What is Hedgehog?

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Hedgehog Protocol

8 min readMar 13, 2024

The frictions of gas fees on the adoption of dApps on Ethereum and blockchain technology have been a hot topic for a long time. The need for a solution becomes increasingly apparent during times of network congestion. This is especially true during periods of market euphoria, like the one we are currently experiencing.

Pushed by that latent need, the entire ecosystem has evolved. Numerous solutions were developed to mitigate the user experience friction when transacting on Ethereum—side chains, L2 solutions, AA, and others. Not only that, Ethereum itself has evolved. With EIP-1559, one of the most significant advancements was a new way for users to bid for blockspace.

With it, the gas market works like this:

Gas Fee = BaseFee + Priority Fee

In our previous article — Gas markets ⛽️ Blockspace & BaseFee in the Ethereum ecosystem. L2 rollups, account abstraction, and more — we show that blockspace can be a very complex subject with several participants. Also, finding buyers and sellers of blockspace can be pretty difficult. With that in mind, Hedgehog’s solution (little spoiler) is about keeping the richness of this valuable market but abstracting away all its complexities; for that, we focus on the BaseFee.

Gas Fee = BaseFee

This may sound abstract, so we’ve prepared a historical chart representing Ethereum’s Base Fee so you can comprehend it visually. On Chart 1, you’ll see the median baseFee of every block on Ethereum in the past 7 days.

Chart 1: baseFee per block — past 7 days

It is important to mention that a lot has been done in this field. 1inch’s CHI token, for example, was one of the first and most significant attempts at creating a Gas token, as described in our previous article — Trading gas derivatives — it allowed users to mint CHI tokens during low gas prices and burn them during high-demand times, effectively locking lower gas costs for future transactions. As described in the article, Ethereum’s protocol changes impacted CHI’s utility and efficiency, rendering it less viable as a long-term solution for gas cost management.

We’ve learned from all previous attempts, and we’re privileged to be in the perfect time in the market where everything is in place for our solution to be technically viable and gas fees are still a problem affecting everyone’s lives.

Enter Hedgehog

Hedgehog is innovating; we’re an infrastructure for onchain native derivatives currently building a Modular Synthetic Blockspace. It involves the creation of freely circulating synthetic assets that represent gas (or any other onchain native derivatives in the future) on the network (Learn more in our Introducing Modular Synthetic Blockspace article!).

One of the biggest differentials of our solution is our custom CDP pools, which allow anyone to launch onchain derivatives to hedge or speculate with. Inspired by Liquity, but with quite a few changes. The opportunities are endless, as an example, currently, there is no place to onchain native derivatives of:

BaseFee volatility;
Staking rate volatility;
Eigen layer restaking rates;
Bitcoin fees;
Celestia DA and end-user speculation, etc…

As we’ve stated previously, we’re at a privileged point in time to start with the gas market and BaseFee as our first solution. As described before in our little spoiler, the modular synthetic blockspace solution for baseFee revolves around:

1. Taking a block at its core

2. Stripping all the complex information from it

3. Checking the gas price at the time of each block

BaseFee derivatives market

With this approach, we create the BaseFee derivatives market, where users are able to mint a BaseFee token CDP in an overcollateralized position. At the same time, the CDP encourages market convergence with the actual gas price by allowing participants to act on arbitrage opportunities themselves through Automated Market Makers (AMMs) and by opening or closing positions at any time.

To mitigate the BaseFee volatility spikes seen on Chart 1, the BaseFee price is derived from the on-chain logarithmic moving average (LMA) of gas prices, updated every 50 blocks through our oracle. We welcome research and initiatives on how to reduce the trust setup of this oracle, for example, by spinning up nodes with staked HOG to replicate the design of Chainlink. The goal is to make the protocol as trustless as possible beyond the initial stages.

The 50 LMA design offers protection against sudden spikes and potential external manipulation. The 50-block smoothed BaseFee is shown in Chart 2 as the green line.

Chart 2: baseFee per block and 50-block MA comparison — past 7 days.

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. Potential hedging use cases for Smart Wallets and L2 Rollups are described in one of our latest articles — Taming Gas Fees with Hedgehog — Hedging Use Cases for Smart Wallets and Layer 2 Solutions.

As illustrated in that article, users and developers are incurring an average of $10+ Million in gas costs every day. This has been consistently growing in the past weeks, reaching levels that deter the average user from participating in the ecosystem, and increasing businesses operational costs tremendously.

Hedgehog will give them the ability to hedge against these costs or trade to take advantage of this market’s intrinsic volatility.

User Segments

Businesses using Hedgehog

The main advantage Hedgehog offers to businesses lies in its simplification of the gas price hedging process, providing a strategic tool to mitigate the impact of gas price fluctuations.

This is particularly beneficial for businesses that depend on gas fees as part of their operational costs (like the vast majority of Ethereum projects).

This hedging strategy can help you navigate high gas prices as a business. If you understand that you’re experiencing gas price volatility and want to hedge against it, you can deposit wstETH as collateral, mint the BaseFee token, and sell it on an AMM.

When gas goes back down, you can buy back your BaseFee tokens at a lower market price and close your position if you want to, effectively shorting gas fees. The profits from these operations could be used to alleviate businesses from their gas fee operational costs, successfully reducing the average gas fee price paid by them.

Traders using Hedgehog

From the traders’ point of view, the high volatility of gas fees makes the BaseFee token an excellent asset to trade. It provides traders several opportunities to capitalize on these fluctuations, diving into the market and seizing the chance to generate substantial profits more frequently than most assets.

An informed trader, for example, might know when an NFT collection is being launched or a gas fee spike caused by a temporary event. You can use that information to either short gas fees using collateral or even trade BaseFee tokens at an AMM.

The flow of a trader in the Hedgehog dApp is the same as described for businesses. At any time, you can deposit wstETH as collateral and mint BaseFee. As a trader, the USD price of your collateral might not be relevant; you care about whether gas prices go up or not.

In case you mint BaseFee when gas prices are very low and then it shoots up, you could be liquidated. Alternatively, if you mint BaseFee with wtsETH as collateral when gas prices on Ethereum are high, you can try to sell on an AMM and then rebuy it lower, making profits.

You can also buy or sell BaseFee on AMMs. The price depends explicitly on the secondary market liquidity and state. It will likely be arbitraged with the protocol’s rates, but that difference and arbitrage opportunity make Hedgehog’s design unique.

Dynamic Fees

It is clear that gas fees have a seasonal aspect; it is influenced by how much the blockchain is being used; this human behavior is reflected in the gas price patterns — with some days of the week or even hours of specific days having a lower median gas price than others. This can be seen in Chart 3:

Chart 3: Median Gas Fees by the day of the week — past year.

Some might say, “What if the gas is too high, it will also drop in the next hour? Am I making free money then”? Or “gas is so cheap now, a huge minting event is upcoming — is this free money”?

Well, markets always have two different opinions. It’s not as obvious it might seem. And when it is truly obvious, dynamic fees come into play. They are essentially Hedgehog Protocol’s version of funding rates.

The dynamic fees ensure that collaterals are not exhausted in episodes of gas fee spikes or downturns, as well as they protect against a malicious attack. The fees effectively discourage redemptions during an under-collateralization spike and restrict potential heavy borrowing during events of high collateralization ratio.

That is, in events where there’s a lot of demand for either the collateral or the BaseFee token — this might happen when the trade is obvious — market participants will induce the dynamic fees to reduce users’ payoffs until the obvious trade is expensive enough to deter new users from either redeeming or borrowing during these events.

Two-token system

For this entire ecosystem to be harmonic, Hedgehog uses a two-token system, that are separated, but together are important parts of the Hedgehog ecosystem. This approach is used in several ecosystems, such as MarketDAO’s (MKR) and DAI. In our case, we’ll have the HOG and BaseFee tokens.

The BaseFee token, which is the CDP described throughout this article that represents a 50-block logarithmic moving average of gas prices, used to hedge against gas prices or even speculate on them.

The HOG token is a utility token that serves as a governance token for the protocol. In addition to that, HOG token holders can stake their tokens to earn rewards and participate in the ecosystem’s growth via different token sinks: minting, staking, and others.

As such, users and investors will have dedicated tokens for both steering the protocol’s future through governance and benefiting from its financial mechanisms. This model allows for active participation in governance, and rewards and strategic financial operations, such as hedging against gas prices, without mixing it all up, ensuring a comprehensive and engaged ecosystem.

Round announcement and Testnet

If you’re as excited about this market as we are, we’d love to share that this solution is closer to becoming a reality than ever, that’s because Hedgehog Protocol has successfully closed its pre-seed funding round! We’re being backed by the best in the industry, so make sure to check out our announcement for more details: