Oiler Research — EIP-1559 BASEFEE manipulations

Oiler launches soon with a set of instruments based on hashrate, block gas limit and block times. The next step for Oiler is to bring fully native gas price derivatives to Ethereum. We can do that with the advent of EIP-1559. EIP-1559 defines a BASEFEE parameter that is included in every block header. Any transaction included in the block has to pay at least the BASEFEE of gas per unit of gas used and the BASEFEE paid is burned (instead of going to the miner account as it happens now with the gas price paid). It is the BASEFEE burning that makes gas prices harder to manipulate within the context of EIP-1559. Harder does not mean impossible and analysis of the manipulation cost and conditions at which it is possible is what we have worked on with the Nethermind protocol research team.

Why is it important to us?

Oiler starts with binary options. If we provide an option definition that is a gas price binary option that can be exercised whenever the BASEFEE reaches, say 500 GWei, then we would like to know what the cost is of artificially moving the current BASEFEE from, say 50 GWei, to 500. Similarly, for put options, we would like to analyse how easy it is to force the BASEFEE to go down.

The two scenarios — pushing the BASEFEE up and forcing BASEFEE down are very unlike each other. Why so? For a simple reason. To move the BASEFEE up it is enough for the manipulator to generate thousands of transactions that are ready to pay a lot for gas while to force the BASEFEE down we need to have a set of colluding miners willing to do so (and they need to have together nearly 50% of the hashrate to be successful with a high probability). Such transactions, unless censored by miners, will be included in the blocks and the BASEFEE will start creeping up. While maintaining such a high BASEFEE level is very costly for longer period of time, it is relatively inexpensive to change the BASEFEE for a short time. Because of the current behaviour of the Oiler options that can be exercised when the underlying asset reaches the strike level just for a moment, we know that we have to introduce a moving average of BASEFEE over a significant period. The length of the period defines the minimal cost of manipulation, which in turn defines how big gas trade are still safe on Oiler. Currently, a solution similar to YFI (additional protocol calculations piggybacking on simple trade transactions) would be best to calculate long-term moving averages. The averages may become even more efficient to calculate when EIP-2935 is available.

It is important to say that even the worst-case scenarios for blockchain native settlement with EIP-1559 are better than any oracle-based solution in the current gas price environment. Having said that, we would like to recommend to you a lecture of the simulation results that the Nethermind team prepared — https://medium.com/nethermind-eth/the-manipulation-of-the-basefee-in-the-context-of-eip-1559-4b082898271c

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