Profits to the protocol: the economic engine behind crypto’s network effects
Protocol economics align incentives and build mechanisms for sustained growth and operations
In traditional infrastructure, value flows in one direction: users pay for access, and centralized entities fund maintenance and upgrades (if it makes financial sense).
Crypto flips this model. Open protocols like Ethereum, Solana, and others are designed not only to operate, but to sustain and evolve themselves. They capture value from use and reinvest it natively, creating a feedback loop that funds their own improvement, rewards participants, and fuels network effects.
This idea — that “profits accrue to the protocol” — is more than just clever tokenomics. It’s a foundational design principle that helps explain crypto’s resilience, growth, and gravitational pull on developers and capital alike.
The protocol as self-sustaining infrastructure
Crypto protocols are unique in that they embed economic mechanisms at the base layer. Ethereum, for instance, collects transaction fees (some of which are burned via EIP-1559), making ETH both the fuel of the network and a deflationary asset.
This transforms what would otherwise be operational overhead into a source of strength: more activity means higher fees, which in turn means greater security for validators, more incentives for ecosystem participants, and a growing value proposition for holders.
Uniswap, as another example, collects swap fees directly within its smart contracts, and its governance token UNI gives holders a say in how these fees and treasury funds are deployed.
Protocol treasuries like those of Optimism and Arbitrum fund grants, public goods, and developer tooling — without relying on venture capital or advertising revenue. In effect, the protocol itself becomes both the service and its own investor.
This self-sustaining loop incentivizes a wide array of stakeholders:
- Users benefit from improving UX, lower costs, and broader app ecosystems
- Developers are drawn to growing networks with available grants and active users
- Token holders gain from value accrual and network expansion
- Validators/miners earn revenue in proportion to network usage
The result is a virtuous cycle: usage funds development, which improves the protocol, attracting more users.
Protocol economics in practice
Let’s look at some real data. As of early 2025, Ethereum consistently ranks among the top protocols in fee revenue — often generating over $10 million per day, according to CryptoFees.info. This is not just theoretical value. These fees directly pay validators, are partially burned (which can reduce ETH supply), and help secure the network.
Layer 1s and leading dApps have amassed sizable treasuries:
- Uniswap DAO holds over $2.5 billion in assets, including ETH and UNI
- Optimism’s treasury manages hundreds of millions earmarked for public goods and retroactive funding
- Lido, Aave, and Curve all operate with protocol-governed treasuries that fund ongoing development
In the traditional world, these functions are split across corporations, infrastructure providers, and public institutions.
AWS hosts applications, central banks manage monetary policy, and governments fund roads and bridges. Crypto collapses these roles into composable, transparent systems that can operate autonomously and upgrade themselves.
Moreover, protocol-driven funding supports areas where private capital hesitates. Tools like ethers.js, block explorers, open-source security audits, and educational platforms are often sustained by grants from DAOs rather than profit-seeking investors.
This is key: when the protocol profits, it can act in ways that mimic a public utility without being dependent on taxation or philanthropy.
Risks and trade-offs
Of course, this model isn’t perfect.
One concern is that protocols may prioritize fee generation over usability. High gas costs on Ethereum, particularly during bull markets, have priced out many users—hurting accessibility and pushing activity to cheaper alternatives. If profit becomes the dominant goal, user experience can suffer.
Governance is another critical weak point. Many protocol treasuries are governed by token holders — often dominated by whales or early investors. Without strong checks, these actors can steer funds toward self-serving initiatives, diluting the public good ethos.
Security is also at stake. When protocols amass significant value, they become high-value targets. Attackers are incentivized to exploit vulnerabilities not just for financial gain, but to disrupt networks and governance systems. The more profits a protocol accumulates, the more it must defend against both technical and social attacks.
Finally, there’s a risk of creating perverse incentives. If too much emphasis is placed on token value or protocol fees, it can encourage short-termism — rushing features to market, encouraging speculation, or over-incentivizing growth at the cost of decentralization.
The evolution: Layer 2s and fractured value capture
Layer 2 solutions are changing how value accrues in the crypto stack.
Take rollups like Optimism, Arbitrum, and Base. These networks handle transactions off-chain and settle periodically to Ethereum, dramatically reducing costs and increasing throughput. While they still pay Ethereum for security, most transaction fees are collected at the L2 layer.
This raises an important question: where do the profits go?
Daniel McGlynn
Many rollups now function as quasi-sovereign protocols. They accrue their own fees, govern their own treasuries, and even issue their own tokens. This fragments the once-unified value accrual of Ethereum, but it also opens new possibilities: localized economic loops that can fund specialized use cases or optimize for specific communities.
For example:
- Optimism’s Retroactive Public Goods Funding distributes rewards to projects based on impact, not speculation.
- Base, launched by Coinbase, seeks to funnel value into the broader Ethereum ecosystem while also advancing its own brand and products.
The long-term challenge is maintaining alignment. If L2s capture most of the value but rely on L1 for security, how do we ensure sustainable incentives for both layers? The profit-to-the-protocol model must now evolve to account for a multi-layered, multi-stakeholder world.
A new economic primitive
“Profits to the protocol” is a new economic primitive. It blurs the line between infrastructure and business model, between public goods and private gain.
By embedding value capture directly into the base layer, crypto protocols create sustainable, incentive-aligned systems that can evolve, grow, and resist obsolescence. This design doesn’t eliminate risk or inefficiency, but it offers a path toward self-reinforcing ecosystems that reward those who build and use them.
As the architecture of crypto continues to shift — with rollups, restaking, and modular chains — the model will need to adapt. But the core insight remains powerful: protocols that profit can outlast, out-innovate, and outmaneuver those that don’t.
And in a world increasingly built on code, the ability for code to fund its own future may be the most revolutionary concept of all.