Source: LongHash
Original title: DeFi users are looking for ways to hedge high gas fees
Gas is regarded as “fuel” on the Ethereum blockchain and is used for transactions, executing smart contracts, paying for storage fees, etc., and its fees vary according to network usage.
In 2020, with Ethereum’s full firepower in the vertical field of DeFi (decentralized finance), according to DeFiPulse, the total lock-up value (TVL) of smart contracts has increased by 20 times year-to-date. According to calculations from Etherscan data, the average gas fee of Ethereum on the 30th continued to rise in 2020 and hit a record high of 198.966 Gwei per month on September 25.
Most DeFi products use smart contract portfolio related development modules to build financial agreements, and users can interact with them in a “decentralized” way to obtain financial services (such as digital currency trading, lending, and derivatives). To this day, these products are still experimental products. The opposite of the lower threshold access mechanism is more security risks and service costs.
Due to the increase in usage scenarios of products on the Ethereum chain, smart contracts interact more frequently between different protocols, making the Ethereum network more congested.
Imagine the daily life of a blockchain geek enthusiast: first convert Bitcoin and Ether to wBTC and wETH, then part of it is used to buy the tokens you like on aggregator platforms such as 1inch, and part is deposited in the decentralized trading platform Uniswap. Liquidity mining is exchanged for LP governance tokens, and the last part is invested in the “forked” DeFi protocol to try to earn returns.
Data from the data analysis company Glassnode, the number of Gas used in Ethereum transactions, and the current income of miners supporting the Ethereum blockchain’s proof of work have surpassed the 2017 level and reached a new high. Behind the attractive short-term high annualized return (APY) brought by one DeFi experimental product after another, in addition to the early ecological participants enjoying the dividends, the Ethereum miners, “scientists” and hackers also got delicious cake.
Common products
Before 2020, few developers and traders mentioned the Gas issue, but there were similar entrepreneurial projects on the Ethereum hackathon. With the 312 black swan incident and the continuous upsurge of liquidity mining, users discovered that Gas fees directly affected their digital asset portfolios when decentralized financial transactions were blocked on a large scale.
At present, the blockchain development community has several common Gas solutions, usually for contract derivatives and smart contracts written using the Gas pricing mechanism to deduct refunds.
The design of Gas contract derivatives uses a zero-sum game between buyers and sellers on the expected price of Gas, such as on-chain futures and options products. The recently launched uGas-JAN21 of UMA Protocol is a futures product. The pool size reached 188 ETH within one week of the launch, and there were about 27 user addresses.
The Chi GasToken designed by the 1inch team has 4504 user addresses and the pool size is about 1.2 million US dollars. These two types of solutions are currently in their early stages, but are gradually being accepted by users.
Due to the unpredictability of Gas, dynamically calculated according to the conditions of the mining pool, its fluctuations are very large, sometimes single-digit Gwei, sometimes breaking through 500 Gwei, so it has also attracted the attention of some speculators, such as some DeFi “scientists” Exploring the profitable way of gas trading in the community. However, the risk of “loss” can be transferred through multiple tools, which has a positive effect on ecological development, allowing DeFi users to manage Gas prices like investment.
Two design directions
Currently, there are two types of products that are popular in the market. The simpler one is to use the characteristics of the long-short-zero-sum game of derivatives to match the buyers and sellers’ expected price of Gas.
There is also a more clever use of the Ethereum-like virtual machine (EVM) Gas pricing mechanism, inserting “burden reduction” codes in the contract, such as cleaning/self-destructing contracts, cleaning and deleting storage, etc., to maintain the simplicity of the code, thereby Receive a Gas refund. The tokenization of this type of smart contract is called GasToken.
The first and second generations of GasToken were proposed and developed by programmers such as Lorenz Breidenbach 3 years ago. At present, the more active one in the market is Chi based on GasToken 2nd generation launched by 1inch. According to 1inch’s article, it has improved the efficiency of GST2 by 10% through modifications.
The following figure compares the market prices of Chi and Ugas-JAN21 products with the price of Ethereum Gas. Although the two types of products cannot be fully linked to the daily gas price changes, they are somewhat related in terms of trends. For example, as the gas fee rose from August to September, the price of Chi also broke new highs, and the newly launched on-chain uGAS-JAN21 contract also remained at $40 after a brief increase in Gas in late November. As the gas rate dropped, it returned to Base position. However, since the token price of uGAS-JAN21 represents the expected price of Ethereum Gas fees on January 21, 2021, it is not sensitive to the current gas rate changes, and even changes completely opposite.
Although the purpose of hedging Gas is to reduce the risk of attrition of on-chain operations, the price of its tokens is completely based on market discovery, with deviations, and belongs to “experimental” products.
Market feedback
Recently, the uGAS-JAN21 futures launched by the DeFi protocol UMA belong to the first category of derivatives design. The market value is about 160,000 US dollars, which is one-tenth of Chi GasToken. The scale of DeFi users who use Chi GasToken to hedge losses is larger.
These two Gas products are not designed for “investment transactions”. The main logic is to mint Gas tokens when the Ethereum Gas fee is low, and sell (or burn) tokens at high prices to offset part of the transaction fee when the Ethereum network is congested. . However, since they are all in ERC20 format and circulated in Uniswap, 1inch and Curve trading platforms, their price discovery is also affected by the secondary market.
Due to the short launch time, the gas derivative uGAS-JAN21 with few sample data has a correlation coefficient of 0.17 with the intraday gas price of Ethereum, which is less than the 0.55 of Chi Gastoken, and both are positively correlated.
A positive correlation coefficient means that the market price of Chi and uGAS-JAN21 is consistent with the real Gas price. The higher the coefficient, the higher the degree of correlation, and the token market price is more sensitive to the Gas price. Therefore, the current market price of Chi Gastoken with a larger user scale is more similar to the changes in the real Gas fee price.
With the increasing complexity of the DeFi basic ecology, the problem of gas loss has never received attention and has become an important consideration for major developers. The volatile market will cause a domino effect on the chain, and nearly 14 billion US dollars of DeFi assets are locked on the Ethereum chain. As a “pass” for tolls on the chain, the risk management tool of Gas will become more and more. important.
