[RFC] Arbitrum Gas Fees & Sequencer Revenue

Arbitrum Gas Fees & Sequencer Revenue

The Arbitrum DAO has one of the largest treasuries by dollar denominated value in all of crypto, but less than 1% of the treasury is held in non-ARB assets (ETH and stablecoins). Between January-March 2024, the DAO was spending an average of 13.8M ARB per month, or roughly $15M, with 90%+ of the spend going towards attracting users through protocol incentives programs. The risks associated with the DAO’s current treasury structure are widely acknowledged (negative feedback loop where excessive ARB spend leads to price depreciation and therefore treasury devaluation), with many teams currently working on proposals for treasury management strategies.

However, there has been less conversation and research put into the topic of DAO revenue, which today is primarily driven through sequencer margin. Sequencer margin is the result of the difference between the fee charged to end users and the costs for data availability and settlement on Ethereum. The motivation behind this post can best be explained through two charts: Image 1 (H/t @r3gen_Finance) shows the DAO’s ETH net fee flow between March 2023-March 2024, whereas Image 2 shows the same data set extended through May 2024.

Arb ETH Treasury Flow Post Atlas

As one can easily point out, the amount of ETH flowing into the DAO’s treasury has essentially gone flat since the end of April 2024. The root cause of this was two protocol changes that came with the ArbOS Atlas upgrade on March 18, shortly after the implementation of EIP-4844 on Ethereum. The L1 surplus fee per compressed byte was lowered from 2 gwei to 0 gwei, essentially removing the L1 surplus fee altogether, and the minimum L2 base fee was reduced from 0.10 gwei to 0.01 gwei. While this has been a benefit to users, developers, and protocols, it has come at the expense of the Arbitrum DAO’s primary revenue stream. We believe the reason for the mismatch in timing between the fall off in DAO revenue and the aforementioned upgrades was simply a delay in funds being officially transferred from the fee inbox to the DAO’s treasury timelock.

The following chart breaks down Arbitrum’s fee revenue at a more granular level, which shows the significant decrease in daily revenue around the middle of March. The L2 base fee had historically served as the DAO’s main revenue driver, but has been overtaken by L2 surplus fees since the ArbOS Atlas and EIP-4844 upgrades went live.

Base / Surplus Breakdown

For the 71 days between January 5 (2024) to March 17, the DAO generated ~2,125 ETH of profit. For the 71 days between March 18 and May 27, the DAO generated ~938 ETH of profit, with nearly half of that coming from a two day period in April where L2 Surplus Fees were abnormally high due to congestion fees kicking in. So even though a statistical outlier heavily skews the post-upgrade profit numbers to the upside, the DAO’s ETH revenue was still down greater than 55% with higher day-to-day variance in DAO profit than the pre-upgrade era.

Meanwhile, Base and Optimism have begun to regularly surpass Arbitrum in weekly profit generation despite Arbitrum consistently seeing a higher level of onchain activity. It is worth noting that if changes were to be made to Arbitrum’s gas pricing mechanism, it could put downward pressure on overall activity due to the increase in costs. However, another important factor to consider is the hefty amount of ARB incentives available across dozens of applications on Arbitrum, whereas Base (the most profitable Ethereum L2) does not have the luxury of a token. This begs the question – should the DAO charge slightly more for gas while incentives are plentiful in order to recoup some of the spend? Or is this approach missing the forest for the trees by focusing too heavily on short term profits over attracting and retaining users for the long-term in an effort to reach economies of scale?

Rollup Sector Chain Profit

Popular transaction types, such as a Uniswap swap, already cost 2-5x less on Arbitrum than OP Stack chains on most days.

The following table taken from the Paradigm team’s recent research on Reth outlines target gas parameters across leading EVMs.

The target gas per block is in practice where congestion pricing kicks in. The lower the target gas, the more quickly L2 surplus fees begin to scale. Interestingly enough, Base contributors recently increased its target gas per block in order to scale up to 6.25 mg/s, and is aiming to increase it again soon to achieve 7.5 mg/s. So it appears the Base team favors the “lower fees, reach economies of scale” approach mentioned above. OP Stack chains do not apply a hard-coded minimum L2 base fee as Arbitrum does, but instead have a maximum base fee increase or decrease per block (2% and 0.4% respectively as default) that adjusts based upon how far above or below a given block is from the predefined gas target (5M target gas per block by default). Arbitrum leverages something similar to OP Stack chains, as both mechanisms mimic EIP-1559 in many ways, called a “backlog” that monitors gas usage against a “speed limit” in an effort to ensure long-term sustainability by avoiding excessive gas usage. The base fee increases exponentially if the backlog grows, but decreases as the backlog shrinks. Quoting the documentation, “F = exp(-a(B-b)), where a and b are suitably chosen constants: a controls how rapidly the price escalates with backlog, and b allows a small backlog before the base fee escalation begins”.

Another key difference between OP Stack chains and Arbitrum is that Optimism orders transactions based on priority fees, whereas Arbitrum operates its sequencer using the FIFO model. According to this query, Optimism saw 25% of transactions over the past 30 days use a priority fee greater than 0.10 gwei, which ironically is where the Arbitrum minimum L2 base fee was set prior to Atlas. To provide a more detailed explanation of the impact of priority fees, we can look at the following spike on Base for “fast” priority fees at 15:31 UTC on May 29.

Priority Fees
This is what blocks typically look like on Base:

However, at the time of 15:31 UTC on May 29, blocks were consuming far more gas, and priority fees escalated as a result (for those curious, the cause looks to be related to a gas intensive, ERC-4337 related operation coinciding with a public NFT mint):

This priority fee auction appears to be a large driver of OP Stack chains’ sequencer revenue, and could potentially be explored for Arbitrum.

More research needs to be conducted on the exact inner-workings of Arbitrum’s gas pricing mechanism in order to make any concrete recommendations. It appears to Entropy Advisors that there are 3 paths to effectively increasing fees:

  1. Increase the L2 minimum base fee from 0.01 gwei to something agreed upon by the DAO. In our opinion, this is the simplest option and is the least likely to have negative effects on various ecosystem participants.
  2. Decrease the target gas per block, effectively kicking in congestion fees earlier.
  3. Adjust the “a” in the exponential backlog formula ( F = exp(-a(B-b)) ) to increase the rate of change to the base fee during times of congestion.

Adjusting constant “a” has the benefit of letting the market decide the gas price, but it could have significant consequences if implemented irrationally. On the other hand, simply raising the minimum base fee would have more predictable effects, but some folks prefer the free market to price resources. Adjusting the target gas per block would likely have similar advantages and drawbacks as adjusting constant “a” in the aforementioned exponential function of the backlog. Again, significantly more research and backtesting is required before we attempt an executable proposal, but we wanted to get the conversation started considering the disparity in ETH sequencer earnings between Arbitrum and other leading Ethereum L2s. Doubling down on this…

Arbitrum has more than twice as much TVL than any other rollup.

Regularly sees higher DEX volume than any other rollup.

Has a higher stablecoin market cap than any other rollup.

Uses just as much L2 native gas as Base, and more than Optimism.

More addresses interacting with dapps each day than any other rollup.

So while the fundamental activity of Arbitrum looks fantastic, we are still not bringing in nearly as much revenue as the competition. Maybe this is a bad thing, or maybe it is a good thing! But we believe it is worth highlighting the situation to the broader DAO on the forum.

Entropy Advisors’ View

Entropy Advisor’s opinion is that raising the minimum L2 base fee from 0.01 gwei to 0.02 gwei is the optimal path forward given the fact that we have seen it 5x higher in the past without experiencing any problems. It’s a small enough change that data could be collected and analyzed with more drastic changes being implemented later. It is also a relatively fast measure to implement barring the DAO voting process, so we could quickly begin accruing more ETH to the DAO treasury in the midst of heightened activity, and thus extending the DAOs runway and helping protect it against ARB price fluctuations. We feel this is the simplest way to increase DAO revenue without hurting dapps and users, but we look forward to the community’s feedback on this matter!

As a rough exercise, we applied various L2 minimum base fees via a Dune query to simulate what sequencer revenue would have been since Atlas went live on March 18th. The DAO would have profited an extra 427 ETH @ 0.02 gwei minimum base fee, 1760 ETH @ 0.05, and 4016 ETH @ 0.1. The nuances around Arbitrum’s fee mechanism likely render this backtest as a loose approximation, and we would like to see more thorough analysis brought forth from the broader community before we attempt to submit an executable proposal to the forum.

Call To Action

Other important things to consider when evaluating Arbitrum’s gas fee mechanism include:

  • Timeboost and whether or not it could remove the need for any change entirely
  • Experimentation occurring in other EVM implementations and what we can learn from it (both other L2s, client teams, and Ethereum researchers)
  • At what price (dollar denominated at various ETH prices) do users become sensitive to transaction fees?
    • Which use cases are driving transaction volume and gas consumption?
  • Which stakeholders in the Arbitrum ecosystem could be negatively impacted by any specific gas mechanism parameter changes and how? (dapps or “good” bots in particular)
  • What effect would higher demand for Blob space on Ethereum have on any changes made to Arbitrum’s gas pricing mechanism?
  • Is there anything being done by other VMs/L1s that could be applicable to Arbitrum’s gas fee mechanism? Additional research does not need to be exclusively within the realm of other L2s.
  • Almost certainly more to consider :slight_smile:

If this is a topic that gets a lot of people in the DAO excited, we think that next steps should be to seek input from the broader community (delegates, other token holders, researchers, OCL and other developers at the dapp layer, etc.) on what the optimal direction is in terms of mechanism changes, and to provide Chaos Labs from the ARDC with specific mechanism(s) to backtest and research further. Depending upon the results of that research, we can decide (next) next steps as a community. If there is interest in a working group call around this topic, please indicate your interest by participating in the comment section below.


Excellent update. GFX thinks the metrics since 4844 are not sustainable or desirable. Thank you for kicking off a discussion of how to improve revenue metrics.


Thank you a lot for this detailed study. It was easily digeastible even for a bovine.

I have a few comments, but would like to start with this one.

Why is this your preferred solution?
The way i see it, for sure is a “sensitive” thing to do. Doubles the amount without effectively impacting users as per the x5 example above.

But at this point: shouldn’t we make adjustment based on competition as well?

If we are constantly below the average costs in Base and OP (which for now are the ones we need to aim to in term of comparing metrics imho), wouldn’t be more desirable, business why, to try and create a model for which we always cost less than OP/Base by x%?
And to be clear I don’t know what would the practical implementation be, for example an agency monitoring data and just proposing new adjusted parameters every quarter for the dao to vote or what else.

I just know that the race to 0 is effectively a possibility, and that we should balance our ability to effectively go to 0, compared to competitors, without putting out all of the firepower that we have right now.
TX costs is, effectively, a weapon that we have. It doesn’t make sense to us it all now, and even just doubling gwei might be too conservative. There could be a merit to set it higher, and also lower than our competition.

NOTE: this only makes sense if we all, collectively, decide that is also time to start weaponizing this revenue. Which is a new can of worm to open, but should also not be treated as a taboo topic.


Thank you!

Taiko going live on mainnet on May 27 already showing that 4844 metrics aren’t sustainable, to your point.

Screenshot 2024-06-04 at 4.19.30 PM

But yes - the overarching goal here is to figure out revenue streams… with the sequencer being the lowest hanging fruit that we have today. We would like to learn more about when users become price sensitive to fees, with the added context of ARB incentives being spent by the DAO to attract users.

I am supportive of the proposal put forth by Entropy Advisors to explore potential adjustments to Arbitrum’s fee mechanism. By considering options such as increasing the minimum L2 base fee, fine-tuning the target gas per block, or carefully adjusting the rate of change to the base fee during congestion, Arbitrum may be able to optimize its revenue generation while still providing a competitive and attractive fee structure for users.

Arbitrum’s profitability has been lower than that of its closest competitors (Base, Optimism), which directly relates to the DAO’s decision to reduce fees (base fee down 90% and surplus fee removed) more than the cost savings from EIP-4844, a blunt tool that could have been more nuanced. This has resulted in a meaningfully higher decrease in gross profit per transaction for Arbitrum than its peers. In contrast, those peers only passed through a portion of the cost savings, which resulted in a healthy balance of meaningful profit growth without sacrificing transaction growth.

While Arbitrum transactions have increased by 200% post-upgrade, this growth is similar to prior transaction fee upgrades (e.g. Nitro) that had less significant cost benefits, and not meaningfully different than its competitors (in fact, worse than Base) who did not cut transaction fees anywhere near the same magnitude. This proves out that price elasticity, at least with the current user base and application set, is not high.

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Thank you for taking the time to put together a thoughtful response.

Do you happen to hold a view on which lever to pull i.e. per block gas target, L2 minimum base fee, or rate of change factor on the base fee during congestion?

To answer @JoJo question which is tangential, we want to tread very carefully here. The current environment on Arbitrum has currently live dapps happy with their costs, but if we change things too drastically we create an incentive for dapps to seek cheaper alternatives. This could be an orbit chain, but it could also be an OP Stack chain, Cosmos app-specific, or somewhere outside of the Arbtirum ecosystem. This is obviously not an outcome we want.

So this is why we tend to lean toward gradually raising the L2 minimum base fee. It’s been much higher before, leaves room for L1 blob space to get more expensive without hurting users/builders, and is rather simple to implement so we could begin bringing in more revenue rather quickly.

Another option could be to look at multidimensional gas pricing/EIPs being seriously considered by ETH researchers and going for something more novel. But maybe this is a long-term idea?

It’s also worth flagging this proposal, which seeks to loan the Arbitrum Foundation close to half of the DAO’s current ETH holdings to bootstrap the first BoLD validator. Considering we need to pay Proposers 3-4% on their 3600 ETH bond from the treasury each year, and the fact that we are bringing in so little ETH revenue, we don’t currently have a path to sustainably incentivize a decentralized group of validators / challengers.

I do believe L2s are a race to 0 on fees over the long-term, but at that point there should be 100m+ transactions occurring on L2s each day and a slim per transaction margin will result in large revenues. However, if we are handing out 10s of millions of ARB to incentivize activity TODAY, we believe we should be recouping more of that in ETH through transaction fees while we have the luxury of ARB incentives.

This is such a helpful and well-written breakdown!

If we were to compare Arbitrum activity when the base fee was 0.5 gwei with today’s activity at 0.01 gwei, how does it look? Was there significantly less activity before when the L2 base fee was higher?

I believe Timeboost introduces a bidding process that could potentially address the non-priority fees issue and change the first-come first-served mechanism that is currently live on Arbitrum. As far as I know, its release date remains TBD, so it might be relevant to consider eventually increasing the base fee and adapting accordingly as it gets closer to going live.

Ethereum’s fee mechanism for blobs is similar to EIP-1559 with a target of 3 blobs per block, if I recall correctly. Would you consider Arbitrum posting back call data if blob space on Ethereum becomes full and 1559 starts to kick in?

On a side note, I understand that we refer to that as sequencer revenue since it’s all integrated today, but I feel that in the longer term, this is more like execution fees/revenue. What do we think?

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Thank you, Entropy, for your thorough analysis on Arbitrum’s gas fees and sequencer revenue. Your post brings up some critical issues and potential strategies for addressing them.

Key Insights and Follow-Up Questions:

  1. Revenue Decline Post-Upgrades:
  • Insight: The ArbOS Atlas and EIP-4844 upgrades reduced key fees, benefiting users but significantly cutting the DAO’s revenue.
  • Question: How has this impacted user engagement and transaction volume? Are there any metrics showing increased satisfaction or adoption that justify the revenue loss? Should we consider raising the price of using Arb? Not clear to me that being the “cheapest” is really an important quality.
  1. Strategies from Competitors:
  • Insight: Base and Optimism generate more profit despite Arbitrum’s higher on-chain activity.
  • Question: What specific strategies have Base and Optimism used that could be adapted by Arbitrum? How do their gas pricing mechanisms differ? Something that I wonder could be the case is maybe Arbitrum has more financial users for whom pricing is a sensistive issue, where maybe (just conjecture) BASE has more consumer usage which isn’t so sensitive to fees?
  1. Proposed Revenue-Enhancing Solutions:
  • Insight: Raising the L2 minimum base fee, decreasing the target gas per block, and adjusting the backlog formula are suggested options.
  • Question: What are the predicted impacts of these changes on user retention and acquisition? Could a phased approach be tested to gauge reactions and adjust accordingly?
  1. Stakeholder Impact:
  • Insight: Any fee changes must consider all ecosystem participants, including dapps and users.
  • Question: Can we identify which stakeholders would be most affected by fee changes? Are there alternative incentives or support mechanisms to mitigate negative impacts?

Overall Thoughts:

Arbitrum’s strong position is evident through its high on-chain activity, TVL, and stablecoin market cap. However, the sustainability of its revenue model needs attention. Raising the L2 base fee seems like a prudent first step given its historical precedent and manageable impact.

A broader strategy should include comprehensive stakeholder engagement, rigorous backtesting of proposed changes, and potentially piloting new fee structures on a smaller scale before wider implementation.

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Thank you for taking the time to put together this analysis.

As shown by the multiple conversations on DAO spending and revenue generation, there is a strong interest in making the DAO operations sustainable in the long-term.

As Arbitrum leaves its start-up phase, this is a key question to answer.

It’s important to be cognizant that Arbitrum as a business is an L2, dependent on sequencer fees for revenue. Striking a balance between user acquisition / retention vs. revenue generation is important. And, we do believe that there’s a tipping point at which further reducing the cost of transactions delivers significantly negligible marginal users/transactions. We support experimenting with an increase in the minimum L2 base fee and closely monitoring its impact on the Arbitrum ecosystem.

In terms of transactions that happen in Arbitrum, we can broadly categorise them into the following:

  1. Spot DEX,

  2. Margin/perpetual DEX,

  3. Lending & Borrowing,

  4. Other DeFi transactions,

  5. NFTs, etc.

Intuitively, gas costs are far more critical for high-frequency market-making and arbitrage-style DEX transactions. In contrast, for other transaction types, factors such as liquidity, yields, and speculative elements (e.g., market volatility, memecoin trends) are significantly more influential. A slight difference in transaction costs is unlikely to have a substantial impact in these cases.

The experiment would help us to judge the % of higher-frequency transactions in the Arbitrum ecosystem, and their sensitivity to gas cost. If these flows constitute a significant portion of Arbitrum’s activity and are highly sensitive, it makes sense to keep the minimum L2 base fee low. We would also recommend looping in the DEX projects for their observations.

Here are some interesting data points we discovered:

  • The data on gas fees generated by Arbitrum contracts reveals that 7 out of the top 10 contracts by gas consumption are from DEXs, including Sushiswap, Uniswap, 1inch, Vela, GMX, and Gains. https://dune.com/codingtalent/arbitrum-transaction-and-gas-usage-by-projects.
  • Examining the last 90 days, the correlation between average transaction costs and the number of transactions across various L2 chains is negligible.
Blockchain Correlation
Arbitrum -0.582845
Base -0.748371
OP Mainnet -0.549256
Zora -0.186923

Hello everyone - please refer to the working proposal related to this topic, posted on 6/17/2024.

This is some insightful research. Definitely something for the DAO to review and consider options around, both tactically and more strategically as Arbitrum continues to scale.

I like the idea of monitoring / analyzing fees as dynamics change as well so we can make better decisions as variables change (network competition, layer 2/3 interactions, user needs, etc). Kudos guys.