## Economics \[Taiko fee flow, proposer and prover bonds, TAIKO token utility, and DAO treasury mechanics — the economic model behind the based rollup.]

Taiko's economic model ensures fair compensation for the actors who operate the network -- proposers and provers -- while sustaining long-term protocol development through the Taiko DAO Treasury. The model is designed around the based rollup architecture, where fees flow through a transparent on-chain cycle.

### TAIKO Token

The TAIKO token serves two primary functions in the protocol:

| Function          | Description                                                                                                                                                            |
| ----------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- |
| **Proving bonds** | Proposers deposit TAIKO tokens as a liveness bond when submitting a proposal. This bond ensures proposers are economically committed to seeing their proposals proved. |
| **Governance**    | TAIKO token holders participate in protocol governance through the Taiko DAO, controlling smart contract upgrades, network parameters, and treasury allocation.        |

### Transaction Fee Flow

When a user submits a transaction on Taiko L2, they pay a standard EVM gas fee denominated in **ETH**. This fee has two components, allocated as follows:

| Fee Component    | Allocation | Recipient          |
| ---------------- | ---------- | ------------------ |
| **Priority fee** | 100%       | L2 block proposer  |
| **Base fee**     | 75%        | L2 block proposer  |
| **Base fee**     | 25%        | Taiko DAO Treasury |

The priority fee incentivizes faster transaction inclusion -- transactions with higher priority fees are more likely to be picked up by proposers (or preconfers). The base fee is determined by EIP-1559 dynamics on L2.

### Proposer Economics

Proposers (or preconfers) earn revenue from L2 transaction fees and bear costs for L1 operations and proving.

#### Revenue

* **Priority fees** from all transactions in the blocks they propose.
* **75% of base fees** from L2 transactions.

#### Costs

| Cost              | Paid To                        | Description                                                                                                            |
| ----------------- | ------------------------------ | ---------------------------------------------------------------------------------------------------------------------- |
| **L1 gas fee**    | Ethereum L1                    | Gas cost of calling `propose` on the Inbox contract to submit the proposal on-chain.                                   |
| **Prover fee**    | Block prover                   | Compensation to provers for generating validity proofs. This is negotiated off-chain between proposers and provers.    |
| **Liveness bond** | Inbox (returned after proving) | TAIKO tokens locked when submitting a proposal. Returned once the proposal range has been proved (which finalizes it). |

:::info
The liveness bond is not a cost in the typical sense -- it is returned to the proposer once the proposal is proved. However, it represents locked capital and creates an opportunity cost. The live Unzen configuration currently runs with a liveness bond of `0`.
:::

#### Profitability Considerations

A proposer is profitable when:

```
L2 fee revenue > L1 gas cost + prover fee + opportunity cost of bond
```

A single proposal can carry many L2 blocks, amortizing the L1 gas cost across all included blocks. This makes small, frequent blocks economically viable -- an important property for preconfirmations.

### Prover Economics

Provers generate validity proofs (SGX, ZK) for contiguous proposal ranges and submit them to Ethereum L1.

#### Revenue

* **Prover fees** paid by proposers. The fee amount is determined by the market -- proposers and provers negotiate off-chain, and competitive dynamics drive fees toward the cost of proof generation.

#### Costs

| Cost            | Description                                                                                                                                  |
| --------------- | -------------------------------------------------------------------------------------------------------------------------------------------- |
| **Computation** | Generating SGX attestations or ZK proofs requires significant computational resources. SGX proofs are cheaper; ZK proofs are more expensive. |
| **L1 gas**      | Submitting proofs to Ethereum L1 via `Inbox.prove` incurs gas fees. Proving a range of proposals in a single submission amortizes this cost. |

### Taiko DAO Treasury

The Taiko DAO Treasury receives **25% of the L2 base fee**, providing sustainable funding for:

* Protocol development and research
* Security audits and bug bounties
* Ecosystem growth and partnerships
* Governance operations

The treasury is managed by the Taiko DAO, which controls fund allocation through on-chain governance.

### Economic Cycle Summary

The full economic cycle flows as follows:

1. **Users** pay ETH gas fees for L2 transactions.
2. **Proposers** collect transaction fees, pay L1 gas to submit proposals, lock a TAIKO liveness bond, and pay provers.
3. **Provers** generate proofs, earn prover fees, and pay L1 gas to submit proofs.
4. **Taiko DAO Treasury** receives 25% of the base fee for protocol sustainability.
5. **Ethereum L1** receives gas fees from both proposers and provers, plus MEV revenue from proposal ordering.

This creates a self-sustaining cycle where each participant is economically incentivized to perform their role, and the protocol itself accumulates resources for long-term development.