Custom Gas Tokens: How to Use ERC-20 Tokens for Transaction Fees

Historically, general-purpose blockchains (Ethereum, Solana, etc) have dictated the native token used for transaction fees. With the rise of app-chains and rollups, Custom Gas Tokens (CGTs) allow blockchain operators to set their own native token.

This feature offers benefits like enhanced token utility, improved user experience, and greater control over ecosystem economics. However, implementation requires careful consideration of technical approaches (Native vs. Account Abstraction) and their economic trade-offs.

What Are Custom Gas Tokens?

Custom Gas Tokens (CGTs) are alternative tokens (often ERC-20's) that chain builders set in order to pay for transactions. This transforms how we think about blockchain infrastructure, enabling protocol developers to create self contained economic systems where network fees are paid in the ecosystem's native currency.

This capability is particularly powerful for application specific chains, gaming ecosystems, and DeFi protocols that want to create seamless user experiences.

Key Benefits for Chain Operators and Application Developers

• Enhanced Token Utility: Transform your token from a speculative or governance asset into essential infrastructure. Every transaction requires your token, creating constant, genuine demand that drives value accrual through fundamental utility rather than speculation.

• Internalized Economic Value: Transaction fees remain within your ecosystem rather than leaking value to ETH or other external tokens. This creates a more sustainable economic model where your community directly captures the value generated by network activity.

• Unified Brand Experience: Reinforce your ecosystem's identity by allowing users to interact entirely with your native token. This is especially powerful for gaming chains, social platforms, or specialized DeFi ecosystems where brand cohesion and user experience differentiation matter.

• Improved User Experience: Eliminate the "gas token shuffle" where users must constantly manage multiple tokens. With custom gas tokens, users can hold just one token for all their needs within your ecosystem, significantly reducing onboarding friction.

Implementation Approaches: Native vs. Account Abstraction

Native Implementation

The native approach configures the chain at genesis to use a specific ERC-20 token for all gas payments at the protocol level.

Supported Chains:

• ✅ Arbitrum Orbit (full support with dynamic price oracles)

• ✅ zkSync Era (ongoing support)

• ✅ Avalanche L1s

• ❌ OP Stack (deprecated as of May 2024)

Key Features:

• Requires 100% of transactions to use the designated token

• Integrates directly with existing developer tooling and infrastructure

• Locks configuration immutably post-genesis deployment

• Provides deterministic gas accounting at the EVM level

Key Considerations:

• Lacks flexibility to support multiple tokens or change tokens post-deployment

• Requires users to acquire the designated token, potentially complicating onboarding

• Simplifies transaction flow with predictable gas costs at the protocol level

• May limit compatibility with applications expecting native ETH or other tokens

• Relies on chain-wide adoption of the designated token, impacting ecosystem diversity

Account Abstraction Implementation

The account abstraction approach leverages ERC-4337 standards to enable gas payments in any ERC-20 token via a paymaster architecture, without modifying the chain’s core protocol.

Supported Chains:

• ✅ Compatible with any ERC-4337-compliant chain

• ✅ Aligned with industry trends post-OP Stack deprecation

• ❌ Requires paymaster infrastructure, which may vary by chain

• ❌ Not enforced at the protocol level, limiting universal adoption

Key Features:

• Offers maximum flexibility to support multiple tokens or change tokens without protocol upgrades

• Enables granular control, allowing applications to specify different gas tokens

• Avoids sell pressure by accepting ERC-20 tokens and handling conversions internally

• Provides a future-proof architecture aligned with ERC-4337 standards

Key Considerations:

• Increases complexity due to additional infrastructure (paymasters, bundlers, entry points)

• Complicates gas estimation and transaction flow for developers and users

• Eliminates token bridging, simplifying user experience for diverse token usage

• Risks inconsistent adoption, as token usage is enforced at the application level

• Requires custom configuration for downstream tooling (e.g., block explorers, indexers)

Economic Considerations

The Parent Chain Fee Challenge

When an L2 utilizes custom gas tokens, it still requires ETH for data availability costs on Ethereum (L1). Similarly, L3s require their L2's native token. This creates a critical economic dynamic:

1. Collection Phase: Chain accumulates CustomToken as gas fees from users

2. Conversion Requirement: Chain needs ETH/parent token for data posting costs

3. Market Operations: Chain must execute CustomToken → parent token swaps

4. Price Impact: Creates systematic sell pressure on CustomToken

Managing Token Economics

Chain operators must implement sophisticated economic models accounting for:

• Collection Forecasting: Statistical models for gas token accumulation rates

• Exchange Rate Volatility: Hedging strategies for token price fluctuations

• Liquidity Requirements: Ensuring sufficient market depth for conversions

• Reserve Management: Maintaining operational buffers for price shocks

Risk Scenario: A 50% token price decline could render collected gas fees insufficient to cover parent chain costs, creating operational deficits that compound with each block.

Technical Requirements and Specifications

Typical ERC-20 Token Compliance Requirements

Your token implementation should generally satisfy these technical constraints:

• Standard ERC-20 interface implementation

• Exactly 18 decimal places (enforced at contract level)

• Non-rebasing token supply mechanics

• No transfer fees or tax mechanisms

• No callback hooks (no ERC-777 functionality)

• name() and symbol() return values ≤ 32 bytes

• Single entry point for transfers (no upgradeable proxy patterns)

Core Protocol Interface

For chains using ETH, gasPayingToken() must return: (0xEeeeeEeeeEeEeeEeEeEeeEEEeeeeEeeeeeeeEEeE, 18)

Account Abstraction Transaction Flow

The AA gas payment flow operates through the following sequence:

1. User Operation Submission: User signs operation with custom token gas payment intent

2. Paymaster Validation: Validates token acceptance and calculates required amount

3. Token Collection: Paymaster pulls custom tokens from user via transferFrom

4. Gas Payment: Paymaster pays ETH to bundler for actual execution costs

5. Settlement: Paymaster handles token → ETH conversion asynchronously

This architecture abstracts gas complexity from end users while maintaining security guarantees.

Production Implementations and Case Studies

Successful Deployments

Degen Chain (Arbitrum Orbit L3 on Base)

• 14M+ transactions in first week

• 770K+ active addresses

• $60M+ total value bridged

• Demonstrated strong product-market fit with native community token

DeFi Kingdoms (Avalanche Subnet)

• Implemented CRYSTAL as custom gas token

• Novel staking-based distribution mechanism

• Maintained user engagement through economic transition

Infrastructure Provider Considerations

RaaS providers and infrastructure teams can leverage custom gas tokens to offer differentiated services, including automated token validation, price oracle integration, and liquidity management solutions. This creates new opportunities for value-added services in the rollup ecosystem.

Learning from Optimism's Deprecation

Optimism's deprecation of native custom gas tokens in May 2024 provides critical insights:

• Security concerns with L1 portal contract modifications

• Architectural inflexibility for protocol upgrades

• Superior user experience through Account Abstraction patterns

Migration and Upgrade Considerations

Migration complexity includes:

1. Bridge contract upgrades with state migration

2. Chain-wide pause for fund reconciliation

3. User balance mapping and verification

4. Coordinated ecosystem-wide transition

5. Non-zero risk of fund loss during migration

Best Practice: Conduct thorough economic modeling and choose your implementation architecture carefully at genesis. If you're unsure,, go with Account Abstraction for optionality.

Implementation Decision Framework

Use them if:

• You have a strong token with genuine utility and liquidity

• Your users already hold and actively use your token

• You want complete control over your chain's economy

• You're building a closed ecosystem (gaming, social)

• You have resources for liquidity management

Skip them if:

• You need maximum interoperability with other chains

• Your token is volatile or illiquid

• You want to be "maximally ETH aligned"

• You lack resources for operational complexity

• Regulatory concerns exist in your jurisdiction

Industry Trajectory and Future Outlook

The ecosystem demonstrates clear momentum toward custom gas token infrastructure:

• Optimism: Complete deprecation of native implementation

• Arbitrum: Dual support with increasing AA adoption

• zkSync: Maintaining native support with AA roadmap

• Avalanche: Protocol-agnostic approach supporting both

• Industry Standards: ERC-4337 adoption accelerating across L2s

Technical Takeaways

1. Economic sustainability requires sophisticated management: Proper liquidity provisioning, price hedging, and reserve management are non-negotiable for operational success

2. User experience drives adoption: Eliminating gas token friction can improve conversion rates by orders of magnitude

3. Optionality has quantifiable value: The ability to modify gas token strategy post-deployment justifies AA's additional complexity

Frequently Asked Questions

Q: What exactly is a custom gas token (CGT)?

A: A custom gas token enables any ERC-20 token to be used for transaction fee payment on a blockchain, replacing the requirement for ETH or the chain's native token at either the protocol or application layer.

Q: Can gas tokens be changed post-deployment?

A: Native implementations are immutable post-genesis. Account Abstraction implementations support runtime modifications without protocol changes.

Q: Which chains currently support custom gas tokens?

A: Arbitrum Orbit, zkSync Era, and Avalanche L1s provide native support. All EVM chains support AA-based implementations via ERC-4337.

Q: What are the operational costs?

A: Expect 10-20% overhead for liquidity management, price slippage, and operational buffers in native implementations. AA adds ~21,000 gas per transaction but eliminates liquidity management overhead.

Conclusion

Custom gas tokens represent a fundamental primitive in blockchain architecture—they're strategic choices that impact ecosystem economics, user adoption, and long-term sustainability. Success requires understanding both technical implementation details and economic implications.

As blockchain infrastructure continues to mature, custom gas tokens will transition from differentiator to standard feature. The winners will be those who architect thoughtful token economic systems with user experience at the forefront. The future of blockchain increasingly points toward ecosystems with sovereign monetary policies, enabled by custom gas tokens.

Deploy a custom gas token with Alchemy Rollups or reach out to our team anytime. We're here to help.