Direct-to-Stakers (e.g., Aave, Compound) excels at aligning incentives between protocol security and token holders by distributing a significant portion of protocol fees directly to those who stake the native token. For example, Aave's Safety Module, which secures the protocol, is funded by a portion of the fees, creating a direct, yield-based reward for risk-taking. This model has proven effective in bootstrapping and maintaining deep liquidity, with protocols like Compound historically distributing millions in daily fees to stakers, directly linking protocol revenue to token value accrual.
LABS
Comparisons
Fee Distribution to Security Providers vs General Treasury
A technical analysis comparing two core fee allocation models for lending protocols. We evaluate the trade-offs between directly incentivizing network security actors versus centralized treasury management for long-term growth.
Chainscore © 2026
introduction
THE ANALYSIS
Introduction: The Fee Allocation Dilemma in Lending
A foundational comparison of two dominant fee distribution models for lending protocols, analyzing their impact on security, growth, and stakeholder alignment.
General Treasury Allocation (e.g., MakerDAO, early-stage protocols) takes a different approach by channeling fees into a community-controlled treasury. This results in greater strategic flexibility, allowing funds to be deployed for long-term growth initiatives like grants, integrations, and marketing, but introduces a principal-agent problem between token holders and governance. MakerDAO's Surplus Buffer, which accumulates DAI stability fees, provides a clear case study, enabling the protocol to fund expansive initiatives like Spark Protocol and real-world asset vaults, but requires active, competent governance to allocate capital efficiently.
The key trade-off: If your priority is immediate security provider incentives and a clear value accrual mechanism to bootstrap a network, choose a Direct-to-Stakers model. If you prioritize long-term strategic flexibility and a war chest for ecosystem expansion, even at the cost of more complex governance, choose a General Treasury model. The decision hinges on whether you need to incentivize capital formation now or fund future growth vectors.
tldr-summary
Fee Distribution to Security Providers vs. General Treasury
TL;DR: Key Differentiators at a Glance
Direct comparison of two primary models for allocating protocol revenue, highlighting the core trade-offs between security incentives and strategic flexibility.
01
Fee Distribution to Security Providers
Direct Security Incentive: Fees are paid directly to validators/stakers (e.g., Ethereum's priority fees, Solana's stake-weighted distribution). This creates a strong, predictable yield that directly secures the network. Best for: Protocols where maximizing decentralization and liveness is the top priority, and tokenomics are designed to reward participation.
02
General Treasury
Strategic Flexibility: All fees flow into a community-controlled treasury (e.g., Uniswap DAO, Arbitrum DAO). Funds are allocated via governance for grants, development, marketing, or strategic reserves. Best for: Application-layer protocols (DeFi, Social) needing to fund long-term growth, R&D, and ecosystem initiatives beyond core security.
03
Choose Fee Distribution for...
Maximizing Nakamoto Coefficient & Staking APR. If your primary KPI is a highly secure, resilient base layer. This model directly ties the protocol's financial success to its physical security. Example: L1s like Solana and Sui use this to attract and retain capital in their security pool.
04
Choose General Treasury for...
Funding Ecosystem Growth & Innovation. If you need capital to bootstrap new applications, run bug bounties, or finance core development teams. This is critical for L2s and dApps competing in crowded markets. Example: Optimism's RetroPGF distributes millions from its treasury to public goods developers.
05
Key Trade-off: Predictability vs. Control
Fee Distribution offers predictable, automated payouts but locks capital into a single use case (security). General Treasury requires active, often slower, governance but can adapt funds to new threats or opportunities (e.g., funding a critical client team).
06
Hybrid Models in Practice
Many protocols use a split. Avalanche burns a portion of fees and directs the rest to stakers. Polygon uses treasury funds to subsidize staking rewards. The optimal split depends on the protocol's maturity and competitive landscape.
HEAD-TO-HEAD COMPARISON
Fee Distribution to Security Providers vs General Treasury
Direct comparison of economic models for allocating protocol fees between stakers/validators and a shared treasury.
| Metric / Feature | Fee Distribution to Security Providers | General Treasury Model |
|---|---|---|
Primary Incentive Target | Validators & Stakers | Protocol Treasury |
Direct Staking APR Boost | ||
Immediate Security Spend | ~90-100% of fees | 0% of fees |
Treasury-Governed Funding | ||
Typical Fee Allocation | Solana (100%), Avalanche (C-Chain) | Uniswap DAO, Arbitrum DAO |
Protocol Upgrade Funding | Requires separate inflation/taxes | Funded from treasury reserves |
Investor/Team Token Vesting Impact | Dilutes staker rewards | Non-dilutive to stakers |
pros-cons-a
Direct Incentives vs. Centralized Treasury
Pros and Cons: Fee Distribution to Security Providers
A critical design choice for protocol sustainability: directing fees to validators/stakers for security or to a general treasury for ecosystem development.
01
Pro: Enhanced Network Security
Direct validator/staker incentives increase the cost of attack by raising the economic penalty for malicious behavior. Protocols like Ethereanafter The Merge and Solana use this model to achieve high Nakamoto Coefficients (>30). This matters for DeFi protocols requiring maximum liveness and censorship resistance.
02
Pro: Predictable, Aligned Stakeholder Rewards
Creates a self-reinforcing flywheel: higher fees attract more stake, which increases security, attracting more TVL. Lido Finance and Rocket Pool demonstrate this with consistent, protocol-fee-backed yields. This matters for staking-as-a-service platforms and long-term capital allocators.
03
Con: Reduced Protocol-Led Innovation Funding
Diverts revenue from a centralized development treasury, potentially slowing ecosystem grants, bug bounties, and R&D. Early-stage protocols like Optimism initially used a treasury model to fund public goods. This matters for rapidly evolving L2s and protocols needing to bootstrap developer activity.
04
Con: Inflexibility in Crisis Response
Locked-in fee streams limit the DAO's ability to fund emergency security audits, insurance funds, or strategic acquisitions during market downturns. A treasury model, as used by Uniswap and Aave, provides a war chest for unforeseen events. This matters for systemically important protocols managing complex risk.
pros-cons-b
Fee Distribution to Security Providers vs General Treasury
Pros and Cons: General Treasury Model
A critical architectural decision: direct fee distribution to validators/stakers versus routing through a community-controlled treasury. Key trade-offs for protocol security and governance.
01
Direct Fee Distribution (Pros)
Stronger security incentives: Fees are a direct, predictable reward for validators (e.g., Ethereum's priority fees) or stakers (e.g., Cosmos Hub's staking yield). This directly aligns economic security with network usage, creating a robust Proof-of-Stake (PoS) security budget.
02
Direct Fee Distribution (Cons)
Inflexible funding for ecosystem growth: Revenue is locked to security providers, leaving no protocol-owned capital for grants, core development, or strategic initiatives. Projects like early Ethereum lacked this, relying on external funding (EF) for development.
03
General Treasury Model (Pros)
Strategic capital allocation: A community treasury (e.g., Uniswap DAO, Arbitrum DAO) can fund public goods, developer grants, liquidity incentives, and security audits. This fosters long-term ecosystem growth beyond just chain security.
04
General Treasury Model (Cons)
Governance overhead and inefficiency: Treasury spending requires DAO proposals and votes, leading to slow decision-making (e.g., multi-week governance cycles) and potential for political capture or suboptimal capital allocation, as seen in some early DAO experiments.
CHOOSE YOUR PRIORITY
Decision Framework: When to Choose Which Model
Fee Distribution to Security Providers
Verdict: Choose this model for maximum security. Strengths: Directly incentivizes validators, sequencers, and stakers, aligning their economic interest with network health. This model is critical for new L1s or L2s (e.g., early Optimism, Arbitrum) needing to bootstrap a robust, decentralized validator set. It provides predictable, protocol-enforced rewards, reducing reliance on inflationary token emissions. Metrics like validator participation rate and time-to-finality are primary KPIs.
General Treasury Model
Verdict: Riskier for nascent networks, strategic for established ones. Strengths: Offers maximum flexibility for a DAO or foundation to fund grants, bug bounties, and marketing (e.g., Uniswap DAO treasury). However, it decouples fee revenue from security, potentially leading to underfunded security providers if governance decisions misprioritize. Suitable only for protocols with immense, stable fee generation (e.g., Ethereum post-Merge) where security is already cryptoeconomically assured.
verdict
THE ANALYSIS
Final Verdict and Strategic Recommendation
A data-driven breakdown of the strategic trade-offs between directing fees to security providers versus a general treasury.
Fee Distribution to Security Providers excels at creating direct, performance-aligned incentives for network security. By allocating block rewards and transaction fees directly to validators (like Ethereum's execution layer) or sequencers (like Arbitrum and Optimism), it ensures a predictable and substantial yield that scales with network usage. For example, Ethereum validators have earned an average of 3-5% APR from fee tips, directly correlating with on-chain activity and MEV. This model is proven to secure high-value networks, with Ethereum's staked ETH exceeding $100B, creating immense economic security.
General Treasury Allocation takes a different approach by pooling a portion of protocol fees into a community-controlled fund, as seen with protocols like Uniswap and Optimism's RetroPGF. This strategy funds long-term ecosystem growth—developer grants, marketing, and public goods—but creates a trade-off: it decouples immediate fee revenue from security providers, potentially reducing their yield. The success hinges on effective governance; a well-managed treasury like Uniswap's, which holds over $4B, can be a powerful tool for sustainable growth, but it introduces execution risk and can dilute the direct value capture for core infrastructure operators.
The key trade-off is between immediate security incentives and long-term ecosystem value. If your priority is maximizing Nakamoto Coefficient and minimizing consensus risk for a high-TVL DeFi or L1 chain, choose Fee Distribution to Security Providers. This is non-negotiable for base-layer security. If you prioritize funding a broad developer ecosystem, marketing, and community initiatives to bootstrap network effects for an application-layer protocol or L2, a General Treasury (or a hybrid model) is strategically superior. The optimal choice is dictated by your protocol's stage and primary bottleneck: nascent ecosystems need treasury-fueled growth, while established networks require unwavering security incentives.
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