Selling Block Space is No Longer Profitable: Arbitrum and MegaETH Shift Focus to Applications

Author: Castle Labs Research

Compiled by: Deep Tide TechFlow

Deep Tide Introduction: On-chain applications are making a fortune, while the chains themselves are becoming poorer; simply selling block space can no longer support their valuations. This article dissects the latest shifts of Arbitrum, Polygon, MegaETH, and Sophon, helping you determine which chains are truly internalizing ecological value.

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, and the only remaining differentiating factor in discussions is "liquidity." Chains with established ecosystems and liquidity attract more builders, thereby increasing block space usage. This is the simple flywheel of blockchain business operations.

As industry technology advances, block space becomes cheaper; even with more builders and usage, its contribution to chain revenue is minimal. The result is an ever-widening gap between chain revenue and application revenue, making it difficult for chains to sustain their valuations.

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

This article is 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:

Ecosystem Expansion: Including chains like Arbitrum and Polygon. The Arbitrum Stack has grown significantly 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.

Ecosystem Expansion {#article-toc-33270-2}

One of the main ways chains increase revenue is through ecosystem expansion.

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

Figure: Source: Hex (Superchain Revenue Dashboard)

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

Although cracks have appeared in the Optimism model, this does not necessarily mean that ecosystem expansion itself is a bad choice. Superchain is still used by multiple networks and is a growing Stack, adopted by chains like Celo, Ink, and Unichain.

Similar to Optimism, Arbitrum has also built its own Stack, called Arbitrum Stack, which is a perfect example of betting on the chain Stack to bring substantial returns. Last month, Robinhood launched its own L2 using Arbitrum Stack, generating approximately $4 million in revenue to date, with a 90/10 split, bringing Arbitrum approximately $390,000.

In addition to Robinhood, the real-world asset chain Plume Network is also using Arbitrum Stack, but so far, Robinhood has been the largest contributor to its Stack growth. Currently, the total value locked (TVL) of this Stack exceeds $800 million. Additionally, Robinhood's deployment has expanded the landscape of tokenized stocks within the Arbitrum ecosystem: this chain focuses on tokenizing stocks on-chain, with a scale of $25 million. Within just one month of launch, Robinhood Chain's TVL is already half of Arbitrum's $1.63 billion.

While expanding its 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 to the treasury.

After earning revenue, Arbitrum will put it to use. The Arbitrum DAO treasury has multiple on-chain and off-chain deployments to earn yields. Of the $90 million in net deployments, it has generated $4 million in interest. Many DAOs and treasuries can learn from this strategy, as most are stuck holding native tokens, which decline over time, affecting treasury sustainability.

Despite the team behind Arbitrum, Offchain Labs, announcing a buyback plan last year, we have yet to see a connection between the success of Arbitrum Stack and the ARB token. Due to ongoing token emissions and unlocks, the value of ARB continues to decline.

Another chain focusing on ecosystem expansion is Polygon, which aims to be a payment chain for fintech and general scenarios.

This positioning makes sense for Polygon, as giants like Stripe currently route stablecoin payments through it, and Mastercard uses it to settle merchant payments and support 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 keep interaction costs low. Additionally, Polygon is advancing enterprise-level controls, making it easier to become the choice for large fintech companies.

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

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

Figure: Source: Dune Analytics (hildobby Gas)

Similar to Arbitrum, Polygon's distribution has not reflected in its token accumulation value. Due to ongoing emissions, the token has performed poorly. Despite the chain consistently generating substantial revenue, often ranking among the top three for chain revenue and token buybacks, this cannot offset the ongoing selling pressure faced by the token.

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

These are the products we will explore in the next section.

Product Expansion {#article-toc-33270-3}

Chains are adopting a newer approach to address the lack of linkage between application fee growth and chain fees, which is verticalization, i.e., building applications themselves.

Applications accumulate substantial fees but do not pass them down to the chain level, which is a problem faced by most chains.

Let's look at the comparison of application fees and chain fees across different chains over the past 30 days: the value accumulated from chain fees is much less, while application revenue continues to grow.

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

This is why newer chains like MegaETH, Sophon, and even older chains like Sei are beginning to pivot towards becoming application builders themselves, potentially internalizing these revenues rather than letting them flow to third-party applications.

MegaETH has not been around long 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 shift from its initial horizontal ecosystem expansion path.

"We are shifting our energy from lending to third-party builders to developing first-party applications: consumer-grade applications built directly by us for the audience 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 developed in partnership with Ethena, with funds deposited into the BlackRock BUIDL fund, bringing yields close to SOFR for on-chain stablecoin supply.

Based on the current supply of $18 million, with SOFR at approximately 3.6%, it could generate $650,000 annually for MegaETH buybacks and burns. However, this revenue source is highly dependent on ecosystem success, and the stablecoin must be actively used. Currently, due to declining on-chain usage, the supply of USDm has dropped by over 95% from its peak of approximately $600 million in May this year.

Despite the team's active efforts to increase chain revenue, these initiatives have had limited success, and the chain faces challenges in adoption and token price. Besides communication issues, limited ecosystem, and hesitations in launching certain aspects, one reason for MegaETH's sharp decline in usage is the lack of proactive incentive programs to attract liquidity. Its competitor Monad is fully focused on this and has seen results, accumulating over $400 million in TVL just last month.

Another chain focusing on self-developed applications is Sophon. It has shut down chain operations and turned into an active builder on the Base chain. This differs from MegaETH, as Sophon did not find any adoption on its own chain, so it decided to shut down and pivot to becoming a builder. The first application they are developing is the crypto card Pyre.

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

The crypto application space is vast, with many building opportunities and a large audience, making these chains' transformations reasonable. Recent applications like FWA, Fomo, and the most well-known Pumpfun and Polymarket are the best examples of what this path could yield.

Conclusion {#article-toc-33270-4}

Hundreds of chains offer almost the same thing: block space. Unless liquidity follows, it is difficult for them to differentiate from each other.

This liquidity moat works for existing chains, as they continue to attract more builders and accumulate on-chain fees. But for new chains, the dilemma remains. To attract liquidity, they must provide incentives. Once incentives diminish, liquidity may leave, as seen with MegaETH.

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

The situation is changing. Chains are realizing this and are actively pushing themselves beyond being mere chains. They are either expanding ecosystem 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 practicality.

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

For years, chains have built around this, benefiting from high incentive programs and buying participants' loyalty. 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.

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