As the amount of activity on the Ethereum network fluctuates with product and market developments, there is an increasing need for an instrument that allows participants to hedge gas prices. A perpetual futures product would allow network users, developers, and miners to lock in their exposure to gas rates, while also allowing speculators to bet on gas prices.
Although products such as GST1/2, 1inch’s Chi GasToken, and UMA Lab’s uGAS futures serve this market to some extent, their adoption has been constrained by several issues. Gas Tokens pose high minting costs. They also suffer from a significant technical limitation since their redemption requires direct smart contract interaction and savings (thus not enabling a speculation use case because they’re illiquid to offload to actual users). Current implementations of fixed expiry futures have historically seen thin liquidity, which combined with the requirement of rolling positions, provide limited utility to users and speculators.
A perpetual swap contract for gas prices would be uniquely differentiated due to the dynamic funding rate, ability to unwind positions when needed, lack of need to roll positions, and potential to speculate on prices with leverage.
The following graph from Dune Analytics shows the median gas price on Ethereum over the past year:
We observe a gradual upward trend with clear mean reversion, and Perp.fi’s vAMM construction is uniquely positioned as a venue for a market with such curves. The funding rate direction will alternate over time, so long/short balance more organically tends toward the index price as compared to pairs with a higher volatility or drift parameter. As a result, the insurance fund assumes less risk and remains solvent in the long run.
We have seen an increasing number of creators of decentralized applications choose to pay for users’ transactions. With gas costs increasing, some of them have had to resort to limiting the amount of transactions per day their applications allow. For example, Polymarket, a flagship prediction market on Ethereum, was paying $25k a day on gas out-of-pocket for their relayer. As a result, they planned a system in which a user would only be allowed to withdraw once every 3 days.
Users and creators of decentralized applications can effectively “lock in” their gas rate for a specified interval of time by estimating their net expenditure over the period, while simultaneously taking a long or short position of the equivalent amount.
Let’s consider a decentralized application owner (such as Polymarket) who expects an expenditure of 100M gas over the course of a month to pay for user transactions. If the current gas price is 80 gwei, Polymarket’s team can attempt to lock in an overall expenditure of 100M * 80 gwei = 8 ETH by going long 100M GAS/USDC contracts (they choose any amount of leverage). They will also need to hedge their ETH/USDC exposure by going short, and they can use perp.fi to do that as well. So this has the added benefit of increasing liquidity on ETH/USDC on perp.fi!
If at the end of the month, their average gas price expenditure over the period is 85 gwei, and GAS/USDC trades at 87 gwei, they can exit their perp.fi position at a profit, having hedged their exposure to gas prices (subject to slippage at exit). Similarly, if their average expenditure ends up at 75 gwei, and the contract is trading at 77 gwei, their overall cost as a result of this hedging would net out at 80 gwei.
Other Notes / Open Questions
Should this product be settled in ETH?
Should the contract price be scaled by some factor to reflect a greater number of units of gas? For example, if the feed says 70 gwei, should the index reflect this in ETH terms with a scaling factor of 10^9 or 10^6? Each contract would represent a larger number of units of gas, which would more closely match the UX of a network participant or speculator.