Crypto's Latest Tokenomic Innovation: the Sharing of Gas Fees with Developers

Connor Lovely -

Introducing SGD (Sharing of Gas Fees with Developers)

In the complex world of blockchain tokenomics, it's relatively rare for a "new" idea or mechanism to be presented, gain traction, and be implemented by multiple chains at the same time. The concept we'll discuss here is called SGD (sharing of gas fees with developers) and it's being explored/implemented by protocols like Ethereum, IoTeX, NEAR, Fantom, and Canto.

SGD is the concept of sharing a portion of the gas fees generated by smart contract interactions with the developer who created the smart contract. Also called CSR (contract secured revenue), gas monetization, or fee-splitting, this mechanism is designed to incentivize smart contract creation and provide a clearer path to monetization for developers. Across the blockchains it is live on, it has generated ~$2.5M in rewards for smart contract developers (the vast majority of which can be attributed to NEAR as first-mover). While this doesn't currently represent a massive dollar amount for developers, it's important to remember that this concept is relatively new and hasn't even been implemented by all of the chains it has been approved on or assessed by.

History of SGD

SGD was first implemented by NEAR as a default part of their mainnet launch in April of 2020. SGD stayed relatively unexplored by other protocols until January of 2023, when Canto pushed it live on their chain after the approval of CIP-001. Zak Cole was a co-author on that Canto improvement proposal and then helped bring the idea over to the Ethereum ecosystem just a few months later (early May 2023) as a co-author of EIP-6968. Weeks later (late May 2023), Fantom debuted a beta SGD program and IoTeX voted to approve IIP-15, coining the term SGD and extending the concept's reach to yet another blockchain.

Differences in SGD implementation across blockchains

Across the chains discussed here that have voted on or approved SGD, the criteria for smart contract approval ranges from nothing (totally permissionless) to a six-figure transaction count, multi-month liveness period, and Foundation approval. The percentage of a gas fee that is shared with eligible smart contracts ranges from 15%-30%.

Notably, Canto uses NFTs to "represent the right to claim a contract's CSR" (contract secured revenue). Over time, the revenue generated from SGD accumulates and can be withdrawn by the owner (using the associated NFT) whenever they choose. The usage of NFTs for SGD makes this new revenue stream composable, allowing for trading, fractionalization, wrapping, staking etc.
See the chart below for more detail on the differences in SGD implementation across chains.

Economic implications of SGD

While the concept of SGD is still too new for its economic implications and impact to be fully understood and judged, its positive benefits are relatively clear: a small (but potentially impactful) financial incentive to smart contract developers for dapps they build that are used, positively correlated with the amount of dapp usage. All else equal, SGD should incentivize additional smart contract development on chains it is deployed on.

However, any change in tokenomics or financial incentives will inevitably open the door to new vectors of gaming or attack by "bad" actors. The most common critiques of SGD I've seen fall into one of three buckets:

  • The construction of dapps and smart contracts that are purposefully not gas-optimized so as to generate additional SGD "revenue" for a developer
  • Bot or spam transactions through SGD-eligible dapps in order to generate SGD "revenue"
  • Developers who hack or phish asset owners and earn SGD from subsequent transactions they carry out

The first and second critiques are addressed in the table below, which provides a 2x2 framework of "good" and "bad" developers building "valuable" and "valueless" dapps and the SGD-related consequences of each. The TL;DR of this table is that Foundation approval could mitigate any "bad" or runaway developer actions as SGD eligibility could be revoked at any time. For chains that are more exposed to attempted SGD arbitrage (e.g. where SGD is permissionless), free market forces would likely limit the amount of SGD to "bad" developers over time as an open-source environment allows "valuable", non-gas optimized contracts to be forked and improved.

The third critique above is not an SGD-related problem. It is a modern-day, crypto problem. In nearly any hacking or phishing situation, the dollar value of SGD a bad actor could earn would pale in comparison to the potential gains from asset thievery.

IoTeX and SGD (IIP-15)

IoTeX is a Web3 infrastructure platform connecting smart devices and real-world data to blockchains. With the launch of W3bstream, the world's first off-chain compute framework for smart devices and real-world data, IoTeX is the leading Decentralized Physical Infrastructure Network (DePIN) technology provider. Founded in 2017 and backed by a global team of 60+ research scientists and engineers, IoTeX will combine its L1 EVM-compatible blockchain, off-chain compute, and open hardware to connect billions of smart devices, machines, sensors and dApps across the physical and digital world.

IoTeX Foundation proposed IIP-15 to incentivize additional smart contract development and provide an interesting new funding source for smart contract developers. IIP-15 was approved by community vote on May 31, 2023 and is slated to go live with the upcoming activation of IoTeX Core Release 1.12.

IoTeX's implementation of SGD via IIP-15 offers a generous 30% of gas fees to eligible smart contracts (and their developers). To become eligible for SGD, smart contracts must have 100k transactions, at least 1 month of liveness, and Foundation approval. In the next few weeks, IoTeX Foundation will release a website where interested developers can submit a form to apply for SGD.

In addition to the SGD benefits laid out in IIP-15, IoTeX is excited to offer several additional incentives for developers building on IoTeX (subject to Foundation approval), such as:

Conclusion

IoTeX believes SGD is an interesting, potentially revolutionary development in blockchain tokenomics that will have a positive impact on the number and quality of dapps being built in Web3. We're proud to support the SGD movement begun by NEAR in 2020 and recently popularized by Ethereum, Fantom, and Canto and will remain on the cutting edge of tokenomic innovation in the years to come. Without thoughtfully constructed and executed experimentation on tokenomic design, no meaningful innovation will occur. The sharing of gas fees with developers represents just the latest thoughtful experiment in Web3 and we couldn't be happier to be a part of it.