Proposal to Launch ETH Gas Futures Market

Proposals
1

Background

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.

Key Metrics

The following graph from Dune Analytics shows the median gas price on Ethereum over the past year:

Screen Shot 2021-02-10 at 9.05.16 PM
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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.

Use Cases

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 Metrics

The price feed for this contract would be Chainlink’s Fast Gas / Gwei aggregation feed, and the conversion to USDC would be using the USDC / ETH aggregation feed.

Other Notes / Open Questions

Open Questions:

  1. Should this product be settled in ETH?

  2. 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.

7 Likes
2

Great idea! In full support. I think it should be settled in ETH, but denominated in gwei (hence 10^-19 ETH).

3

This would be awesome.

I do think this market should be settled in Gwei as well, but times some multiplier following the uGAS Futures Token system. I believe they multiply it by 1M to get the range in the milli-Ether resolution. Otherwise you’d be transacting in dust and fumbling with a lot of zeroes during trading. The math for a multiplier for 1M makes more sense since estimates are around 25K gas for ETH transactions, 40K for ERC20, and 250K for trades. Users can easily estimate their average gas usage and multiply it by the 1M.

In your above example, instead of ordering 100M shares, they would order 100.

4

I´m in support of this, thanks for the well thought out proposal. I like the utility aspect of it which goes beyond pure speculation.

Settlement in ETH sounds reasonable, just like pricing in Gwei. Make it as intuitive as possible.

1 Like
5

while I really support this proposal, settled in eth might be a technical challange

1 Like
6

I think its a great Idea that may also attract some new Folks!

7

Big fan of this and has an obvious use case beside just speculation for businesses in DeFi. I think this could be a hit.

1 Like
8

I think it’s important that the price is displayed in GWEI for easier understanding. It can be scaled by a large factor but the price needs to say 100, not 100,000,000.

Is the gas price a 30 day rolling average? How is that feed calculated?

9

I’m a big fan of us launching this. The only problem is if we do it in base gwei then I think there is more work that is required first :frowning:

Do people think that based in USD it’s possible? Or may as well wait until we get GWEI?

10

I think the important thing is that it keeps the same base as its current value in gwei. If you could just do a 1:1 conversion from the gas price in gwei and an index on Perp in USD that could work

For example, when gas is 220 gwei then the index would be $220. That would be easy enough to understand. I honestly think this market could do really well and should be prioritized.

1 Like
11

This is a pretty good idea. Price 1 GAS = XX gwei, and assume 1 gwei = 1 USDC.

1 Like
12

I think the chainlink feed is updated every two hours or so.

https://data.chain.link/fast-gas-gwei

I think a 30-day rolling average would be overkill given how volatile gas can be over short periods of time. I wonder how necessary any moving average is needed given the frequency of the feed update

13

I´m still much in favor of this proposal but I´d like to raise the question, how will EIP-1559 influence this proposal?
There will be a base fee that changes depending on traffic and that is burned. Then there is also a tip for miners to prioritize transactions.

Will the future market only target the base fee? Or is there a way to incorporate the tips, like a moving average? Is that even desired?

14

Depends how Chainlink handles it, but either the base fee or the “fast tip gas price” would be sufficient for this purpose. I don’t think it’s a massive issue but something to keep in mind when EIP-1559 launches.

15

Any update on the viability of this? Have the devs. shown any interest in this market?

16

Have been asking around but not too much interest - there’s been more interest in just listing more tokens actually! But keen to hear what others say about this topic

17

Deribit is launching an implied volatility index and futures contracts. I think that IV trading could be a good addition to Perp.

2 Likes