Introducing Modular Synthetic Blockspace
Learn about the concept of Modular Synthetic Blockspace and how this approach simplifies gas hedging in a limited blockspace market.
Prologue
Understanding Gas
In blockchains, gas is a critical element, akin to fuel in a vehicle. It’s essential for executing transactions, smart contracts, and other on-chain actions. Gas serves as a unit of measurement for the computational work required by a network to process an action. The cost of gas is not static; it fluctuates based on the network’s demand and congestion levels. Or at least that’s how most blockchains function.
High demand periods, often seen during network upgrades, liquidations, or popular dApp launches, can lead to increased gas prices. This dynamic pricing is crucial for the network’s health as it prevents spam transactions and ensures that resources are allocated to those willing to pay. Understanding gas is critical to interacting with a blockchain, as every user action requires gas, from simple transfers to complex dApp interactions. It’s really like oil…
Gas Market and Blockspace
Blockspace refers to the finite space available in each block for transactions. This space limitation creates a natural market dynamic where users must bid for their transactions to be included in a block, with gas prices acting as the bidding mechanism. This system reflects a real-time supply and demand scenario: higher demand for block space leads to higher gas prices, and vice versa.
During network congestion, such as during popular ICOs or NFT drops, this market becomes highly competitive, leading to a surge in gas prices. This can result in slower transaction processing times and higher costs, impacting user experience. Where does that lead us?
Blockspace as a Product
When you get to the bottom of how blockchains work, you have no doubt that blockspace is one of the most important commodities. It’s the holy grail and the underlying market for all different actions: NFT minting, ICO gas wars, liquidations, inscriptions on Bitcoin, and everything else. Then why was it never productized?
Generalization Obstacles
Well, it has been, to an extent, by Flashbots. And that’s because they figured out a concrete use case that both sides of the market needed. There is a clear value proposition and not a super generalized blockspace offering. And that’s extremely important, because a generalized approach to blockspace might still take ages or… be ultimately impossible to deliver! That’s right, many ideas targeting blockspace have gone nowhere, largely due to overcomplicating the protocol design.
Overcomplicating design is crucial in this case, because not all blockspace is made equal. For financial use cases like liquidations, minting, and trading — it’s not about just being inside the block, but about what position in the block you are in. And you also want to have it somewhat guaranteed, or it would be a pretty weird service… Imagine if you wait 15 min for an uber and have like a 50%-50% chance of the driver accepting you? Kinda strange, right? Making the probability higher requires a huge amount of trust from the entire validator vertical, which is super hard to do for any newly launched protocol. We will also explain some of the intricacies in the next section.
Do check this awesome piece by Frontier Tech on the struggles of blockspace design:
Other use cases do not require guaranteeing a certain position within a block, for example, if you just want to execute a transaction within the next 12 hours. There is no real urgency there. Overall, the requirements for “blockspace as a product” are different depending on what product it is. As a result, we don’t believe you need to generalize blockspace from the start; youneed to focus on the use case first.
What is the use case we see for Hedgehog to start with? Financial:
- Rollups paying huge gas costs in ETH
- Account abstraction wallets on different chains
- Exchanges, NFT platforms, and more…
There are a few ways to make it possible. Let’s check how.
Hedging and Its Variations
First of all, why hedge? Effective gas hedging allows users and developers to navigate this competitive space more predictably, managing transaction costs against market volatility. Understanding this market is crucial for users and developers, as it influences decisions regarding transaction timing and gas price settings. As the amount of use cases grows where providers pay for their users’ gas fees, hedging becomes more important, minimizing the need for retail users having to do it themselves.
The time is now, or at least very soon! How to best do it though?
Hard-settled (physical blockspace delivery) gas hedging in the Ethereum network is similar to physical delivery derivatives in traditional markets. Users lock in a future price for gas to protect themselves against potential price surges. This is typically achieved through derivative contracts, where a user agrees to buy or sell gas at a predetermined price at a future date. This strategy can provide cost certainty and protect against volatility, but it also introduces elements of risk and complexity.
Why is it such a complex and hard problem, you can ask? — The problem here is that physical blockspace doesn’t belong to the derivative issuer due to the decentralized nature of blockspace. Only the validator can manage blockspace during the creation of a new block. However, the Ethereum network is one of the most decentralized networks, with over 900,000 nodes. Therefore, you cannot just come and buy a place in the next block — you need to agree and coordinate with everyone. Mission impossible, you say. Really? Generally speaking, NO. It is appropriate to remember here about PBS and mev-boost built by Flashbots.
Theoretically, it would be possible to buy space in a block by negotiating with individual block builders. To an extent, Flashbots have done in their own use case. However, MEV is one of the most dynamic growing verticals in blockchain, with significant changes constantly occurring (in the past and definitely in coming years) — with partial block auctions proposed by Vitalik, mev-boost++ from EigenLayer, trusted execution experiments, decentralized builders, and more and more and more… Building a protocol on top of something that is changing so actively is quite risky — everything will change while your code goes into production.
Alkimiya is making a fair effort in that direction, but it’s not an easy challenge to solve. 1inch team in 2020 launched a cool product-token CHI which worked! Back in the day, on Ethereum the traction was stopped by Vitalik himself, unfortunately, but it is still live on Binance Smart Chain with some usage there. As for UMA, they once also tried to launch a derivative for gas, but they have never really pushed it enough, or maybe they chose an overcomplicated launch strategy. Oiler is also known to have worked on this problem, waiting for the on-chain capabilities to catch up to their needs… Another way to tackle this problem would be to do an insurance-like product for edge cases, but that’s a topic for another day. Overall, as you can see, a lot of research is ongoing!
Let’s get back to the metaphor with cars and oil. Imagine if part of an Uber car needed to have space for shipments, a part for kids, a part for adults, and a part for business people… and you needed to stick all of it in at once, as a service, in one car. That’s pretty much impossible. You can’t build with such generalization. Or you can, but you better start more specialized and then work your way upwards. That’s what we do!
We are abstracting away complexities.
And getting to the core of the use case.
We strip away all the unnecessary parts and create…
Synthetic Blockspace
Synthetic Blockspace (modular ™ ) emerges as an innovative, cash-settled free market approach to traditional gas hedging methods. It involves the creation of freely circulating synthetic assets that represent gas on the network.
- We take a block at its core
- We remove all the complex information from it
- And just check the gas costs at the time of each block
That’s it, that’s the beauty of this. We take something complex and make it easy for our use case. Because what do rollups, wallets, validators, and other providers need in this case? — hedging. And for hedging, you only really need to know the gas costs.
Ok, let’s get the fluff out of the way. How?
Hedgehog Protocol is a synthetics protocol in essence. It can also be seen as an infrastructure layer that all providers can utilize for their gas needs: layer 2 rollups, wallets, paymasters, 4337, etc. We are inspired by the Liquity CDP (collateralized debt position) design and are able to tweak it to our needs.
Different collateral + different synthetic asset = different combo!
The steps are fairly simple:
- Set up or incentivize a new oracle feed specifying how much gas was used in a block, for example. The price of ETH is easy to get,but the price of gas is harder. In the latter case, some modifications should be applied. Conceptually, it can be prices of anything, as long as they can be safely calculated.
- Store those values and use an aggregated value of 50–100 blocks LMA to avoid manipulation attacks, yet don’t make the chart too flat. That’s in the case of Ethereum gas prices, for example. For other chains, a different LMA or mechanism altogether can be taken. Synthetics can be made out of anything!
- Foster a secondary free market for that synthetic asset.
- Tweak dynamic fees for the redemption mechanism to balance the synthetic asset price and value of the system with regard to the collaterals inside.
- More magic…
We have gone through the math since the start of 2023, and have been diving into the research for many months. Full protocol details on how LMA, redemptions, dynamic fees, and all complex things — will be posted soon!
Overall, compared to traditional gas hedging methods, Synthetic Blockspace is more user-friendly and versatile, allowing real-time adjustments to gas market conditions and needs. This method simplifies the process of gas price hedging, as it doesn’t require locking into a fixed price or predicting future market movements. Instead, users can buy or sell synthetic gas assets as needed based on current market conditions. This approach opens up gas management to a broader range of users, from casual Ethereum network participants to large-scale dApp developers, making it a more adaptable solution.
Synthetic Blockspace in Hedging
Synthetic blockspace is particularly advantageous for various entities within the Ethereum ecosystem, ranging from individual users and developers to large organizations and dApps. Let us link this article again:
For individual users, synthetic blockspace provides an opportunity to speculate on events of high congestion without diving too deep into the technical aspects. Developers and organizations can use synthetic blockspace to ensure more predictable operating costs for their projects or services. For instance, a dApp developer expecting high user activity, typically leading to increased gas costs, can leverage synthetic blockspace to hedge against this cost variability. This enables better budgeting and financial planning, ensuring the sustainability and growth of projects within the Ethereum ecosystem.
Modular Design for Growth
The most striking aspect of Synthetic Blockspace is its unlimited potential for customization and innovation. It allows for the creation of various financial products and services tailored to the specific needs and conditions of the Ethereum market. Or Bitcoin. Or Data Availability fees. Or some other on-chain native derivative. Hence, the word modularity, which is, in fact, true, as the CDP model can be applied as modules to any synthetic asset Hedgehog DAO decides to push forward.
BaseFee gas market is just the first step for Hedgehog. The protocol utilizes a generalized CDP model inspired by Liquity. This approach can further be applied to Bitcoin transaction fees, Eigenlayer re-staking rates, Data Availability costs of Celestia, Priority Fees, and other on-chain derivatives.
This approach can perhaps be superior for the reason that synthetics can cover gas markets of any chain at all, without having to deploy on those 100+ chains. Synthetic assets can replicate the exposure providers need, all in one place. That makes those markets potentially more accessible and more liquid too, especially for users! This is not possible with physical blockspace at all as validators, miners, and other participants will always be different from chain to chain, it’s an unrealistic BD effort…
One more interesting thing is multidimensional gas fees. Also this is not relevant to ethereum only — other blockchain also considering multidimensional gas fees approach:
In conclusion, the exploration of Modular Synthetic Blockspace kick-starts an exciting chapter for innovative solutions to the constant challenges of gas pricing and blockspace management by abstracting the complexities of gas markets into a more accessible and manageable form. This approach, grounded in the principles of modularity and flexibility, paves the way for a wide array of financial products and services tailored to the unique needs of the community.
Hedgehog Protocol is not far from testnet, be ready!
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