Layer One: How the Avalanche Foundation is rethinking L1 economics

Welcome to Layer One: the newsletter and podcast on the intersection of crypto and the real world. Hosted by The Block's Kelvin Sparks and John Wu, President of Ava Labs, Layer One brings you inside the institutional conversations driving blockchain forward.

In our upcoming episode, we’ll be joined by Matias Antonio, CIO at the Avalanche Foundation, and Eric Lu, Lead Economist at the Avalanche Foundation, to talk about their research into network economics.

In this week's newsletter, we're taking a look at how L1 blockchains are capturing a disproportionately small share of the value flowing through them, and what a solution to that imbalance could look like.

How the Avalanche Foundation is aiming to rebalance the network’s economic architecture

In past Layer One newsletters, we’ve covered how the balance of value accrual has shifted heavily towards applications, rather than the blockchains they’re built on top of. For example, at its peak Pump.fun singlehandedly out-earned even some of the largest blockchains on daily fees. Matt Hougan, CIO of Bitwise, this week dubbed the phenomenon “revenue fever”; both applications and blockchains are increasingly being judged on how effectively they can drive real revenue, much like traditional companies.

Yet for the blockchains themselves, capturing the value that flows through them is a growing problem. As chains have scaled and become dramatically cheaper to use, the amount of economic activity they capture directly has not necessarily kept pace. In other words, increased network adoption has not translated neatly into higher native L1 token prices.

Capturing more of that value at the L1 level is a core mission of the Avalanche Foundation’s Matias Antonio and Eric Lu, our upcoming guests on Layer One. In their Economics Research Agenda, they outline the pressing need for Layer 1 chains to redesign mechanisms for measuring, capturing, and distributing onchain value.

Analyzing this flow of value is not just an academic exercise. The security of Layer 1 blockchains depends on maintaining a robust validator set through healthy economic incentives in the native token. As Antonio writes, “security in a proof-of-stake network is not something a protocol ships once; it is a cost paid continuously, and the credibility of that security depends on the economic weight behind the token doing the securing.”

Yet relying on token emissions alone to provide these incentives is a double-edged sword. In Avalanche’s case, Eric Lu describes overreliance on emission-based staking rewards as a fundamental flaw: dilution forces an “inflation tax” on token holders, and AVAX’s finite issuance budget means emissions cannot subsidize validator rewards indefinitely. The goal, then, is to design a new system that both reduces dilution and develops alternative sources of validator revenue.

Just this week, Ethereum researchers filed an EIP aimed at rebalancing that network's own staking economics. If passed, EIP-8363 would utilize a “tapered burn mechanism” to reduce the amount of validator rewards paid out as the total percentage of staked supply increases, effectively curbing ETH emissions as participation rises. This has led to debate among network participants, including ETH treasury firms who could see their revenue drop by more than half under the proposed system.

For the Avalanche Foundation, the challenge is ultimately one of alignment: finding a model that can sustainably pay validators for security, reward applications for generating activity, and ensure that some of the value created across the ecosystem ultimately accrues to AVAX.

This is just a brief snapshot of Antonio and Lu’s ongoing research. For an in-depth breakdown of how the Avalanche Foundation is rethinking L1 economics, and what this could mean for users, validators, and AVAX holders, catch them both on Layer One next week.

Podcast Preview: Matias Antonio and Eric Lu on the Avalanche Foundation's Economic Research Agenda

In the Headlines: The stories driving the conversation this week

• Bitcoin mining firm Keel has announced the “complete demolition” of its mining operations as it pivots to AI. CEO Ben Gangnon said that “miners spent years building up these huge energy portfolios” before realizing there was “much greater value to be had by converting those assets off into HPC and AI.” The recent decline in bitcoin’s price — down almost 50% year-over-year to $64,000 — has only strengthened the economic case for miners to make the switch.
• Vitalik Buterin outlined the priorities in the Ethereum Foundation’s roadmap, with privacy and quantum security front and center. In a post on X earlier this week, Buterin also advanced the “Lean Ethereum” vision — a multi-year effort to simplify and overhaul much of the network’s underlying architecture. Although this “Strawmap” stretches out to 2029, Buterin added that it’s an evolving document, subject to revision and expansion.
• The Avalanche Foundation received over 150 independent research proposals as part of its network economics grant program. Live since April, the initiative offers grants of up to $50,000 to researchers producing original work on cryptoasset valuation and validator economics. The first cohort of shortlisted applicants has now progressed to panel review to determine who will contribute to the Foundation’s efforts.

Top of the Charts: Layer 1 blockchain fees trending down overall, with some significant exceptions

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Layer One is brought to you in collaboration with Avalanche.