Layer 1s, Layer 2s, Layer 3s, whatever, The fundamental expectation is that these protocols accrue value to sufficiently incentivize the entities securing them. Typically, these entities derive revenue through three parallel streams: transaction fees, Miner Extractable Value (MEV), and token emissions.

Transaction fees can be further divided into base fees and priority fees. Base fees are paid to ensure that transactions are included in the canonical chain. Priority fees, on the other hand, are paid either to guarantee inclusion when demand for block space exceeds capacity or to guarantee the specific ordering within a proposed set of transactions. The latter is crucial for time-sensitive transactions, such as arbitrage or NFT sales conducted on a first-come, first-served basis.

The value accrued through base fees per transaction typically has a ceiling relative to the underlying cost of operating the protocol. Assuming available capacity, validators are incentivized to include transactions in the proposed head of the canonical chain as long as the total value accrued exceeds the cost of forging that block.

Priority fees are accrued during periods of congestion—whether local or global—or through time-sensitive transactions. As overall protocol capacity grows and approaches infinity (assuming demand doesn’t scale linearly with capacity), the probability of global congestion approaches zero. While local congestion remains possible in protocols that operate local priority auctions, the likelihood diminishes as capacity increases indefinitely. Time-sensitive transactions will likely persist regardless of a protocol’s architecture; however, their number is expected to scale sublinearly with the total number of transactions, resulting in an ever-decreasing percentage of transactions being time-sensitive.

Therefore, protocols face a strategic decision:

• Restrict capacity to maximize value accrual per transaction through priority fees, or
• Maximize capacity to enhance value accrual through a higher volume of base fee-paying and time-sensitive transactions.

This presents a classic “quality versus quantity” dilemma.

What About MEV and Token Emissions?

A significant portion of protocol revenue is accrued through MEV. The extent varies depending on the protocol and its usage. For instance, as a percentage of total protocol revenue, Solana accrues more value through MEV than Ethereum. Common types of MEV include backruns (such as centralized exchange–decentralized exchange or decentralized exchange–decentralized exchange arbitrage), frontruns, frontrun-backrun bundles (often referred to as “sandwich attacks”), and liquidations.

Some forms of MEV are benign or even beneficial to the capital efficiency of applications on the protocol, while others can be considered malicious. While validators can optimize value accrual through MEV independently, they typically collaborate with specialized entities. These entities are incentivized to share a portion of the accrued MEV with validators to ensure that time-sensitive, MEV-generating transactions are honored.

Money on the Table

Notably absent from the prior discussions are the applications responsible for generating priority fees and MEV. Are these applications willing to leave substantial sums of money on the table? This is where appchains and application-specific sequencing (ASS) come into play. Both approaches aim to internalize the maximum viable amount of priority fees and MEV while relegating base fees to the underlying protocol.

In an appchain, this is achieved through the physical separation of the application’s state. However, for certain applications, real-time or near-real-time composability is essential—a feature not facilitated by appchains. This is where ASS becomes particularly relevant.

Value Accrual Through Token Emissions

To address an ongoing debate: token emissions are a cost imposed on the protocol. This cost is borne by non-staked token holders through the dilution of their ownership share in the total supply. Consequently, protocols must balance minimizing the “tax” on non-stakers with maximizing revenue for consensus participants. In other words, how can the emission rate be minimized while maintaining optimal protocol security?

Ethereum and Solana have implemented similar solutions involving partial fee burns. Post-EIP-1559, Ethereum burns the base fee of every transaction. Solana burns half of both the base fee and the priority fee of each transaction. The burning of ETH and SOL aims to partially or fully offset the emission schedules of their respective tokens.

But is the goal to minimize token supply inflation or to maximize the scarcity of the native token? If it’s the former, the protocol must ensure sufficient value is accrued through “burnable mechanisms.” If it’s the latter, the protocol should aim to maximize value through these mechanisms. Consequently, it would be counterintuitive for such a protocol to both maximize available capacity and isolate congestion. Additionally, the protocol would strive to prevent value leakage through applications branching into appchains or utilizing application-specific sequencing. Assuming that both capacity increases and appchains/ASS are inevitable, the protocol should at best aim for inflation minimization.

The Untimely Demise of Fat Protocols

Ultimately, the endgame for most protocols converges. Despite varying current approaches, the misalignment of incentives between protocols and the applications built atop them will shift value accrual toward the applications themselves. In response, underlying protocols will attempt to accrue value through sheer transaction volume rather than the expected value of individual transactions.

Disclaimer：

1. This article is reprinted from [Toghrul Maharramov]. All copyrights belong to the original author [Toghrul Maharramov]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.

1. This article is reprinted from [Toghrul Maharramov], All copyrights belong to the original author [Toghrul Maharramov]. If there are objections to this reprint, please contact the Gate Learn “Gate Learn”) team, and they will handle it promptly.
2. Liability Disclaimer: The views and opinions expressed in this article are solely those of the author and do not constitute any investment advice.
3. Translations of the article into other languages are done by the Gate Learn team. Unless mentioned, copying, distributing, or plagiarizing the translated articles is prohibited.