are included.
- Enables permissionless builder markets, similar to Ethereum's PBS roadmap.
- Requires protocol changes, making it a long-term, not immediate, fix.
L1/L2
Protocol Change
Ethereum
Roadmap Aligned
03
The Solution: Reputation-Based Staking (e.g., Stackup, Alchemy)
Bundlers stake capital and are slashed for malicious behavior or poor performance. A reputation score determines work allocation and rewards.
- Penalizes bad actors through economic security.
- Incentivizes reliability and fair ordering for a better UX.
- Introduces new centralization vectors around who defines and scores reputation.
$1M+
Stake Required
Slashed
For Censorship
04
The Solution: Intent-Based Auction Markets (e.g., UniswapX, Across)
Shifts the paradigm from transaction execution to outcome fulfillment. Users submit intents; solvers compete to fulfill them optimally, paying bundlers fixed fees.
- Decouples bundler profit from on-chain MEV, creating a fee-for-service model.
- Leverages existing infrastructure from CowSwap, UniswapX, and Across.
- Increases complexity by adding a solver layer between user and chain.
Fixed Fee
Bundler Model
Solvers
Compete on Price
05
The Problem: Subsidy Reliance & Unsustainable Pools
Current functional bundler networks are propped up by grant funding or protocol subsidies. This masks the fundamental economic flaw and isn't scalable.
- Creates false positives about network health and decentralization.
- Collapses when subsidies end, as seen in early DeFi liquidity mining.
- Distorts measurement of true user-paid gas economics.
Grant-Funded
Current State
$0
Sustainable Profit
06
The Bridge: Cross-Chain Super-Bundlers (e.g., LayerZero, Axelar)
Omnichain messaging protocols are becoming natural bundlers, leveraging their existing validator sets and economic security to guarantee cross-chain user operation execution.
- Monetizes existing infrastructure and stake.
- Provides atomic cross-chain UX, a killer app for account abstraction.
- Risks consolidating power in a few large cross-chain messaging hubs.
Omnichain
Execution
Validators
As Bundlers
future-outlook
THE INCENTIVE MISMATCH
The Bundler's Dilemma
ERC-4337's viability depends on solving the economic disincentive for bundlers to process user operations.
Bundlers face a fee deficit. They pay the base layer gas fee in ETH but receive payment in arbitrary ERC-20 tokens from user operations, creating immediate FX risk and operational friction that disincentivizes reliable service.
The solution is a trusted fee market. Systems like Pimlico's Verifying Paymaster or Stackup's Bundler abstract this by accepting stablecoin fees and converting them to ETH, but this recentralizes the network around a few trusted entities.
Decentralization requires a native solution. A sufficiently decentralized bundler network needs a standardized mechanism, like a native gas token abstraction or a cross-chain MEV auction, to align incentives without trusted intermediaries.
Evidence: The dominant Alchemy's Rundler and Stackup handle most 4337 traffic, proving the current model trends toward centralization without robust, permissionless economic incentives.
takeaways
THE BUNDLER ECONOMICS DILEMMA
TL;DR for CTOs and Architects
ERC-4337's promise of account abstraction is held back by a critical, unsolved economic problem at its core: bundler incentives.
01
The Mempool is a Free-Rider Problem
Bundlers are public mempool operators who must front gas for user operations. The current design creates a toxic race to the bottom where:\n- No Priority Fees: UserOps lack a direct fee market, making them low-value for searchers.\n- MEV is Opaque: Unlike in Ethereum blocks, extracting value from a bundle is complex and unreliable.\n- Result: Bundling is a public good with private cost, leading to under-provisioning and centralization risk.
~0 ETH
Priority Fee
High Risk
For Bundler
02
Paymasters Subsidize Users, Not Bundlers
The primary revenue stream today is paymaster subsidies, which is a broken model.\n- Client Capture: Bundlers are incentivized to only process ops for their own sponsored paymaster to guarantee payment.\n- Fragments Liquidity: This creates walled gardens, defeating the open permissionless vision.\n- Economic Limit: Paymaster revenue is capped by user onboarding budgets, not transaction value—a non-scalable subsidy.
Walled
Gardens
Capped
Revenue
03
Solution: A Native Bundle Auction (EIP-4337's Missing Piece)
The fix is a first-price auction for bundle space, similar to Ethereum's block space, but for UserOperations.\n- Direct Bundler Payment: Users/Apps bid for inclusion, creating a real fee market.\n- Unlocks Searcher Economy: Enables transparent MEV extraction (e.g., arbitrage, liquidations) within bundles, aligning with Flashbots and MEV-Boost models.\n- Critical Path: Requires a standardized mempool (P2P) and reputation system to prevent spam, a la Eden Network.
Required
P2P Mempool
Searcher-Led
Incentives
04
The Centralization Trap: Today's Bundler-as-a-Service
Without proper incentives, bundling centralizes into a few BaaS providers like Stackup, Alchemy, Biconomy.\n- Single Points of Failure: Censorship and liveness risk if major BaaS goes down.\n- Vendor Lock-in: Developers integrate specific SDKs, not the open standard.\n- This recreates the very problem AA aims to solve: reliance on trusted intermediaries instead of decentralized network actors.
3-5
Major Providers
High
Censorship Risk
05
Interoperability Suffers Without Profit
A healthy bundler network is prerequisite for cross-chain intents via protocols like Socket, Li.Fi, and Across.\n- Complex Ops Unbundled: Multi-chain user operations are high-gas, high-risk, and will be ignored by loss-leading bundlers.\n- Kills Composable UX: The promise of a single signature spanning Ethereum, Polygon, Arbitrum dies if no one is paid to execute it.\n- **Contrast with LayerZero: Their OFT standard relies on incentivized executors; 4337 currently lacks this.
Ignored
Complex Ops
Broken
Cross-Chain UX
06
The Verdict: Build, But Hedge
Architects should deploy 4337 smart accounts today for UX gains, but design for bundler volatility.\n- Implement Fallbacks: Use multiple bundler RPC endpoints (e.g., Stackup + pimlico).\n- Monitor EIP-7511 & 4337 Updates: The core team is actively designing the fee market/auction mechanism.\n- Long-term: The network only becomes robust when bundling is more profitable than simple block building.
Multi-RPC
Required Now
EIP-7511
Watch This
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall