Gas hedging for 4337, paymasters, rollups, validators: Hedgehog for B2B
Whether we like it or not, gas can be regarded as the fuel of blockchain operations. Disagree with us? Check our previous article:
Hedgehog Protocol addresses a critical challenge in the Ethereum ecosystem: the unpredictability and volatility of gas prices. As the Ethereum network continues to grow in daily usage, fluctuations in gas prices have become a significant concern for individuals and businesses operating on the platform.
Wallets and other end-user service providers often have to bear significant gas-related costs, which can impact their efficiency and, as a result, profitability. Hedgehog Protocol is pioneering solutions tailored for Layer 2 rollups, paymasters, and almost every project operating on the Ethereum mainnet to address this. Account abstraction coupled with strategic gas hedging gives businesses the tools to manage and mitigate their exposure to fluctuating gas prices.
By allowing speculation on future gas prices, Hedgehog not only creates a new asset class for trading but, more importantly, offers a mechanism for projects to hedge against potential spikes in gas costs, ensuring more predictable transaction expenses.
All in all, contributing to better user experience!
The increasing number of transactions boosts L1 congestion and, as a result, gas fees. Various L2 rollups help reduce such costs using batching or sharding. However, operational costs keep growing for the service providers themselves.
Hedgehog Protocol helps to deal with such risks by introducing a fit solution with a secure infrastructure relevant to various products, from rollups to paymasters and validators. Let’s dive deeper into the B2B market and check the particular use cases.
Layer 2 Solutions
We’ve already briefly pointed out the expenditures of L2 rollups. These solutions, such as Arbitrum, zkSync, and OP, help users significantly reduce gas costs. Their current market isn’t that large because their infrastructure is in its infancy, but they already consume a lot of gas. According to the on-chain data, the monthly gas spent to settle/proof L2 activity on Ethereum was around 390 ETH this August.
According to @rubenduburck, two months ago, the actual gas spent by Arbitrum was 13,964.43 ETH, and of zkSync — 5,311.89 ETH. According to @msilb7, on the 23rd of March 2023, batch submitters’ total gas used on L1 alone was 6,22 ETH on Arbitrum. Also, at the time of writing, the total number of batches was 453,559. To see more relevant data, follow the link.
However, Hedgehog Protocol can work as an appropriate solution that helps rollups better manage and, as a result, cut operational costs.
Let’s explore a potential strategy:
A rollup should mint when the gas price is over 15 Gwei, sell baseFee, and later, buy from the market and close their trove when the gas price drops below 15 Gwei.
Next, let’s assume the number of batches is ~1250 per day, 1 batch is worth ~0,0019 ETH, and baseFee is ~70Bn per month. The rollup needs to buy 70Bn baseFee, so it spends 1 ETH (70Bn * 15 Gwei = 1 ETH), ignoring slippage. To avoid liquidation when gas price peaks, collateral can be ~x35 (500 Gwei max), so to mint 70Bn baseFee, ~35 ETH collateral is needed.
AA Wallets and Paymasters
Account Abstraction wallets like Argent, Safe, and Sequence are beginning their journey, waiting to show impressive numbers. The number of Account Abstraction daily user operations exceeds 150K per day.
However, thanks to UX improvements, a paymasters-powered opportunity to make gas payments in ERC-20 tokens, and many other features that smart-contract wallets can provide, we are sure they will reach mass adoption.
While the Ethereum Foundation works hard to decrease gas price costs, it also works on a massive adoption of SC Accounts. They spend more gas than EOAs (usual wallets), so SC Accounts users will pay x2-x3 more.
It is a step back from cheap transactions. So, paymasters do need to improve their business models. As for now, gas price fluctuations make it hard or even impossible to build profitable solutions, which inhibits the future growth of this particular type of business. Hedgehog Protocol can enable paymasters to sell subscription-based transactions with a fixed price, use BaseFee as gas, and, consequently, make onboarding the new DeFi users smoother, expanding the market further.
Centralized Exchanges (CEXs)
Centralized exchanges like Binance and Coinbase tend to cover users’ fees partially. Considering the number of their users (e.g., Binance has about 30Mn), the load is significant, and the total fees are high. For instance, only Binance’s cumulative fees are almost 16K ETH this year.
Users go for CEXs seeking something well-tried, secure, and convenient. So, the network congestion is destined to grow bigger with even more significant expenses. As you can, CEXs can hedge up to 60% of their costs by leveraging Hedgehog.
Binance could save more than $12M on gas fees spending, and Coinbase up to $4M during the last year, considering the current price of ETH.
NFT Marketplaces
Major NFT mints always pushed the network to its limits.
For example, on April 30, 2022, Yuga Labs, the company that owns Bored Ape Yacht Club, one of the most expensive collections of NFTs, began selling its latest digital assets for the new metaverse called “Otherside”. While the sale has brought in $253 million, the spike in demand surged Ethereum, driving up transaction fees. Many buyers who paid less than $10 for a single NFT had to cash out tens of thousands of dollars in gas fees. One anonymous buyer of a $5,800 NFT paid about $45,000 in transaction fees. The demand was so high that this event even pushed Yuga Labs to start thinking about building their blockchain to handle such volumes without spoiling everyone else’s routine transactions.
Nowadays, marketplaces are gradually switching to the gasless or partially gaseless model, where users either don’t pay fees or pay them while buying assets only. So, platforms like UCOLLEX and Showtime pay for gas themselves. If this trend broadens, NFT marketplaces will become one of the top guzzlers seeking hedging opportunities. Luckily, we have all the necessary tools for them to operate such costs effectively.
Validators
Currently, over 26M ETH is staked among various pools, which is almost 22% of the total supply of ETH. The number of validators is constantly growing, passing 824,479 by today.
Validators make the whole Ethereum Network work by proving blocks. Their service, especially of the big validators, is well-compensated, but their outcome depends on the current gas prices.
The meaning of hedging for a validator is similar to mining pools — stabilizing cash flows. Their rewards for confirming transactions depend on the gas fee. You’re in great shape if the gas fee is 500 gwei then, but you also under-earn if the gas fee is around 10 gwei. Hedging the gas will stabilize this cash flow for the validator, making it more predictable.
Validators are the ones who would have their strategies in between aggressive and conservative, as they still get rewarded for their services.
On top of that, any blockchain business can switch to the gasless model with the Hedgehog Protocol. The outcomes of this B2B cooperation are excellent: improved UX, more extensive user base, improved economy, and accelerated Web 3 adoption.
In conclusion, the challenges caused by gas volatility have consistently impacted Ethereum’s growth and scalability. As the blockchain landscape evolves, there’s a pressing need for solutions that bring predictability and stability. Hedgehog Protocol is stepping up to meet this demand.
Given the current surge in demand for rollup hedging and the growing prominence of Account Abstraction and paymasters, the introduction of the Hedgehog Protocol couldn’t be better timed. Its innovative mechanisms, catering to both B2B and B2C segments, bridge the complexities of gas fee management and improve user experience.
As the Ethereum community pushes for a more efficient and user-centric ecosystem, Hedgehog Protocol offers the tools necessary for sustainable growth and broader adoption.
About Hedgehog Protocol
Gas derivative protocol focusing on AA (account abstraction) wallets, L2 rollups and similar 4337 paymaster use cases for hedging BaseFee. Overall, Hedgehog Protocol is building a secure infrastructure for on-chain financial derivatives that can go beyond Ethereum BaseFee: including Bitcoin hashrate, EigenLayer hedging, and even end user speculation.
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