Understand how the Base Fee token works

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Hedgehog Protocol

6 min readApr 10, 2024

The core of Hedgehog Protocol is the Modular Synthetic Blockspace. As we’ve described in our previous article, an essential part of it revolves around sourcing and submitting onchain Base Fee data to ensure market operations are based on accurate and reliable information.

This foundational data enables the minting of BaseFee tokens through Collateralized Debt Positions — CDPs, in the case of Hedgehog, users leverage Wrapped Staked Ether (wstETH) as a collateral to participate in the gas fees derivatives market. The architecture simplifies thethe complexities of blockspace and gas fees, turning them into tradable assets.

This tradable asset is embodied in the Base Fee token. In this article, we’ll dive deeper into it, explaining how to mint, manage, and redeem it and the many ways that you can use it to your benefit.

Base Fee Token

In the Hedgehog Protocol, the Base Fee token is a token minted through a Collateralized Debt Position (CDP) in the Hedgehog’s dApp. Its v price is derived from the on-chain logarithmic moving average (LMA) of gas prices, updated every 50 blocks through our oracle. This way, the BaseFee derivative market will still allow for several trading opportunities, be it for hedging or speculation purposes, mitigating volatility and potential manipulation attacks.

Once minted, holders of BaseFee can use it for several reasons:

Speculate on gas prices
Hedge against gas during high fluctuation
Stake to earn as a Stability Pool depositor
Provide Liquidity and earn rewards

Let’s explain how everything works.

Minting

In this section, we’ll explain how to mint BFEE and manage a position in the Hedgehog Protocol dApp using wrapped staked Ether (wstETH) as collateral.

How?

TL;DR — Add a sufficient amount of wstETH as collateral to create Base Fee tokens.

Step-by-step:

Connect your wallet and ensure it has enough wstETH to use as a collateral and enough ETH to cover for gas fees.

2. Mint BFEE: We’ve designed the Hedgehog’s dApp to be straight-forward. After connecting your wallet, simply click on the BFEE mint tab. You’ll be prompted to specify the amount of wstETH you want to lock up.

To decide the ideal collateral ratio for you, remember, the number of BFEE you can mint depends on the collateral’s value (your wstETH) and the protocol’s current collateralization ratio requirements, which must be >150%.

3. Enter the desired amount: Input how many BFEE tokens you wish to mint. The interface will show you the required amount of wstETH needed as collateral.

4. Confirm and Mint: After reviewing the transaction details, including any associated fees, confirm the transaction. Execute the minting to create your BFEE tokens.

Managing Your Position

With your BFEE tokens now in your wallet, you need to manage your exposure. Remember, your CDP is an active position you need to monitor. Let us refresh you about the collateralization ratios.

Minimum Collateral Ratio (MCR): Set at 150%, this ratio ensures that each trove (individual CDP) maintains a healthy collateral level to mitigate risk.

Critical System Collateral Ratio (CCR): At a threshold of 200%, the CCR acts as a safeguard for the overall system’s health, triggering Recovery Mode if the system’s total collateral ratio falls below this level.

Monitoring: Maintain a healthy collateralization ratio of your CDP. If the value of your locked wstETH falls to below 200%, you might need to add more collateral or reduce your debt to avoid liquidation.

Liquidation Process: If the collateral falls below 150% , your CDP could be liquidated, meaning some or all of your wstETH could be sold automatically to cover your debt.

Closing Your Position

When you decide to close your position, you must repay the Base Fee tokens you minted, along with any accrued interest or fees, in order to reclaim your collateral.

Repaying the Debt: Interact with the CDP through the Hedgehog dApp, selecting the option to close the position. You’ll need to submit the equivalent amount of Base Fee tokens you initially borrowed, along with the fee.

Claiming Your Collateral: After your debt is repaid, you can withdraw your wstETH from the CDP. Your position is now closed, and your tokens are back in your wallet.

What to do with your BFEE

Trade

Having your BFEE tokens securely stored in your wallet opens up a variety of opportunities for generating income. The clearest one is trading, BFEE price is based on gas fees, which can be very volatile, this gives traders several opportunities to capitalize on price fluctuations to make a profit.

Trading on the Hedgehog dApp is easy, simply click on the Trade BFEE tab and you’ll be prompted with a BFEE historical chart and trading terminal. Simply click on the Trade BFEE button and you’ll be able to interact with the underlying AMM.

Provide Liquidity

Additionally, you might explore the option of participating in liquidity pools, where you can provide your BFEE tokens as liquidity to a decentralized exchange and earn transaction fees in return.

To become a liquidity provider (LP), simply click on the BFEE/wstETH tab on the Hedgehog dApp and deposit both BFEE and wstETH. From the same tab you’ll be able to manage your position, claiming rewards or unstaking tokens at any time.

Stability Pool

Finally, another way to earn is to participate in the stability pool. You can do that by depositing the Base Fee token in the Stability Pool tab. These tokens are pooled together and serve as a reserve to absorb losses from liquidation events and ensure the overall stability of the protocol.

Risk Mitigation: The stability pool acts as a first line of defense against volatile market conditions. It is designed to protect the protocol against scenarios like sharp declines in collateral value, which could otherwise render the system insolvent.

By contributing to the stability of the ecosystem you’ll be rewarded with a share of interest rates, a portion of the collateral from liquidated positions and Hedgehog’s governance token (HOG); proportionally based on your stake in the entire pool.

Testnet is coming soon.

The Testnet for the Hedgehog Protocol is launching soon, allowing users to directly interact with the functionalities outlined above in a test environment. This phase is crucial for anyone looking to get hands-on experience with minting Base Fee tokens, managing Collateralized Debt Positions (CDPs), and exploring various income-generating activities without the risk associated with real transactions. It’s an opportunity to familiarize yourself with the protocol’s operations, from speculating on gas prices to participating in liquidity pools and the stability pool.

The introduction of the Testnet is also an important step for the protocol’s development, offering users the chance to contribute feedback based on their interactions. This feedback is invaluable for identifying areas of improvement and ensuring the platform is user-friendly and fully optimized for launch. It’s a chance for the community to engage with the protocol’s features in-depth and help shape its future direction.