Discover why higher gas fees don't guarantee better service. Deep dive into fee economics, miner incentives, and the $200B coordination failure.
In this article we discuss how gas fees function as participation tolls rather than prices, the three requirements for trustworthy fee systems (User Incentive Compatibility, Miner Incentive Compatibility, and Side-Contract-Proofness), and some economic theory around fee mechanisms.
You’re Not Paying for the Product — You’re Paying to Participate
Users typically treat linear fees as if they were linear prices. On the surface, the difference seems semantic—but under the hood, it reflects a deep divergence in how value flows, who sets the terms, and who bears the risk.
If you're designing fee mechanisms, modelling incentives, or forecasting protocol revenue, understanding this distinction is essential.
Let’s make the distinction even more clear, and compare the actual Ethereum fee structure with a hypothetical linear pricing model. The table below shows why this breaks down in practice.
Your gas fee doesn't go to one person. It gets decomposed into:
🔥 A burned fee that removes supply
🧱 A builder reward that shapes which transactions go in a block
📦 A proposer payment from a separate, private auction
Your payment funds three different economic layers , each with their own dynamics and incentives.
Fees function as participation tolls, not product prices
For a blockchain transaction “fee” mechanism (TFM) to work, it needs:
🔒 User Incentive Compatibility (UIC)
Users must bid their true value.
Why it matters: Prevents gaming—users pay what space is worth to them. No overbidding or undercutting.
⚙️ Miner Incentive Compatibility (MIC)
Miners must follow the rules.
Why it matters: Stops miners from cheating (e.g., inserting their own low-fee transactions).
🤝 Side-Contract-Proofness (SCP)
No backroom deals between miners and users.
Why it matters: Blocks collusion like "Pay me off-chain to skip the fee queue."
This trilemma forces certain consequences: we can not achieve all three. Therefore, the tradeoffs result in the following consequences:
This leads us to the concept of “Zero Platform Revenue”. As a third-party operator—not the miner or block producer—we face a key limitation: if the fee mechanism is designed to be manipulation-resistant, then we cannot earn revenue directly from users' transaction fees. Allowing any party, including us, to profit from individual bids would create incentives to interfere with or bias the transaction selection process. To maintain trust and prevent such manipulation, the mechanism must ensure that revenue is completely independent of any individual user’s bid.
However, we can utilize mechanisms like fee burning that enables part of the user's payment to be destroyed rather than given to the miner. This decouples total user payment from miner revenue while preserving ex-post budget feasibility—that is, ensuring no party ends up in deficit after the transaction.1
This constraint reveals a coordination failure —one that can be resolved by rethinking how, when, and where value flows within the system. Two promising directions include:
Time Decoupling: Separate the moment of fee payment from the moment of miner compensation, allowing for more flexible allocation mechanisms.
Asset Transformation: Convert transaction fees into alternative forms of value, such as NFTs or bonds, which can be distributed in ways that preserve security while enabling broader economic participation.
Since fees are only applied when an option is exercised, we convert ETH to FOLD and burn the FOLD token. FOLD is the XGA platform token for underwriting risk, and is fully distributed. In most markets, participants don't destroy revenue or shift payment timing. But blockchains aren’t typical two-sided platforms.
While the Revenue Equivalence Theorem (Myerson, 1981) tells us that user payments cannot be increased in a Bayesian equilibrium, it does not preclude redistribution of that payment in new ways. ↩