diff --git a/Cargo.lock b/Cargo.lock
index 3799c8dda..b6249622b 100644
--- a/Cargo.lock
+++ b/Cargo.lock
@@ -1471,6 +1471,7 @@ dependencies = [
  "logos-blockchain-zone-sdk",
  "serde",
  "serde_json",
+ "system_accounts",
  "testnet_initial_state",
  "thiserror 2.0.18",
  "tokio",
@@ -3018,6 +3019,7 @@ dependencies = [
 name = "fee_core"
 version = "0.1.0"
 dependencies = [
+ "borsh",
  "lee_core",
  "serde",
 ]
@@ -10649,6 +10651,7 @@ dependencies = [
 name = "testnet_initial_state"
 version = "0.1.0"
 dependencies = [
+ "fee_core",
  "key_protocol",
  "lee",
  "lee_core",
diff --git a/Cargo.toml b/Cargo.toml
index 5a842f342..b67450873 100644
--- a/Cargo.toml
+++ b/Cargo.toml
@@ -45,6 +45,7 @@ members = [
   "lez/programs/clock",
   "lez/programs/faucet",
   "lez/programs/fee",
+  "lez/programs/fee/core",
   "lez/programs/pinata",
   "lez/programs/pinata_token",
   "lez/programs/token",
diff --git a/artifacts/lez/programs/amm.bin b/artifacts/lez/programs/amm.bin
index 088b1f282..c324fc2a2 100644
Binary files a/artifacts/lez/programs/amm.bin and b/artifacts/lez/programs/amm.bin differ
diff --git a/artifacts/lez/programs/associated_token_account.bin b/artifacts/lez/programs/associated_token_account.bin
index 754a73fb4..82471ef2f 100644
Binary files a/artifacts/lez/programs/associated_token_account.bin and b/artifacts/lez/programs/associated_token_account.bin differ
diff --git a/artifacts/lez/programs/authenticated_transfer.bin b/artifacts/lez/programs/authenticated_transfer.bin
index ae572fcb0..27d416ea8 100644
Binary files a/artifacts/lez/programs/authenticated_transfer.bin and b/artifacts/lez/programs/authenticated_transfer.bin differ
diff --git a/artifacts/lez/programs/bridge.bin b/artifacts/lez/programs/bridge.bin
index b0dc4ff6c..89384c955 100644
Binary files a/artifacts/lez/programs/bridge.bin and b/artifacts/lez/programs/bridge.bin differ
diff --git a/artifacts/lez/programs/bridge_lock.bin b/artifacts/lez/programs/bridge_lock.bin
index b12252226..15b34410b 100644
Binary files a/artifacts/lez/programs/bridge_lock.bin and b/artifacts/lez/programs/bridge_lock.bin differ
diff --git a/artifacts/lez/programs/clock.bin b/artifacts/lez/programs/clock.bin
index cedf2f819..db41cce0a 100644
Binary files a/artifacts/lez/programs/clock.bin and b/artifacts/lez/programs/clock.bin differ
diff --git a/artifacts/lez/programs/cross_zone_inbox.bin b/artifacts/lez/programs/cross_zone_inbox.bin
index 9eca4e316..aa90f4ed2 100644
Binary files a/artifacts/lez/programs/cross_zone_inbox.bin and b/artifacts/lez/programs/cross_zone_inbox.bin differ
diff --git a/artifacts/lez/programs/cross_zone_outbox.bin b/artifacts/lez/programs/cross_zone_outbox.bin
index ef9e18b55..811056fba 100644
Binary files a/artifacts/lez/programs/cross_zone_outbox.bin and b/artifacts/lez/programs/cross_zone_outbox.bin differ
diff --git a/artifacts/lez/programs/faucet.bin b/artifacts/lez/programs/faucet.bin
index 24236e925..e33b7f4ce 100644
Binary files a/artifacts/lez/programs/faucet.bin and b/artifacts/lez/programs/faucet.bin differ
diff --git a/artifacts/lez/programs/fee.bin b/artifacts/lez/programs/fee.bin
index 0b82a2847..a799abcc4 100644
Binary files a/artifacts/lez/programs/fee.bin and b/artifacts/lez/programs/fee.bin differ
diff --git a/artifacts/lez/programs/pinata.bin b/artifacts/lez/programs/pinata.bin
index 54b39e5da..83be88bc4 100644
Binary files a/artifacts/lez/programs/pinata.bin and b/artifacts/lez/programs/pinata.bin differ
diff --git a/artifacts/lez/programs/pinata_token.bin b/artifacts/lez/programs/pinata_token.bin
index 45afc1be7..6c2c5df1b 100644
Binary files a/artifacts/lez/programs/pinata_token.bin and b/artifacts/lez/programs/pinata_token.bin differ
diff --git a/artifacts/lez/programs/ping_receiver.bin b/artifacts/lez/programs/ping_receiver.bin
index 710eeeb8a..26d0800b1 100644
Binary files a/artifacts/lez/programs/ping_receiver.bin and b/artifacts/lez/programs/ping_receiver.bin differ
diff --git a/artifacts/lez/programs/ping_sender.bin b/artifacts/lez/programs/ping_sender.bin
index 3a3e40c90..3d482a473 100644
Binary files a/artifacts/lez/programs/ping_sender.bin and b/artifacts/lez/programs/ping_sender.bin differ
diff --git a/artifacts/lez/programs/token.bin b/artifacts/lez/programs/token.bin
index 47bc6ef1f..17f80037a 100644
Binary files a/artifacts/lez/programs/token.bin and b/artifacts/lez/programs/token.bin differ
diff --git a/artifacts/lez/programs/vault.bin b/artifacts/lez/programs/vault.bin
index 4a7b2a11e..564ee4914 100644
Binary files a/artifacts/lez/programs/vault.bin and b/artifacts/lez/programs/vault.bin differ
diff --git a/artifacts/lez/programs/wrapped_token.bin b/artifacts/lez/programs/wrapped_token.bin
index 4b19212a0..c8c0a7e14 100644
Binary files a/artifacts/lez/programs/wrapped_token.bin and b/artifacts/lez/programs/wrapped_token.bin differ
diff --git a/lez/chain_state/Cargo.toml b/lez/chain_state/Cargo.toml
index ec7c6a45f..045bba053 100644
--- a/lez/chain_state/Cargo.toml
+++ b/lez/chain_state/Cargo.toml
@@ -25,4 +25,5 @@ tokio.workspace = true
 
 [dev-dependencies]
 testnet_initial_state.workspace = true
+system_accounts.workspace = true
 serde_json.workspace = true
diff --git a/lez/chain_state/src/apply.rs b/lez/chain_state/src/apply.rs
index e66edf278..f49cfc3dd 100644
--- a/lez/chain_state/src/apply.rs
+++ b/lez/chain_state/src/apply.rs
@@ -285,6 +285,44 @@ mod tests {
         assert!(matches!(err, BlockIngestError::EmptyBlock));
     }
 
+    #[test]
+    fn fee_state_advances_with_the_chain() {
+        let mut state = initial_state();
+        let genesis = produce_dummy_block(1, None, vec![]);
+        apply_block(None, &genesis, &mut state).expect("genesis applies");
+        let mut tip = tip_of(&genesis);
+        for id in 2..=5_u64 {
+            let block = produce_dummy_block(id, Some(tip.hash), vec![]);
+            apply_block(Some(&tip), &block, &mut state).expect("block applies");
+            tip = tip_of(&block);
+        }
+
+        let fee_state = fee_core::state::FeeState::from_bytes(
+            &state
+                .get_account_by_id(system_accounts::fee_state_account_id())
+                .data
+                .into_inner(),
+        );
+        // Five blocks applied: height tracks the chain; zero load holds the floor.
+        assert_eq!(fee_state.height, 5);
+        assert_eq!(fee_state.base_fee_exec, fee_core::market::BASE_FEE_EXEC_MIN);
+        assert_eq!(fee_state.base_fee_stor, fee_core::market::BASE_FEE_STOR_MIN);
+        assert_eq!(fee_state.payout_carry, 0);
+        // Escrow and inbox hold no balance.
+        assert_eq!(
+            state
+                .get_account_by_id(system_accounts::fee_escrow_account_id())
+                .balance,
+            0
+        );
+        assert_eq!(
+            state
+                .get_account_by_id(system_accounts::fee_inbox_account_id())
+                .balance,
+            0
+        );
+    }
+
     #[test]
     fn missing_fee_tx_is_invalid_fee() {
         let mut state = initial_state();
diff --git a/lez/programs/fee/core/Cargo.toml b/lez/programs/fee/core/Cargo.toml
index 03887a654..7fb18221b 100644
--- a/lez/programs/fee/core/Cargo.toml
+++ b/lez/programs/fee/core/Cargo.toml
@@ -8,5 +8,6 @@ license = { workspace = true }
 workspace = true
 
 [dependencies]
+borsh.workspace = true
 lee_core.workspace = true
 serde.workspace = true
diff --git a/lez/programs/fee/core/src/lib.rs b/lez/programs/fee/core/src/lib.rs
index 031a903fb..246eacdb1 100644
--- a/lez/programs/fee/core/src/lib.rs
+++ b/lez/programs/fee/core/src/lib.rs
@@ -6,6 +6,9 @@ use lee_core::{
 };
 use serde::{Deserialize, Serialize};
 
+pub mod market;
+pub mod state;
+
 const FEE_STATE_SEED: [u8; 32] = *b"/LEZ/v0.3/FeeSeed/State/0000000/";
 const FEE_ESCROW_SEED: [u8; 32] = *b"/LEZ/v0.3/FeeSeed/Escrow/000000/";
 const FEE_INBOX_SEED: [u8; 32] = *b"/LEZ/v0.3/FeeSeed/Inbox/0000000/";
diff --git a/lez/programs/fee/core/src/market.rs b/lez/programs/fee/core/src/market.rs
new file mode 100644
index 000000000..09980f633
--- /dev/null
+++ b/lez/programs/fee/core/src/market.rs
@@ -0,0 +1,206 @@
+//! The dual fee market: protocol constants and the base-fee controller.
+//!
+//! All values are protocol constants; changing any is a protocol-version
+//! change.
+
+#![expect(
+    clippy::arithmetic_side_effects,
+    clippy::integer_division,
+    clippy::integer_division_remainder_used,
+    reason = "spec-mandated integer math: products are widened to u128 and subtractions are \
+              guarded by the enclosing comparison"
+)]
+
+use core::cmp::Ordering;
+
+pub const TARGET_GAS_EXEC: u64 = 5_000_000;
+pub const MAX_GAS_EXEC: u64 = 10_000_000;
+pub const D_EXEC: u64 = 8;
+pub const BASE_FEE_EXEC_MIN: u64 = 8;
+pub const BASE_FEE_EXEC_MAX: u64 = u64::MAX / MAX_GAS_EXEC;
+
+pub const TARGET_GAS_STOR: u64 = 500_000;
+pub const MAX_GAS_STOR: u64 = 1_000_000;
+pub const D_STOR: u64 = 8;
+pub const BASE_FEE_STOR_MIN: u64 = 8;
+pub const BASE_FEE_STOR_MAX: u64 = u64::MAX / MAX_GAS_STOR;
+
+pub const SMOOTHING_WINDOW: usize = 50;
+
+// Genesis validation: the ±12.5% bound and elasticity framing assume
+// MAX = 2·TARGET for both resources.
+const _: () = assert!(MAX_GAS_EXEC == 2 * TARGET_GAS_EXEC);
+const _: () = assert!(MAX_GAS_STOR == 2 * TARGET_GAS_STOR);
+
+/// One base-fee update. The deviation clamp bounds the move to `max(1, b / d)`;
+/// products are widened to 128 bits so the cap price cannot overflow; the
+/// result saturates into `[lo, hi]`.
+#[must_use]
+pub fn next_base_fee(b: u64, g: u64, target: u64, d: u64, lo: u64, hi: u64) -> u64 {
+    match g.cmp(&target) {
+        Ordering::Greater => {
+            let deviation = (g - target).min(target);
+            let delta = ((u128::from(b) * u128::from(deviation))
+                / (u128::from(target) * u128::from(d)))
+            .max(1);
+            let delta = u64::try_from(delta).expect("delta is at most b/d, which fits u64");
+            hi.min(b.saturating_add(delta))
+        }
+        Ordering::Less => {
+            let deviation = (target - g).min(target);
+            let delta =
+                (u128::from(b) * u128::from(deviation)) / (u128::from(target) * u128::from(d));
+            let delta = u64::try_from(delta).expect("delta is at most b/d, which fits u64");
+            lo.max(b.saturating_sub(delta))
+        }
+        Ordering::Equal => b,
+    }
+}
+
+#[cfg(test)]
+mod tests {
+    use super::*;
+
+    #[test]
+    fn constants_satisfy_genesis_validation() {
+        // MAX_GAS_r = 2·TARGET_GAS_r for both resources.
+        assert_eq!(MAX_GAS_EXEC, 2 * TARGET_GAS_EXEC);
+        assert_eq!(MAX_GAS_STOR, 2 * TARGET_GAS_STOR);
+        // MAX_GAS_r · BASE_FEE_r_MAX fits u64 for both resources.
+        assert_eq!(BASE_FEE_EXEC_MAX, u64::MAX / MAX_GAS_EXEC);
+        assert_eq!(BASE_FEE_STOR_MAX, u64::MAX / MAX_GAS_STOR);
+        assert!(MAX_GAS_EXEC.checked_mul(BASE_FEE_EXEC_MAX).is_some());
+        assert!(MAX_GAS_STOR.checked_mul(BASE_FEE_STOR_MAX).is_some());
+        // Spec parameter values, pinned.
+        assert_eq!(BASE_FEE_EXEC_MAX, 1_844_674_407_370);
+        assert_eq!(BASE_FEE_STOR_MAX, 18_446_744_073_709);
+    }
+
+    #[test]
+    fn at_target_price_is_unchanged() {
+        assert_eq!(
+            next_base_fee(
+                100,
+                TARGET_GAS_EXEC,
+                TARGET_GAS_EXEC,
+                8,
+                8,
+                BASE_FEE_EXEC_MAX
+            ),
+            100
+        );
+    }
+
+    #[test]
+    fn live_upward_from_the_minimum() {
+        // One unit above target must move the price up by at least 1, even at
+        // b = 8 where the proportional delta rounds to 0.
+        let next = next_base_fee(
+            8,
+            TARGET_GAS_EXEC + 1,
+            TARGET_GAS_EXEC,
+            8,
+            8,
+            BASE_FEE_EXEC_MAX,
+        );
+        assert_eq!(next, 9);
+    }
+
+    #[test]
+    fn full_deviation_moves_exactly_one_eighth() {
+        // g = 2T clamps deviation to T: delta = b/8 exactly (±12.5%).
+        let b = 8_000;
+        let up = next_base_fee(
+            b,
+            2 * TARGET_GAS_EXEC,
+            TARGET_GAS_EXEC,
+            8,
+            8,
+            BASE_FEE_EXEC_MAX,
+        );
+        assert_eq!(up, b + b / 8);
+        let down = next_base_fee(b, 0, TARGET_GAS_EXEC, 8, 8, BASE_FEE_EXEC_MAX);
+        assert_eq!(down, b - b / 8);
+    }
+
+    #[test]
+    fn deviation_clamp_bounds_any_overshoot() {
+        // Usage far above 2T moves no further than the full-deviation step.
+        let b = 8_000;
+        let extreme = next_base_fee(b, u64::MAX, TARGET_GAS_EXEC, 8, 8, BASE_FEE_EXEC_MAX);
+        assert_eq!(extreme, b + b / 8);
+    }
+
+    #[test]
+    fn asymmetric_at_small_prices() {
+        // One unit below target rounds the down-delta to zero: price holds.
+        let next = next_base_fee(
+            100,
+            TARGET_GAS_EXEC - 1,
+            TARGET_GAS_EXEC,
+            8,
+            8,
+            BASE_FEE_EXEC_MAX,
+        );
+        assert_eq!(next, 100);
+    }
+
+    #[test]
+    fn saturates_at_bounds() {
+        // Down-step clamps at lo.
+        assert_eq!(
+            next_base_fee(8, 0, TARGET_GAS_EXEC, 8, 8, BASE_FEE_EXEC_MAX),
+            8
+        );
+        // Up-step clamps at hi, computed with a 128-bit product (b·deviation
+        // would overflow u64 here).
+        let at_cap = next_base_fee(
+            BASE_FEE_EXEC_MAX,
+            2 * TARGET_GAS_EXEC,
+            TARGET_GAS_EXEC,
+            8,
+            8,
+            BASE_FEE_EXEC_MAX,
+        );
+        assert_eq!(at_cap, BASE_FEE_EXEC_MAX);
+    }
+
+    #[test]
+    fn bounded_adjustment_over_a_grid() {
+        // |next − b| ≤ max(1, b/8) and next ∈ [lo, hi], across a price × usage
+        // grid including both extremes.
+        let prices = [
+            8,
+            9,
+            63,
+            64,
+            1_000,
+            5_000_000,
+            BASE_FEE_EXEC_MAX - 1,
+            BASE_FEE_EXEC_MAX,
+        ];
+        let usages = [
+            0,
+            1,
+            TARGET_GAS_EXEC - 1,
+            TARGET_GAS_EXEC,
+            TARGET_GAS_EXEC + 1,
+            2 * TARGET_GAS_EXEC,
+            u64::MAX,
+        ];
+        for b in prices {
+            for g in usages {
+                let next = next_base_fee(b, g, TARGET_GAS_EXEC, 8, 8, BASE_FEE_EXEC_MAX);
+                let bound = 1.max(b / 8);
+                assert!(
+                    next.abs_diff(b) <= bound,
+                    "move too large: b={b} g={g} next={next}"
+                );
+                assert!(
+                    (8..=BASE_FEE_EXEC_MAX).contains(&next),
+                    "out of range: b={b} g={g}"
+                );
+            }
+        }
+    }
+}
diff --git a/lez/programs/fee/core/src/state.rs b/lez/programs/fee/core/src/state.rs
new file mode 100644
index 000000000..846a94ce5
--- /dev/null
+++ b/lez/programs/fee/core/src/state.rs
@@ -0,0 +1,196 @@
+//! Persistent fee market state, stored in the fee-state account's data.
+
+#![expect(
+    clippy::arithmetic_side_effects,
+    clippy::integer_division,
+    clippy::integer_division_remainder_used,
+    reason = "spec-mandated integer math: the payout split is floor division with an explicit \
+              carry, and additions are checked"
+)]
+
+use borsh::{BorshDeserialize, BorshSerialize};
+
+use crate::{BlockFeeSummary, market};
+
+/// The fee market's persistent state, Borsh-serialized into the fee-state
+/// account's `data`. The escrow is the escrow *account balance*, deliberately
+/// not a field here.
+#[derive(Debug, Clone, PartialEq, Eq, BorshSerialize, BorshDeserialize)]
+pub struct FeeState {
+    /// Execution base fee for the current block.
+    pub base_fee_exec: u64,
+    /// Storage base fee for the current block.
+    pub base_fee_stor: u64,
+    /// Base revenue of the last [`market::SMOOTHING_WINDOW`] blocks; slot
+    /// `height % SMOOTHING_WINDOW` is the most recent.
+    pub window: [u128; market::SMOOTHING_WINDOW],
+    /// Payout division remainder, always < [`market::SMOOTHING_WINDOW`].
+    pub payout_carry: u128,
+    /// Block height; an increment at 2^64 - 1 is a consensus fault.
+    pub height: u64,
+}
+
+impl FeeState {
+    /// The state every zone starts from: both base fees at their minimum,
+    /// empty window, zero carry, height zero.
+    #[must_use]
+    pub const fn genesis() -> Self {
+        Self {
+            base_fee_exec: market::BASE_FEE_EXEC_MIN,
+            base_fee_stor: market::BASE_FEE_STOR_MIN,
+            window: [0; market::SMOOTHING_WINDOW],
+            payout_carry: 0,
+            height: 0,
+        }
+    }
+
+    /// Applies one block's summary: pushes the block's base revenue into the
+    /// window, computes the smoothed payout and carry, updates both base fees,
+    /// and advances the height. Returns the payout owed to the producer from
+    /// escrow.
+    pub fn apply_block(&mut self, summary: &BlockFeeSummary) -> u128 {
+        self.height = self
+            .height
+            .checked_add(1)
+            .expect("height increment at u64::MAX is a consensus fault");
+
+        let window_len = u64::try_from(market::SMOOTHING_WINDOW).expect("window length fits u64");
+        let slot = usize::try_from(self.height % window_len).expect("slot index fits usize");
+        self.window[slot] = summary.revenue_base;
+
+        let numerator = self.window.iter().fold(self.payout_carry, |acc, revenue| {
+            acc.checked_add(*revenue)
+                .expect("window sum of 50 u128 revenues cannot overflow in practice")
+        });
+        let window_len = u128::from(window_len);
+        let payout = numerator / window_len;
+        self.payout_carry = numerator % window_len;
+
+        self.base_fee_exec = market::next_base_fee(
+            self.base_fee_exec,
+            summary.gas_used_exec,
+            market::TARGET_GAS_EXEC,
+            market::D_EXEC,
+            market::BASE_FEE_EXEC_MIN,
+            market::BASE_FEE_EXEC_MAX,
+        );
+        self.base_fee_stor = market::next_base_fee(
+            self.base_fee_stor,
+            summary.gas_used_stor,
+            market::TARGET_GAS_STOR,
+            market::D_STOR,
+            market::BASE_FEE_STOR_MIN,
+            market::BASE_FEE_STOR_MAX,
+        );
+
+        payout
+    }
+
+    #[must_use]
+    pub fn to_bytes(&self) -> Vec<u8> {
+        borsh::to_vec(self).expect("FeeState serialization should not fail")
+    }
+
+    #[must_use]
+    pub fn from_bytes(bytes: &[u8]) -> Self {
+        borsh::from_slice(bytes).expect("FeeState deserialization should not fail")
+    }
+}
+
+#[cfg(test)]
+mod tests {
+    use super::*;
+    use crate::BlockFeeSummary;
+
+    fn summary_with_revenue(revenue_base: u128) -> BlockFeeSummary {
+        BlockFeeSummary {
+            revenue_base,
+            ..BlockFeeSummary::default()
+        }
+    }
+
+    #[test]
+    fn genesis_matches_spec() {
+        let state = FeeState::genesis();
+        assert_eq!(state.base_fee_exec, market::BASE_FEE_EXEC_MIN);
+        assert_eq!(state.base_fee_stor, market::BASE_FEE_STOR_MIN);
+        assert_eq!(state.window, [0; market::SMOOTHING_WINDOW]);
+        assert_eq!(state.payout_carry, 0);
+        assert_eq!(state.height, 0);
+    }
+
+    #[test]
+    fn serialization_round_trips() {
+        let mut state = FeeState::genesis();
+        state.apply_block(&summary_with_revenue(12_345));
+        assert_eq!(FeeState::from_bytes(&state.to_bytes()), state);
+    }
+
+    #[test]
+    fn zero_load_holds_the_floor() {
+        let mut state = FeeState::genesis();
+        for expected_height in 1..=120_u64 {
+            let payout = state.apply_block(&BlockFeeSummary::default());
+            assert_eq!(payout, 0);
+            assert_eq!(state.height, expected_height);
+        }
+        assert_eq!(state.base_fee_exec, market::BASE_FEE_EXEC_MIN);
+        assert_eq!(state.base_fee_stor, market::BASE_FEE_STOR_MIN);
+        assert_eq!(state.payout_carry, 0);
+    }
+
+    #[test]
+    fn congested_blocks_raise_both_fees() {
+        let mut state = FeeState::genesis();
+        let full = BlockFeeSummary {
+            gas_used_exec: market::MAX_GAS_EXEC,
+            gas_used_stor: market::MAX_GAS_STOR,
+            ..BlockFeeSummary::default()
+        };
+        state.apply_block(&full);
+        // From the floor, one congested block moves each fee up by max(1, 8/8) = 1.
+        assert_eq!(state.base_fee_exec, market::BASE_FEE_EXEC_MIN + 1);
+        assert_eq!(state.base_fee_stor, market::BASE_FEE_STOR_MIN + 1);
+    }
+
+    #[test]
+    fn revenue_pulse_amortizes_exactly_over_the_window() {
+        // A pulse of R contributes to exactly 50 consecutive payouts starting
+        // with the collecting block, and nothing is stranded. 1234567 is
+        // deliberately not divisible by 50.
+        const PULSE: u128 = 1_234_567;
+        let mut state = FeeState::genesis();
+        let mut paid = state.apply_block(&summary_with_revenue(PULSE));
+        for _ in 0..market::SMOOTHING_WINDOW - 1 {
+            paid += state.apply_block(&BlockFeeSummary::default());
+        }
+        assert_eq!(paid, PULSE, "the 50th payout completes the pulse");
+        // After the window passes, nothing remains: payouts and carry are zero.
+        assert_eq!(state.apply_block(&BlockFeeSummary::default()), 0);
+        assert_eq!(state.payout_carry, 0);
+    }
+
+    #[test]
+    fn carry_stays_below_the_window_length() {
+        let mut state = FeeState::genesis();
+        let window_len = u128::try_from(market::SMOOTHING_WINDOW).expect("fits u128");
+        for i in 0..200_u128 {
+            state.apply_block(&summary_with_revenue(i * 7 + 3));
+            assert!(state.payout_carry < window_len);
+        }
+    }
+
+    #[test]
+    fn cumulative_payout_never_exceeds_cumulative_revenue() {
+        // Payout ≤ escrow at every block, where escrow is cumulative revenue
+        // minus cumulative payouts.
+        let mut state = FeeState::genesis();
+        let (mut revenue, mut paid): (u128, u128) = (0, 0);
+        for i in 0..200_u128 {
+            let r = (i * 31) % 97;
+            revenue += r;
+            paid += state.apply_block(&summary_with_revenue(r));
+            assert!(paid <= revenue, "payout exceeded revenue at block {i}");
+        }
+    }
+}
diff --git a/lez/programs/fee/src/main.rs b/lez/programs/fee/src/main.rs
index 048776d8c..ebfcc9db5 100644
--- a/lez/programs/fee/src/main.rs
+++ b/lez/programs/fee/src/main.rs
@@ -7,10 +7,11 @@
 //! before the clock invocation. Fee accounts are assigned to the fee program at
 //! genesis, so no claiming is required here.
 //!
-//! Skeleton stage: verifies its accounts and echoes them unchanged; the block
-//! fee summary is validated byte-for-byte (all-zero) by the transition.
+//! Applies the per-block market update to the fee-state account; the block fee
+//! summary is validated byte-for-byte (all-zero until metering lands), so
+//! escrow and inbox stay untouched.
 
-use fee_core::Instruction;
+use fee_core::{Instruction, market, state::FeeState};
 use lee_core::program::{AccountPostState, ProgramInput, ProgramOutput, read_lee_inputs};
 
 fn main() {
@@ -19,7 +20,7 @@ fn main() {
             self_program_id,
             caller_program_id,
             pre_states,
-            instruction: _summary,
+            instruction: summary,
         },
         instruction_words,
     ) = read_lee_inputs::<Instruction>();
@@ -44,8 +45,26 @@ fn main() {
         panic!("Fee accounts must be owned by the fee program");
     }
 
+    // A summary above the per-block caps is not a valid block; the transition
+    // also pins the summary byte-for-byte.
+    if summary.gas_used_exec > market::MAX_GAS_EXEC || summary.gas_used_stor > market::MAX_GAS_STOR
+    {
+        panic!("Block fee summary exceeds per-block gas caps");
+    }
+
+    let mut fee_state = FeeState::from_bytes(&pre_state.account.data.clone().into_inner());
+    let payout = fee_state.apply_block(&summary);
+    // Until charging lands the summary is all-zero, so no payout can be owed.
+    assert!(payout == 0, "no payout can accrue under zero fees");
+
+    let mut post_state_account = pre_state.account.clone();
+    post_state_account.data = fee_state
+        .to_bytes()
+        .try_into()
+        .expect("FeeState data should fit in account data");
+
     let posts = vec![
-        AccountPostState::new(pre_state.account.clone()),
+        AccountPostState::new(post_state_account),
         AccountPostState::new(pre_escrow.account.clone()),
         AccountPostState::new(pre_inbox.account.clone()),
     ];
diff --git a/lez/storage/src/indexer/tests.rs b/lez/storage/src/indexer/tests.rs
index 7bcbf4e79..91be072c7 100644
--- a/lez/storage/src/indexer/tests.rs
+++ b/lez/storage/src/indexer/tests.rs
@@ -38,10 +38,21 @@ fn initial_state() -> lee::V03State {
             )
         })
         .collect::<Vec<_>>();
+
+    // push clock system accounts
     for clock_id in system_accounts::clock_account_ids() {
         public_accounts.push((clock_id, system_accounts::clock_account()));
     }
-    for fee_id in system_accounts::fee_account_ids() {
+
+    // push fee system accounts
+    public_accounts.push((
+        system_accounts::fee_state_account_id(),
+        system_accounts::fee_state_account(),
+    ));
+    for fee_id in [
+        system_accounts::fee_escrow_account_id(),
+        system_accounts::fee_inbox_account_id(),
+    ] {
         public_accounts.push((fee_id, system_accounts::fee_account()));
     }
 
diff --git a/lez/system_accounts/src/lib.rs b/lez/system_accounts/src/lib.rs
index b8a0e7ee8..7b9c2bd8d 100644
--- a/lez/system_accounts/src/lib.rs
+++ b/lez/system_accounts/src/lib.rs
@@ -83,6 +83,20 @@ pub fn fee_account() -> Account {
     }
 }
 
+/// The fee-state account at genesis: owned by the fee program, carrying the
+/// genesis market state in its data.
+#[must_use]
+pub fn fee_state_account() -> Account {
+    Account {
+        program_owner: programs::fee().id(),
+        data: fee_core::state::FeeState::genesis()
+            .to_bytes()
+            .try_into()
+            .expect("FeeState data should fit"),
+        ..Account::default()
+    }
+}
+
 #[must_use]
 pub const fn clock_account_ids() -> [AccountId; 3] {
     clock_core::CLOCK_PROGRAM_ACCOUNT_IDS
diff --git a/lez/testnet_initial_state/Cargo.toml b/lez/testnet_initial_state/Cargo.toml
index f06d5f51f..f8d8decc6 100644
--- a/lez/testnet_initial_state/Cargo.toml
+++ b/lez/testnet_initial_state/Cargo.toml
@@ -13,5 +13,8 @@ programs.workspace = true
 
 serde.workspace = true
 
+[dev-dependencies]
+fee_core.workspace = true
+
 [lints]
 workspace = true
diff --git a/lez/testnet_initial_state/src/lib.rs b/lez/testnet_initial_state/src/lib.rs
index 65b5c26fe..cdafcb6e7 100644
--- a/lez/testnet_initial_state/src/lib.rs
+++ b/lez/testnet_initial_state/src/lib.rs
@@ -212,11 +212,20 @@ fn initial_public_accounts() -> HashMap<AccountId, Account> {
                 .into_iter()
                 .map(|clock_id| (clock_id, system_accounts::clock_account())),
         )
-        .chain(
-            system_accounts::fee_account_ids()
-                .into_iter()
-                .map(|fee_id| (fee_id, system_accounts::fee_account())),
-        )
+        .chain([
+            (
+                system_accounts::fee_state_account_id(),
+                system_accounts::fee_state_account(),
+            ),
+            (
+                system_accounts::fee_escrow_account_id(),
+                system_accounts::fee_account(),
+            ),
+            (
+                system_accounts::fee_inbox_account_id(),
+                system_accounts::fee_account(),
+            ),
+        ])
         .collect()
 }
 
@@ -429,6 +438,28 @@ mod tests {
             assert_eq!(account.program_owner, fee_program_id);
             assert_eq!(account.balance, 0);
         }
+
+        // The fee-state account carries the genesis market state; escrow and
+        // inbox start empty.
+        let fee_state = fee_core::state::FeeState::from_bytes(
+            &state
+                .get_account_by_id(system_accounts::fee_state_account_id())
+                .data
+                .into_inner(),
+        );
+        assert_eq!(fee_state, fee_core::state::FeeState::genesis());
+        for empty_id in [
+            system_accounts::fee_escrow_account_id(),
+            system_accounts::fee_inbox_account_id(),
+        ] {
+            assert!(
+                state
+                    .get_account_by_id(empty_id)
+                    .data
+                    .into_inner()
+                    .is_empty()
+            );
+        }
     }
 
     #[test]
diff --git a/test_fixtures/fixtures/prebuilt_sequencer_db.dump b/test_fixtures/fixtures/prebuilt_sequencer_db.dump
index fd0a2ad73..e18b57c7b 100644
Binary files a/test_fixtures/fixtures/prebuilt_sequencer_db.dump and b/test_fixtures/fixtures/prebuilt_sequencer_db.dump differ