Vertical Integration: The Missing Link in L1 Value Creation

(This article is the first of a series)

Sonic is entering a new phase focused on measurable value creation. Instead of following the traditional L1 playbook of subsidizing broad ecosystem growth that drives activity but fails to translate into durable economic adoption, Sonic is evolving to prioritize integrated consumer-facing products and infrastructure designed to directly drive adoption, usage, and sustainable growth for the S token.

Rather than presenting Sonic as another source of blockspace, we are evolving Sonic into an ecosystem where core infrastructure, applications, and liquidity are intentionally aligned around reinforcing the S token’s economics. This alignment is designed to ensure that usage, liquidity, and incentives translate directly into sustained demand for the S token. Products built within this model will be specifically designed to increase S token utility.

Sonic remains open and permissionless for developers, but we're no longer relying solely on external teams to drive value creation. We're building critical economic infrastructure ourselves, particularly where token utility, liquidity, and usage converge, while welcoming all builders who genuinely strengthen, rather than extract from, the S token ecosystem.

Now that we have established Sonic as the “fastest, cheapest, most scalable decentralized Layer 1 EVM chain”, the next chapter is all about leveraging this technology for the S token and turning network performance into measurable, long-term value for users, builders, and token holders.

The Limits of the “Gas Fee Only” Model

For most Layer 1 blockchains, the core economic promise has been simple: more users lead to more transactions, higher fees, and stronger native tokens. In theory, adoption should translate directly into value.

However, satisfying the “gas fees revenue” theory is simply not enough, especially given competitive transaction-fee compression.

Yes, burns should remain a foundational programmatic element, but Layer 1 chains can no longer rely on gas fees as their sole source of value capture. As competition intensifies, transaction fees alone are no longer sufficient to sustain value capture against blockchains whose native tokens encompass business fundamentals of advanced technology platforms, rather than functioning purely as governance or gas tokens. This is why the next chapter of Layer 1 evolution is not just about scalability. It is about vertical integration: a protocol’s ability to own, internalize, and monetize its most important economic activities.

Most L1s still rely primarily on transaction fees for value accrual, assuming that enough adoption will naturally support the token.

Even chains that host category-defining applications often fail to capture meaningful value at the base layer. A clear example is Polymarket on Polygon, one of the most prominent prediction platforms in the world, attracting a blockchain’s ideal retail and consumer-based adoption, yet this success has not translated into fair, sustained value accrual for the Polygon gas token. Polymarket’s subsequent migration to its own Polygon CDK chain, along with signals that it plans to launch its own token, illustrates the value leakage problem this model creates.

A realistic example:

External DEX: Generates $2M annual revenue → Chain receives $15K in gas fees (0.75%) → $1.985M exits to external team
Sonic-integrated DEX: Generates $2M annual revenue → Foundation captures 100% → Reinvested into S token

That $1.985M difference, multiplied across multiple integrated applications, compounds into liquidity depth, strategic partnerships, infrastructure improvements, and developer talent.

This pattern repeats across the industry, where applications retain most of the economic upside of their own success, not the gas token of the chain on which they are deployed.

For Sonic, avoiding this trap is now a core priority.

Blockspace Is Becoming a Commodity

As scaling technology advances, blockspace is no longer scarce. Rollups, alternative L1s, modular architectures, and high-throughput designs have created a structural surplus. Moreover, most end users care very little about “decentralization” as an abstract principle, prioritizing performance, low cost, and security instead. This is reflected in the strong user retention achieved by fully centralized or highly permissioned blockchains.

This leads to three long-term consequences.

Fee Compression: Chains compete by lowering fees, which reduces protocol revenue.
Liquidity Mobility: Users and capital move freely between ecosystems.
Rapid Imitation: Technical advantages are quickly replicated by competitors.

Infrastructure differentiation is becoming increasingly fragile. In such an environment, relying on transaction demand alone is unsustainable. Vertical integration is the structural response to blockspace commoditization, and it is central to Sonic’s long-term architecture.

How Vertically Integrated Chains Capture Value

Vertically integrated ecosystems control not only infrastructure, but also applications that play a central role in driving usage and economic activity across the network. They do not rely on independent teams to route value back to the protocol. Value capture is embedded by design.

Two examples illustrate this approach.

Binance Smart Chain benefits from direct integration with Binance's centralized exchange, where trading volume and user deposits are routed to BSC via native bridges and liquidity incentives. This vertical control ensures that a meaningful share of on-chain activity accrues to BNB, rather than leaking to competing tokens or external platforms.

Similarly, Hyperliquid demonstrates this model by design: their perpetual DEX IS the chain. Every trade, liquidation, and fee directly strengthens HYPE because the application and infrastructure are inseparable. Users cannot access Hyperliquid's core product without participating in the token ecosystem - this is vertical integration in practice.

Over the past cycle, we have learned very important takeaways from building a blockchain.

Even if you have the most successful, globally adopted, retail-friendly application (Polymarket on Polygon), the value does not transfer to the native gas token of the chain on which the application is launched. The value is purely directed to the application, and can only be used by that application for its own benefit. The L1 or L2 can only benefit in either short-term narrative traction, gas fee burn, or equity investment for an ownership stake (which can later be sold to buy back the native token). There is no direct correlation of value.
If you have an integrated application with revenue embedded (beyond standard gas fee burn), it gives your chain and token a legitimate use case, which can scale well beyond transaction fees (Hyperliquid).

Sonic’s renewed approach is informed by these learnings, ensuring that core economic activity remains structurally tied to the network rather than outsourced to disconnected layers.

Rethinking The Blockchain <> Application Relationship

Independent application teams are not misaligned with Layer 1s because of bad intentions; the misalignment is structural. They are misaligned by nature.

Most teams behave rationally, optimizing for the sustainability of their own token and product, often by maximizing revenue and long-term viability for their own ecosystem. As a result, even highly successful applications are designed to internalize value to their own token rather than distribute it back to the native token of the chain on which they are deployed.

Currently, there is minimal structural incentive for applications to favor a chain’s native gas token over their own. From an application’s perspective, prioritizing its native token is the rational choice because it directly aligns with its financial incentives. Applications are not obligated to support or promote the underlying chain’s gas token, and typically lack a meaningful reason to prioritize it beyond potentially pairing it with their own token for liquidity purposes.

Blockchains operate under a fundamentally different mandate: they exist to strengthen the base layer that enables all smart contract execution.

Their role is to demonstrate the chain’s capabilities, bootstrap core use cases, attract durable liquidity, and strengthen the base asset. Unlike application teams, foundations are incentivized around system-wide outcomes rather than isolated or application-specific success.

At Sonic, we are refocusing on building and coordinating flagship primitives that will reinforce the long-term strength of the S token and ensure value flows back to S.

How does Fee Monetization fit into this?

The notion that Fee Monetization only works if the S token price is performing well is a misnomer. This assumption often frames Fee Monetization as a speculative mechanism rather than a product tool.

By design, the core use case of Fee Monetization is the ability for an application to recycle gas fees to bootstrap a user’s initial onboarding and overall user experience.

While Fee Monetization can create an additional revenue stream for developers, this is only meaningful if selling S tokens provides more value than the application’s own underlying economics. In such cases, the issue lies not with Fee Monetization, but with the application’s core business model.

The revenue stream from FeeM is not meant to supplement their application’s core business model. It is meant to be complementary and used as a tool.

Here is a Sonic example:

You subsidize user gas to remove friction.
Sonic’s fee rebate returns most of that subsidy back to you.
Your real cost becomes a micro-CAC (consumer acquisition cost) of 0.001 dollars.
If users generate more than one cent in total value, you profit.

The Fee Monetization tool can not replace a failed application business model. The tool only works if your application has its own value and revenue streams and can be scaled/amplified.

On Sonic’s integrated applications, all deployed integrated app FeeM contracts will do exactly this, setting a clear precedent for how abstracted, low-friction user experiences should function across the ecosystem.

How Sonic Will Execute Vertical Integration: An Integrated Application Layer

Sonic’s approach to vertical integration is centered on building and owning core economic primitives rather than outsourcing value creation.

1. Application Team Acquisitions
Sonic will acquire and integrate high-quality application teams from across the industry to develop foundational ecosystem primitives in-house.

2. Chain-Powered Integrated Applications
Core products across trading, credit, payments, settlement, and risk markets will be built as integrated primitives on Sonic. Their design ensures that activity and fees are routed back to the Sonic S token rather than being captured by isolated applications.

3. Revenue-Centric Value Creation
Sonic is designing its ecosystem so that major revenue streams, trading fees, protocol income, and application revenues flow back into the S token.

How Foundation Ownership Captures Value:
When Sonic partners with core applications, revenue dynamics change fundamentally. Unlike externally operated applications, where profits primarily accrue to private teams or separate tokens, revenues from integrated applications flow directly back to the S token.

Combined with gas demand from increased usage, this dual capture ensures application success, directly strengthening the ecosystem and S token holders, rather than diverting to external shareholders.

Sonic Labs is pursuing integrated “chain-owned” primitives to capture all scalable revenue sources on Sonic and direct value to the S token.

Some of the DeFi primitives we are evaluating for strategic ownership, partnership, and integration include core trading infrastructure, battle-tested lending, capital efficient liquidity, scalable stablecoins, staking infrastructure, and more.

Vertical Integration Is No Longer Optional

The introduction of this renewed vertical integration strategy will ensure that economic activity on Sonic compounds inward rather than leaking outward. As a result, reliance on extractive grant farming, short-term airdrop incentives, and low-ROI programs is being phased out. Going forward, every S token allocated is expected to deliver measurable value back to the S ecosystem.

Speculative “upside” for a chain’s native gas token from incentivizing external ecosystem tokens and drawing attention away from S does not work.

As blockspace becomes cheaper and more abundant, infrastructure alone is no longer enough. The next generation of leading chains will be defined by strong economic coordination, not just low fees, high TPS, and scalability. The focus needs to shift to the native S token as the value driver.

Sonic’s renewed internal roadmap reflects this philosophy by building core primitives natively so their success compounds across the network. In a commoditized landscape, vertical integration is what separates networks that merely host activity from those that truly own it.

Significant developments are underway, and we look forward to providing updates and demonstrating our progress through continued releases to recenter our ecosystem around the S token.

So…“wen buybacks?”

This is a natural question, and the answer is directly tied to everything above. Vertical integration isn't just a strategy for ecosystem growth. It's the engine that allows Sonic Labs to build revenue into the S token economy beyond a Layer 1 blockchain limited “gas fee” model.

As these revenue streams build, it will allow the Labs team to execute buybacks at sustainable rates.

The key difference from how other chains approach buybacks: ours aren't funded by treasury drawdowns or short-term incentive reallocation. They will be funded by real protocol revenue from integrated primitives built, partnered, or acquired to serve the Sonic ecosystem.

As these primitives scale, so does the buy pressure on S. The buyback mechanism activates as revenue from integrated primitives comes online and scales with it. Those who support these integrated apps ultimately compound their support for the overall success of the S token.

This is the architecture for a more sustainable L1.

These integrated products are part of a unified vision to close the gap between Sonic’s groundbreaking technology and a go-to-market business focused on the S token.

The kickoff of this renewed initiative is well underway, and updates will be shared throughout the process as key components of this architecture are deployed.

In following updates, we will expand on leadership, the Sonic development fund, institutional expansion, tokenomics, governance, integrated revenue verticals, and more.