Trading gas derivatives
Exploring trading opportunities for Gas Derivatives.
Introduction
In our previous article, we discussed the potential future of sponsored transactions and which steps have been taken already to make them cheaper and more affordable. Let’s look at the same thing but at another angle: How can an end-user profit from the ever-fluctuating gas fees? While offsetting gas costs at first may be considered a potential profit increase, the volatile nature of BaseFee allows a whole new market to emerge. This volatility, a significant pain for regular network users, opens unique trading opportunities in the form of gas derivatives.
Understanding gas volatility
Before diving into gas derivatives trading, it’s essential to understand what gas fees are and why they fluctuate. In the Ethereum network, gas fees are payments made by users to compensate for the computing energy required to process and validate transactions. These fees are dynamic, changing based on network activity and demand for block space. During periods of high demand, gas prices surge, presenting both a challenge for network users and an opportunity for traders.
The emergence of gas derivatives
Since the early days of Ethereum, people have been wondering about the potential of the untapped market of native on-chain assets, such as BaseFee, introduced during the London hard fork, aimed to reduce the volatility of gas fees. Until today, various attempts have been made to make it tradable in some way or another, including purely economical solutions, also called cash-settled and physical delivery-based, more known as a blockspace market.
Validate the idea
One of the first and most significant attempts of its time to create tokenized gas fees was the CHI token, created in a few days during the hackathon by 1inch.
It was engineered as a gas token to ease users’ transaction costs by capitalizing on Ethereum’s refund mechanism. Users could mint CHI tokens during low gas prices and burn them during high-demand times, effectively locking lower gas costs for future transactions. Despite its initial success and attention, CHI faced challenges that led to its doom soon after its creation.
Ethereum’s protocol changes and optimizations, including EIP-1559, ultimately impacted CHI’s utility and efficiency, rendering it less viable as a long-term solution for gas cost management. As a result, its adoption decreased, marking a brief yet impactful journey. However, no one has ever considered CHI a proper solution to the problem. It was a nice toy to play with, showing everyone the demand for such a product.
Demand is growing
During the highest congestion peak, several things became evident: the need for robust gas hedging and the will to trade gas. What if BaseFee was a tradable asset? Well, the volatile nature of it leads to several trading strategies. It’s either daily/weekly trading based on previous records and historical data or a more complicated social prediction based on a trader’s experience. The game is challenging, yet the more interesting it becomes.
Trading BaseFee 101
Whenever there is a massive NFT mint or a mainnet launch of a particular protocol, you know that BaseFee will peak: Buy the BaseFee token from the market before this event and sell it during the highest demand. This trading strategy relies on experience; no hardcore math or pattern recognition is involved.
But on the other hand, after a surge, there is always a decline: Mint the token and sell it right away in the market. After the event, BaseFee trades at a lower price, buy back the tokens and close the position. This strategy is similar to futures trading, yet it is more predictable for a savvy trader.
These are the most basic mechanics of gas trading. Like sports betting, you either bet on a high demand or a decrease based on your observations. It’s up to you how to recognize the event. It may be pure eyeballing or more complicated stuff.
Mastering the trade in a new market is challenging but not impossible. With the evolution of gas trading, we see more complicated strategies to come next.
Hedgehog is spiked up to give this opportunity to everyone willing to trade native on-chain derivatives.
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