Why Smart Accounts' Economic Model is Inherently Deflationary

EOAs force protocols to burn cash on opaque, one-way gas subsidies. This is a pure cost center with zero protocol upside, creating a $1B+ annual drain on DeFi treasuries.

• Value Leak: Fees paid to L1/L2 sequencers provide no stake in the network.
• No Recirculation: Subsidy capital is permanently extracted from the protocol ecosystem.
• Opaque Spend: No accountability for subsidy efficiency or user acquisition cost.

Smart accounts enable protocols to become their own gas market makers. Instead of paying ETH/AVAX/SOL to an external chain, they use their own token to pay fees, which are then automatically and programmatically bought back and burned.

• Direct Deflation: Every user transaction becomes a buy pressure event for the native token.
• Treasury Flywheel: Protocol earns MEV/priority fee revenue from its own user activity.
• Aligned Incentives: User growth directly strengthens the protocol's tokenomics, as seen in models like EigenLayer's restaking or Celestia's data availability fee burn.

ERC-4337 Bundlers and Paymasters are not just infrastructure—they are deflationary sinks. The smart account stack programmatically converts transaction volume into token demand.

• Bundler Economics: Competitive bundler markets (like Stackup, Alchemy) pay gas in the protocol's token, creating constant base demand.
• Paymaster as AMM: The paymaster acts as a dedicated AMM pool, swapping user's fee token for the native gas token, ensuring liquidity and price stability.
• Verifiable Burn: On-chain proof of burn replaces opaque marketing spend with cryptographically verifiable value accrual.

Unlike EOA wallets, smart accounts enable sponsored transactions via Paymasters. This creates a mandatory, protocol-level fee market where a portion of every gas fee is paid in the native token and burned or staked.

• Fee Capture: Every sponsored tx converts user's stablecoin/ERC-20 gas into native token demand.
• Automatic Buyback: Protocols like Starknet and zkSync bake this deflationary mechanism directly into their fee logic.

The EntryPoint contract centralizes transaction validation, forcing Bundlers to stake and transact in ETH. This anchors the entire account abstraction stack's security and liquidity to the L1 asset.

• Staking Requirement: Bundlers must bond ETH, creating a ~$100M+ sink at scale.
• Settlement Layer: All UserOperation bundles settle on Ethereum, generating continuous base-layer fee demand irrespective of L2 activity.

Smart accounts enable novel treasury mechanics. A protocol can act as the default Paymaster for its ecosystem, accumulating fees in its token and using them for strategic buybacks or staking rewards.

• Treasury Flywheel: Fees from millions of accounts compound into a self-sustaining treasury.
• Reduced Sell Pressure: Native token becomes a utility asset for gas, not just governance, aligning long-term holders.

With smart accounts, L2 sequencers lose their monopoly on MEV and transaction ordering to a competitive Bundler network. This shifts value accrual from sequencer profit (often off-chain) to on-chain, verifiable fee burning.

• MEV Democratization: Bundler competition reduces extractable value, funneling more fees to the public burn mechanism.
• Verifiable Economics: All fee flows are on-chain, making the deflationary model transparent and auditable.

Applications must pay for user gas, creating a customer acquisition cost that scales linearly with usage. This model fails when:

• TVL-heavy protocols (e.g., Aave, Compound) see no direct revenue from subsidizing transactions.
• Low-margin DEX aggregators (e.g., 1inch, CowSwap) cannot absorb fees without eating into already thin profits.
• Subsidies become a winner's curse, where the most successful apps face the largest, unsustainable cost burden.

Bundlers and paymasters, as centralized transaction processors, become new rent-seeking intermediaries. They can:

• Extract MEV by reordering or censoring user operations within a bundle.
• Impose premium fees during network congestion, mirroring L1 validator behavior.
• Create economic centralization where a few dominant bundlers (e.g., Pimlico, Biconomy) control pricing and access, negating the user benefit.

Smart account transaction costs are ultimately pegged to the underlying L1 (Ethereum). This creates a hard ceiling on adoption:

• Ethereum at $200/gwei makes any gas abstraction pointless; user onboarding halts.
• Failed bundler auctions leave transactions stuck, breaking the seamless UX promise.
• Cross-chain smart accounts (via LayerZero, Chainlink CCIP) compound this risk, tethering the model to the most expensive chain in the user's path.

Paymasters need deep pools of stablecoin or ETH liquidity to sponsor diverse users. This faces a cold-start problem:

• Smaller apps cannot bootstrap sufficient capital, limiting their ability to compete.
• Volatile token prices (if using app tokens) create accounting nightmares and balance sheet risk.
• Cross-chain fragmentation means liquidity must be replicated on every supported chain (Arbitrum, Optimism, Base), multiplying capital inefficiency.

Subsidizing transaction fees could be construed as a financial inducement, attracting regulatory scrutiny:

• SEC may view fee payment as part of an investment contract for app usage.
• OFAC sanctions compliance becomes a bundler/paymaster responsibility, forcing censorship.
• Money transmitter licenses may be required for entities continuously paying fees on behalf of users, creating a legal moat for incumbents like Coinbase.

Privacy-preserving features (e.g., stealth addresses, transaction mixing) increase gas costs by 5-10x. If apps subsidize this:

• Privacy becomes a premium feature only profitable apps can offer, defeating its purpose as a public good.
• Bundlers can deanonymize users by analyzing which paymasters fund private transactions, creating a metadata leak.
• The system incentivizes lowest-common-denominator transparency, stifling innovation in protocols like Aztec or Zcash.

Externally Owned Accounts (EOAs) are a public good with zero protocol-level monetization. Wallets like MetaMask and Rabby capture value via frontends and swaps, but the underlying infrastructure (EVM) sees no direct revenue.

• Value leaks to centralized sequencers and RPC providers.
• No native fee capture for the protocol securing the state.
• Creates a tragedy of the commons for L1/L2 block space.

Smart Accounts are stateful contracts. Their deployment, maintenance, and operation generate protocol-level fees that are programmatically captured and burned or staked.

• Deployment fees are paid to the factory contract (e.g., ERC-4337 EntryPoint).
• Session key rotations and social recovery actions create recurring fee events.
• This turns user growth into a direct revenue stream for the underlying chain or account abstraction protocol.

Captured fees are burned (reducing supply) or staked (increasing security), creating a positive feedback loop. More users → More fees → Stronger tokenomics.

• Burning (e.g., EIP-1559 style) makes the native token inherently deflationary under adoption.
• Staking increases yield, attracting more validators and securing the network.
• This aligns protocol success directly with token holder value, a model proven by Ethereum post-merge.

These L2s are aggressively pushing native account abstraction, baking the economic model into their core. Their fee markets are designed around smart account interactions.

• Starknet's fee mechanism directly taxes account operations for sequencer/ prover revenue.
• zkSync's LLVM architecture natively abstracts gas, enabling sophisticated fee logic.
• They demonstrate how L2s can escape the commodity trap by monetizing the account layer.

If every L2 and L1 implements its own proprietary account system, liquidity and user experience fragment. The winner will be the chain-agnostic standard that achieves dominance.

• ERC-4337 aims to be this standard, but L2s have incentives to fork it.
• Wallet providers (e.g., Safe, Argent) become critical intermediaries.
• The economic model only achieves escape velocity if a dominant standard emerges.

Architect your protocol's fee mechanism to explicitly capture and burn/stake value from account lifecycle events. Don't just build an AA stack; build an economic engine.

• Instrument your EntryPoint or Account Factory to collect fees.
• Automate the burn/stake mechanism via smart contract logic.
• Partner with wallets and dApps that drive volume to your implementation, creating a symbiotic ecosystem.