Author: Castle Labs Research

Compiled by: Deep Tide TechFlow

Deep Tide Guide: On-chain applications are making a fortune, but the chains themselves are becoming poorer, and simply selling block space can no longer support valuations. This article dissects the latest turns of Arbitrum, Polygon, MegaETH, and Sophon, helping you assess which chains are truly putting ecological value back into their pockets.

Selling block space is no longer a defensible business for blockchains.

For any blockchain, the core business is selling "block space." However, this service is easily replicable and does not constitute differentiation. Almost every chain offers the same thing, leaving liquidity as the only remaining differentiating factor in discussions. Chains with mature ecosystems and liquidity attract more builders, which in turn increases block space usage. This is the simple flywheel that drives blockchain businesses.

With technological advancements in the industry, block space has become cheaper; even as builders and usage increase, its contribution to chain income is minimal. As a result, the gap between chain income and application income continues to widen, making it difficult for chains to sustain their valuations.

We discussed this topic in detail in our latest report, "Verticalization Theme: How Blockchain Revenue Models are Evolving." The report explores how vertical chains like Hyperliquid maintain exposure to the entire ecosystem and also mentions other chains such as Arbitrum (Timeboost), MegaETH (USDm buyback flywheel), and CEX chain expansion revenue sources.

This article serves as a follow-up to that report, focusing on the latest developments in this category: more chains are addressing the growing gap between on-chain fees and application fees, attempting to internalize more value generated by the ecosystem.

We categorize the chains discussed into two types:

Eco-expansion: Including chains like Arbitrum and Polygon. The Arbitrum Stack has grown and is currently used by chains like Robinhood; Polygon is becoming a payment chain.

Product expansion: Covering chains like MegaETH and Sophon, which are focusing on internally developed applications.

Ecological System Expansion

One of the main ways for chains to increase revenue is through ecological expansion.

Chains like Optimism pioneered this model by expanding ecosystems through Superchain: it provides OP Stack to different Layer 2 (L2) networks and charges the greater of either 15% of net profits on-chain or 2.5% of L2 revenue. This model has been quite successful and is currently adopted by multiple L2s. However, after Base left Superchain in February this year, Optimism's revenue plummeted. Base had contributed to over 90% of Superchain's revenue, far exceeding Optimism’s own.

Image: Source: Hex (Superchain revenue dashboard)

In the weeks leading up to Base's departure, OP token holders had also approved a proposal to use 50% of Optimism Superchain's revenue for OP buybacks. However, after losing most of the revenue in February, these buybacks can no longer accumulate sufficient value for the tokens.

While cracks appeared in Optimism's model, this does not necessarily mean that ecological expansion itself is a bad choice. Superchain is still used by multiple networks and continues to grow as a Stack, adopted by chains like Celo, Ink, and Unichain.

Similar to Optimism, Arbitrum has also built its own Stack, named Arbitrum Stack, which is a perfect example of betting on a chain Stack to yield rich returns. Last month, Robinhood launched its own L2 using the Arbitrum Stack, which has generated approximately 4 million dollars in revenue, bringing in about 390,000 dollars to Arbitrum at a 90/10 split.

Aside from Robinhood, the real-world asset chain Plume Network is also using the Arbitrum Stack, but so far, Robinhood is the biggest contributor to its Stack growth. Currently, the total locked value (TVL) of this Stack exceeds 800 million dollars. Moreover, Robinhood's deployment has expanded the territory of tokenized stocks within the Arbitrum ecosystem; this chain focuses on tokenizing stocks on-chain, with a scale of 25 million dollars. Launched just a month ago, Robinhood Chain's TVL is already half of Arbitrum's 1.63 billion dollars.

While expanding the ecosystem, Arbitrum has also launched Timeboost: users can pay higher fees for priority transactions. Since its launch in April 2025, Timeboost has contributed over 7.7 million dollars to the treasury.

After earning income, Arbitrum puts it to use. The Arbitrum DAO treasury is involved in several on-chain and off-chain deployments that earn yields. Out of the 90 million dollars net deployment, it has generated 4 million dollars in interest. Many DAOs and treasuries can learn from this strategy, as most are stuck holding native tokens, whose values drop over time, affecting treasury sustainability.

Despite Offchain Labs, the team behind Arbitrum, announcing a buyback plan last year, we still do not see a connection being established between the success of Arbitrum Stack and the ARB token. Continuous token emissions and unlocks have led to a decline in ARB's value.

Another chain focused on ecological expansion is Polygon, which aims to position itself as a payment chain for fintech and general scenarios.

This positioning makes a lot of sense for Polygon, as giants like Stripe currently route stablecoin payments through it, and Mastercard uses it to settle merchant payments while supporting its Agent Pay product. Products like Revolut, Paxos, and Cash App also utilize Polygon's infrastructure. They prefer Polygon because its high throughput and ultra-low fees reduce interaction costs. Additionally, Polygon is promoting enterprise-level control, making it a more favorable choice for large fintech companies.

To date, Polygon has handled approximately 2.9 trillion dollars in stablecoin transaction volume, with its stablecoin supply currently at 3 billion dollars, growing by over 80% since 2025.

While the chain's payment usage is increasing, most of its revenue still comes from the Polymarket deployment. Faced with this concentration and potential single point of failure risk, Polygon has been pushing to expand other sources of income.

Image: Source: Dune Analytics (hildobby Gas)

Similar to Arbitrum, Polygon's allocation has not reflected in the accumulated value of its tokens. Due to continuous emissions, the token's performance has been poor. Even though the chain consistently generates substantial revenue and frequently ranks in the top three for chain income and token buybacks, this cannot offset the ongoing selling pressure faced by the tokens.

While eco-expansion is beneficial, some chains are addressing income issues by owning on-chain generated exposure more directly and building products directly on their infrastructure.

These are exactly what we will explore in the next section: products.

Product Expansion

Chains are adopting a newer approach to address the lack of linkage between growing application fees and chain fees by vertically integrating, that is, building applications themselves.

Applications accumulate a significant amount of fees, but these do not trickle down to the chain level, which is an issue faced by most chains.

Let's look at the comparison between application fees and chain fees for different chains over the past 30 days: the value accumulated from chain fees is much lower, while application income continues to grow.

This is to be expected, as mentioned at the beginning of this article, chain fees have been declining over time. Chains were originally conceived as infrastructure providers: a healthy chain should have high application fees and low chain fees, making it an efficient deployment chain. However, without fee income, it is difficult for chains to maintain their valuation, token economic models, and sustainable operations.

This is why newer chains like MegaETH and Sophon, and even older chains like Sei, are beginning to turn towards becoming application builders themselves to potentially internalize those revenues instead of letting them flow to third-party applications.

MegaETH is relatively new and has been addressing the gap between application fees and on-chain exposure. To this end, the team has refocused on building applications on its chain while still supporting OMEGA applications (i.e., applications that can only be built on MegaETH due to its ultra-low latency and high throughput). This marks a significant turn from its initial horizontal eco-expansion path.

"We are shifting the energy that was originally lent to third-party builders towards developing our first-party applications: consumer applications built directly for the people we want to serve." — Shuyao Kong of MegaETH

Another effort by the MegaETH team is to capture the value generated by on-chain stablecoins. They launched USDm (MegaETH USD), a white-label stablecoin launched in collaboration with Ethena, with funds deposited into the BlackRock BUIDL fund, bringing yields close to SOFR for the stablecoin supply on-chain.

Based on the current supply of 18 million dollars, and with SOFR at approximately 3.6%, it could generate 650,000 dollars annually for MegaETH buybacks and burns. However, this income source heavily depends on ecological success; the stablecoin must be actually used. Currently, due to declining on-chain usage, the supply of USDm has dropped by over 95% from its peak of about 600 million dollars in May this year.

Despite the team's active efforts to increase chain income, these initiatives have not been very effective, as the chain faces challenges in both adoption and token price. Apart from issues with communication, limited ecosystem, and hesitancy in launching certain aspects, one reason for the sharp drop in MegaETH usage is the lack of proactive incentive programs capable of attracting liquidity. Its competitor, Monad, is fully committed to doing this and has seen results, accumulating over 400 million dollars in TVL just last month.

Another chain focusing on internally developed applications is Sophon. It has shut down its chain operations and transformed into an active builder on Base chain. This is different from MegaETH, as Sophon did not find any adoption on its chain and thus decided to shut down and pivot as a builder. The first application they are developing is a crypto card called Pyre.

Like other chains, its token price performances have been disappointing due to low chain adoption (now shut down) and the failure of its "entertainment and consumer applications" narrative, which failed to attract many builders in the field.

The crypto application space is vast, with ample building opportunities and a large audience, making these chains' transformations reasonable. Recent applications such as FWA, Fomo, as well as the most well-known Pumpfun and Polymarket, are some of the best examples of the potential of this path.

Conclusion

Hundreds of chains offer almost the same thing: block space. Unless liquidity follows, it is hard for them to distinguish themselves from one another.

This liquidity moat works effectively for existing chains, continuously attracting more builders and accumulating on-chain fees. But for new chains, the dilemma remains. To attract liquidity, they must provide incentives. Once incentives diminish, liquidity might leave, as seen with MegaETH.

While liquidity is a differentiating factor, it is not enough to support the current high valuation multiples of blockchains, as the fees they earn are insufficient.

The situation is changing. Chains are becoming aware of this and are actively pushing themselves beyond being just chains. They are either expanding eco-products or building applications themselves to add value to their ecosystems. Arbitrum, MegaETH, and others are examples of this.

This can be seen as a broader return to utility.

The bottom line for any network is having users and usage rates.

For years, chains have been built around this, benefiting from generous incentive programs and buying loyalty from participants. In fact, chains need applications more than the other way around.

Ultimately, chains are working to resolve this principal-agent dilemma by vertically integrating and building applications themselves.

Chains are becoming more than just chains.

Will this work?

The competition has already begun.