Sonic Labs CEO: Layer 1 Blockchains Must Evolve Beyond Transaction Speed to Survive
Introduction: The End of the Speed Race and the Dawn of a New Blockchain Era
The foundational layer of the crypto ecosystem, Layer 1 (L1) blockchains, is undergoing a profound strategic shift. For years, the battle for supremacy was waged on a simple, quantifiable battlefield: transactions per second (TPS) and gas fees. Chains emerged promising to be the "Ethereum killer" by being faster and cheaper. However, according to Mitchell Demeter, CEO of Sonic Labs, that phase is decisively over. In a recent interview with crypto.news, Demeter laid out a compelling case that the commoditization of block space has rendered the old competition obsolete. The new frontier for L1s is no longer raw performance but sustainable value creation, developer retention, and tangible returns for token holders. As Sonic itself pivots its strategy under Demeter's new leadership, its journey offers a blueprint for how blockchain foundations must evolve to stay relevant in an increasingly crowded and sophisticated market.
From Speed Wars to Sustainability: The Commoditization of Block Space
The narrative that dominated the last crypto cycle is now a relic of a different technological landscape. Demeter contextualizes this shift, stating, "Back in 2020 and 2021, the landscape was very different. When you were comparing chains against Ethereum, being faster and cheaper was a major differentiator." This was the era where Solana’s raw speed and Avalanche’s subnets gained significant traction by directly addressing Ethereum's scalability trilemma.
However, the proliferation of high-performance L1s and the explosive growth of Layer 2 (L2) scaling solutions like Arbitrum, Optimism, and zkSync have fundamentally altered the playing field. "We have a lot of fast and cheap chains. Block space has effectively become commoditized," Demeter explains. The initial problem of scalability has been largely solved by multiple projects, making speed and low cost a baseline expectation rather than a unique selling proposition. This commoditization forces a critical question: when every chain is fast and cheap, what else matters?
The New Moat: Builder Stickiness and Protocol-Level Innovation
With speed and cost becoming table stakes, the defining challenge for L1s is now user and developer retention. "Builders, users, and capital move very easily today. Being fast and being cheap is no longer enough. There has to be a reason for them to stay on your chain," Demeter asserts. This requires building a "moat"—a sustainable competitive advantage that makes a blockchain ecosystem difficult to replicate or abandon.
For Sonic, this means differentiating through protocol-level changes and specific Ethereum Improvement Proposals (EIPs). Demeter highlights one concrete example: EIP-7903, which proposes to increase the smart contract size limit beyond the current constraint of roughly 49 kilobytes. "Increasing that limit makes it easier to build more complex applications and makes the chain stickier, because it becomes harder for developers to move their entire infrastructure across chains," he notes. By adopting such proposals ahead of the slower-moving Ethereum mainnet, smaller chains like Sonic can create a more conducive and unique environment for developers, fostering loyalty and long-term ecosystem growth.
Rewarding Holders: The Critical Shift in Tokenomics and Value Capture
A central theme in Demeter's strategy is ensuring that on-chain activity translates into real value for token holders. He observes that the market is moving away from pure speculation toward demanding clear value-accrual mechanisms. "The simplest one is a burn mechanism, where tokens are actively removed from circulation. That’s how you move from an inflationary model to a deflationary one," he states.
Demeter draws a parallel to corporate finance, comparing early-stage blockchain projects to companies like Tesla. "For years, they issued stock to raise capital. Once they hit a critical mass, they shifted into buybacks. That’s the 'value return' phase." He acknowledges that many blockchains, including Sonic, are still seeking product-market fit, but the pathway must be unambiguous: increased usage should lead to collected fees, which then lead to token burns or buybacks, ultimately returning value to holders.
Overhauling the Fee Model: From Builder Subsidies to Holder Value
Sonic's current fee model is a testament to the previous era's priorities. It returns 90% of transaction fees to builders and 10% to validators. This model was designed to enable applications to abstract away blockchain complexity from end-users through fee subsidies and account abstraction. In this system, an app could pay a user's gas fees, creating a seamless, Venmo-like experience where the user never interacts directly with gas or signs complex transactions.
However, Demeter identifies a critical flaw in this model from a tokenomics perspective: "The problem is: token holders don’t benefit. If the whole world moved to on-chain under that model, nothing would leave the circulating supply. No scarcity is created."
To address this, Sonic is planning a significant overhaul. The company is moving towards a sliding-scale model where builders might receive around 15% of fees, validators retain 10%, and the remainder—a substantial majority—is burned. This structural change directly links network usage to token scarcity, creating a deflationary pressure that benefits long-term holders and aligns economic incentives across all network participants.
Competitive Positioning: L1 Agility vs. L2 Dependence
In the broader ecosystem debate between monolithic L1s and modular L2s, Demeter positions Sonic's independence as a key advantage. "Layer 2s are ultimately dependent on Ethereum. They rely on Ethereum’s base layer," he notes. In contrast, Sonic operates its own network with its own distributed validator set.
This independence grants operational agility. "That gives us more flexibility and lets us move faster when it comes to protocol changes and experimentation," Demeter explains. While L2s benefit from Ethereum's security, they are also bound by its pace of innovation and governance processes. An independent L1 can more rapidly implement novel EIPs and tailor its protocol to meet specific builder needs without waiting for broader ecosystem consensus.
Funding Ecosystem Growth: Beyond Direct Grants
Ethereum has pioneered models for funding public goods through programs like Gitcoin Grants. When asked about Sonic's approach, Demeter revealed a more partnership-oriented strategy. "Historically, we ran grant programs. The challenge is that builders can be very transitory."
Instead of acting as a direct venture capitalist, Sonic is focusing on building relationships with established VCs to help fund sustainable businesses built on its chain. "The ideal case is that public infrastructure has real business models and real entrepreneurs behind it," he says. This approach aims to foster projects with inherent economic sustainability rather than those reliant on continuous grant funding.
A New CEO’s Blueprint: Shifting from a Tech Focus to a Business Mindset
Demeter stepped into the CEO role at Sonic Labs two months ago with a clear set of priorities aimed at steering the company through this industry-wide transition. His immediate focus areas are:
- Fixing Tokenomics: Ensuring clear mechanisms for value to flow back to token holders.
- Building a Sustainable Grants Model: Partnering with VCs rather than funding projects directly.
- Cultural Shift: Moving Sonic from a "tech-only culture" into a fully-fledged business encompassing marketing, communications, business development, and institutional sales.
This reflects a broader industry maturation. "For years, the company focused almost entirely on technology. Now the industry itself is moving away from pure speculation, and it’s the right time to shift toward sustainability," Demeter states.
Broader Market Outlook: Fundamentals Over Narratives
Demeter’s view of the current crypto market aligns with his operational philosophy. "We’re moving through a transition. Liquidity has tightened, investors are more sophisticated, and builders and users have more optionality. We can’t just rely on narratives anymore. We have to build real businesses."
While cautiously optimistic that "most of the pain is behind us," he believes the return of liquidity will be fundamentally driven rather than speculative. This environment rewards projects with sound economic models, clear utility, and sustainable growth strategies.
Strategic Conclusion: The Path Forward for Layer 1 Blockchains
Mitchell Demeter's vision for Sonic Labs encapsulates the necessary evolution for the entire Layer 1 sector. The race for transaction speed has concluded in a multi-chain world where performance is a given. The next chapter will be defined by economic resilience, developer loyalty, and tangible value capture.
For investors and builders watching the L1 landscape, the key metrics are shifting. It is no longer sufficient to ask how fast or how cheap a chain is. The critical questions now are:
- How does the protocol actively encourage developer stickiness?
- What are the clear, immutable mechanisms that ensure value generated by network usage flows back to token holders?
- Is there a viable path from being a capital-raising venture to a value-returning business?
Sonic’s strategic pivot—emphasizing protocol-level innovation for builders, overhauling its fee model for holder benefit, and pursuing commercial licensing—provides a concrete case study in this new paradigm. As the market continues to mature, the L1s that survive and thrive will be those that recognize their role not just as technological infrastructures but as sustainable economic ecosystems built for long-term growth.
This article is based exclusively on an interview conducted by crypto.news with Mitchell Demeter, CEO of Sonic Labs.