The model creates a fee paradox. The protocol burns fees paid in ETH to mint its native token, attempting to create artificial demand. This forces a direct competition between the token and ETH for fee payment, a battle the rollup token always loses due to ETH's superior liquidity and established trust.
zk-rollups-the-endgame-for-scaling
Blog
Why Burn-and-Mint Equilibrium Fails for Rollup Tokens
An analysis of why the popular burn-and-mint model, adapted from Proof-of-Burn chains, creates flawed economic incentives and unsustainable inflation for layer 2 tokens, failing to capture real protocol value.
introduction
THE TOKENOMICS TRAP
The Siren Song of Burn-and-Mint
Burn-and-mint equilibrium is a flawed token model for rollups because it creates a misalignment between token utility and network security.
It divorces security from usage. In a successful model like Ethereum's, security (staking) directly correlates with economic activity (gas fees). Burn-and-mint severs this link; the token's value is a derivative of burned fees, not a staked asset securing the chain. This creates a speculative feedback loop detached from real utility.
The equilibrium is unstable. Projects like OMG Network (formerly More Viable Plasma) demonstrated this failure. The model requires perpetual, exponential growth in burned fees to sustain token value, a condition no scaling network achieves. When growth stalls, the token death spiral begins as sell pressure from new minting overwhelms buy pressure.
Evidence: Look at SKALE or early Loom Network. Their tokens are not used to pay for core L2 execution. The primary utility becomes governance over a treasury, which is a weak value accrual mechanism compared to EigenLayer's restaking or direct fee capture like Arbitrum's sequencer.
thesis-statement
THE MISALIGNMENT
Core Thesis: Security Spend ≠Utility Value
The burn-and-mint equilibrium model fails for rollups because it conflates security expenditure with user-driven utility, creating a structurally unsound token.
Burn-and-mint equilibrium is a flawed model for rollup tokens. It assumes token burns for L1 security fees create sustainable value, but this is a cost, not a value-adding service. Users pay for security because they must, not because they want the token.
Utility value requires demand elasticity. A token's price appreciates when users voluntarily demand it for a service, like governance in Arbitrum or staking in Avalanche. Paying for L1 gas via a burn is an inelastic, mandatory tax with no premium.
The model creates a death spiral. If token price falls, the burn rate must increase to cover the same USD-denominated security cost, increasing sell pressure and further depressing the price. This is the opposite of a virtuous cycle.
Evidence: Look at Optimism's OP token. Its primary utility is governance and protocol incentives, not paying for L1 batches. Its value accrual is decoupled from the mandatory cost of posting data to Ethereum, which is a wise design choice.
key-trends
WHY BURN-AND-MINT EQUILIBRIUM FAILS
The Flawed Mechanics in Practice
The burn-and-mint equilibrium model, used by chains like Celo and Osmosis, is fundamentally misapplied to rollups, creating perverse incentives and security risks.
01
The Fee Token Disconnect
Rollup security is paid for in the L1's native asset (e.g., ETH on Ethereum), but value accrual targets a separate, speculative token. This creates a fatal misalignment: sequencer costs are real and volatile, while token demand is speculative.
- Real Cost: Sequencer must pay L1 gas in ETH.
- Speculative Revenue: Token burns rely on trading volume, not security expenditure.
- Result: Treasury bleed during bear markets when token demand evaporates.
>90%
Cost Mismatch
ETH-Denom
Real Expense
02
The Speculative Death Spiral
The model's stability depends on perpetual token demand for fee burning. In a downturn, reduced activity lowers burns, increasing net issuance and selling pressure.
- Negative Feedback Loop: Lower volume → lower burns → higher inflation → price decline.
- Contrast with ETH: Ethereum's fee burn is a deflationary mechanism on its own security asset, creating a virtuous cycle.
- Empirical Proof: Tokens like CELO and OSMO have failed to sustainably capture value versus their underlying security costs.
Inflationary
Downside Pressure
No Floor
On Demand
03
The Sequencer Subsidy Fallacy
Proponents argue token rewards can subsidize low fees. This is a temporary marketing gimmick that centralizes control and defers the real economic test.
- Centralization Vector: The foundation/DAO controlling the subsidy becomes the essential patron of the sequencer.
- Deferred Reality: Users aren't paying the true cost of security, creating a fragile ecosystem.
- Superior Model: Shared sequencing layers like Astria or Espresso decouple execution from settlement, allowing rollups to use ETH for security while competing on execution.
Temporary
Subsidy
Centralized
Control Risk
04
The Governance Token Illusion
Packaging the fee token as a governance token (e.g., ARB, OP) doesn't solve the economic problem. Governance over a subsidized system is low-stakes theater.
- Empty Sovereignty: Voting on upgrade parameters is meaningless if the chain's economic engine is broken.
- Contrast with Real Assets: MakerDAO's MKR governs a system with direct, tangible revenue (stability fees).
- Solution Path: Follow dYdX Chain: use the L1 (Cosmos) for security/staking, and a separate, fee-capturing token for governance and utility.
Low-Stakes
Governance
No Revenue
To Govern
BURN-AND-MINT EQUILIBRIUM ANALYSIS
The Inflation Trap: Modeled Scenarios
Comparative analysis of token economic models for rollups, demonstrating why a pure burn-and-mint equilibrium fails compared to fee-based or dual-token models.
| Economic Metric | Pure Burn-and-Mint (Failed Model) | Fee-Based Settlement (e.g., Arbitrum, Optimism) | Dual-Token Utility (e.g., Celestia, EigenLayer) |
|---|---|---|---|
Primary Token Utility | Pay gas, burned for security | Pay gas, governance, staked for sequencing | Pay for data/security, governance staked separately |
Inflation Driver | Burning must outpace minting for staking rewards | Sequencer profit from MEV & fees; inflation optional | Service payment inflation decoupled from staking security |
Equilibrium Condition | Net token burn > Protocol Revenue. Fails if usage drops. | Protocol Revenue > Sequencer Operating Costs | Service Demand > Validator Staking Supply |
Death Spiral Risk | High. Falling usage reduces burn, inflates token, disincentivizes holders. | Low. Fees are a real revenue sink; token value supports security. | Managed. Service token volatility isolated from staking token stability. |
Real Yield to Token | None. Value accrual is purely deflationary speculation. | Yes. Up to 100% of sequencer profits can be distributed. | Yes. Fees for data availability or restaking services. |
Demand-Supply Coupling | Tightly coupled. Security budget directly fights user demand. | Loosely coupled. Security budget funded by profitable sequencer ops. | Decoupled. Staking security is cost-based; service demand is utility-based. |
Example Protocol Stress Test (50% Usage Drop) | TVL -50%, Burn -50%, Inflation +200%, Token Price -70%+ | TVL -50%, Revenue -30%, Sequencer margin compressed, Security unchanged | TVL -50%, Service revenue -50%, Staking APR unchanged, Security unchanged |
Adoption by Major L2 | None (Arbitrum, Optimism, zkSync, Starknet all rejected it) | Arbitrum, Optimism, Base | Celestia (data availability), EigenLayer (restaking) |
deep-dive
THE TOKENOMIC TRAP
The Vicious Cycle and The Viable Alternatives
Burn-and-mint equilibrium creates a death spiral for rollup tokens by misaligning incentives between users and speculators.
Burn-and-mint equilibrium fails because it creates a direct conflict between network usage and token price. The model requires burning tokens for fees to create deflationary pressure, but this makes the network more expensive for users precisely when adoption should be rewarded.
Speculators subsidize users in a toxic relationship. Token holders provide security or liquidity, expecting appreciation from fee burns. When usage drops, the token price collapses, destroying the subsidy and accelerating the decline—a classic death spiral.
Proof-of-Use tokens like Celestia solve this by decoupling the security asset from the fee token. Rollups pay for data availability in TIA, while users pay fees in ETH or stablecoins. This separates the speculative asset from the utility function.
Arbitrum's sequencer revenue model demonstrates a viable alternative. Over 90% of fees are denominated in ETH and accrue to the DAO treasury. The ARB token governs this treasury, creating value capture through protocol-controlled revenue, not artificial scarcity.
takeaways
WHY BME FAILS FOR L2s
TL;DR for Architects and Investors
Burn-and-Mint Equilibrium (BME) is a flawed token model for modern rollups, creating misaligned incentives and unsustainable security.
01
The Problem: Security is a Fee, Not a Product
BME treats L2 security as a consumable to be burned, but users don't buy security—they pay for execution. This creates a fundamental demand mismatch.\n- Users pay fees in ETH for gas and speed.\n- Validators are paid in a volatile native token with no intrinsic utility.\n- Result: The token's value is decoupled from actual chain usage, relying purely on speculation.
0
Fee Utility
High
Speculative Reliance
02
The Solution: Fee-Based Value Accrual (See: Arbitrum, Optimism)
Successful rollups accrue value by capturing a portion of transaction fees, typically in ETH, and using it to fund a decentralized sequencer set or treasury.\n- Value Flow: Fees (ETH) -> Treasury/Staking Pool -> Validator Rewards.\n- Demand Alignment: Token demand is linked to fee revenue and governance over a cash-flowing asset.\n- Case Study: Optimism's RetroPGF and Arbitrum's sequencer fee split create tangible utility beyond security staking.
ETH
Fee Asset
Direct
Value Accrual
03
The Flaw: BME Creates a Permanent Inflation Overhang
To pay validators, BME mints new tokens, causing perpetual sell pressure unless burned demand perfectly matches minting—a fantasy in practice.\n- Imbalance: User burn for trivial perks (e.g., gas discounts) never equals validator mint for $100M+ security budgets.\n- Death Spiral Risk: If token price falls, more must be minted to pay validators, further diluting holders.\n- Contrast: Ethereum's fee burn (EIP-1559) removes supply; BME adds it, fighting itself.
Constant
Sell Pressure
Fragile
Equilibrium
04
The Reality: Validators Want ETH, Not Memecoins
Professional node operators and staking pools calculate costs in fiat. They immediately sell volatile L2 tokens for ETH or stablecoins, creating relentless exit liquidity pressure.\n- Operator Incentive: Minimize volatility, maximize real yield.\n- Economic Leakage: Value intended for security immediately leaves the ecosystem.\n- Superior Model: EigenLayer restaking shows validators prefer to secure new chains for additional ETH-denominated yield, not speculative tokens.
Immediate
Token Sale
ETH
Real Yield
05
The Alternative: Dual-Token Staking (Inspired by Celestia)
Separate the security asset from the gas asset. Use a high-value, restakable asset (e.g., ETH, TIA) for consensus security, and a native token for governance and ecosystem incentives.\n- Security: Backed by liquid restaking tokens (LRTs) or a proven cryptoasset.\n- Gas: Paid in ETH or stablecoins for user convenience.\n- Native Token: Used for governance votes, protocol upgrades, and community grants—functions that don't require monetary premium.
Separated
Functions
Restaked ETH
Security Backing
06
The Verdict: BME is a Vestigial Model
BME worked for Cosmos zones securing their own sovereignty, but fails for rollups that derive security from Ethereum. The future is hybrid models: ETH for fees/security, and a lean token for governance.\n- Architect's Take: Don't force a token to be money. Design for fee capture and delegated security.\n- Investor's Take: Avoid L2 tokens whose sole utility is being burned for a discount; they are perpetual dilution machines.\n- Look to: Arbitrum, Optimism, Starknet's planned model, and EigenLayer AVSs for viable blueprints.
Obsolete
For L2s
Hybrid
Future Model
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