Degenerative Finance: uGAS Explained
We are excited to announce the launch of Degenerative Finance, a product built by Yam, on UMA, for Degens. Our first offering is uGas, a synthetic futures contract that settles to the 30-Day Median Gas Price at the end of each month.
For those of you new to uGas and UMA’s synthetic contracts more broadly, we’ve answered some key questions below, including why and how you might use uGas.
What is uGAS?
uGAS is a Synthetic Gas Futures Token.
Each uGAS token is named after the month that it’ll expire at the end of (for example, the uGAS-JAN21 token will expire at 0:00 UTC, Feb 1st 2021.)
Once the uGAS token expires, it will settle at the median gas price of all Ethereum transactions for the past 30 days.
Each uGAS token represents 1,000,000 GAS, so if the median gas price over the 30 days before expiry was 70 Gwei, the uGAS token would be worth 0.07 ETH.
Wait, what’s a Synthetic?
Synthetic tokens are collateral-backed tokens whose value changes depending on the tokens’ reference index.
In the example above, our uGAS’s reference index is the 30 day median gas price.
Synthetics are created by depositing collateral into a smart contract and minting tokens backed by that collateral.
How do I get a uGAS token?
You can get a uGAS token by either creating them by depositing collateral or trading for them on a DEX like Uniswap. Both can be done via our Degenerative.Finance site.
To Create uGAS:
Deposit ETH as collateral to mint uGAS tokens. Synthetics are priceless, so you will initially mint at the Global Collateralization Ratio (GCR.) The GCR is calculated by dividing the total amount of collateral deposited by the total number of uGAS tokens outstanding.
You can withdraw collateral at any time as long as the Minimum Collateral Ratio of 1.25 is maintained (or else you will be liquidated.) Creating uGAS or Withdrawing Collateral will increase or decrease your collateral ratio. Prior to expiry, the Collateral Ratio is based on a 2-hour TWAP from Uniswap, not the actual median gas price.
How do we use uGAS?
Let’s walk through some examples!
Zombie Rick the Trader
Zombie Rick is a trader who believes ETH Gas prices will rise in January and decides to buy the uGAS-JAN21 token.
He connects his wallet to Uniswap and sees that the price shows 1 uGAS-JAN21 = 0.070 ETH. This effectively means Zombie Rick is longing ETH Gas prices at 70 Gwei. He sells 7 ETH to buy 100 uGAS-JAN21 tokens.
The ETH Gas prices rise in January for a 30-day median price of 100 Gwei. Zombie Rick’s uGAS-JAN21 tokens are now worth 0.100 ETH each. He sells his 100 uGAS-JAN21 tokens for 10 ETH in return for a profit of 3 ETH.
Zombie Glenn the Farmer
Zombie Glenn is an active farmer who carries out many transactions to manage his crypto portfolio. It’s early December and he sees that the uGAS-JAN21 token is trading at 70 Gwei. He wants to lock in that price for his gas usage in the month of January.
Zombie Glenn typically spends about 210,000,000 gas per month. Since each uGAS token is equivalent to 1,000,000 gas, Zombie Glenn needs to buy 210 uGAS-JAN21 tokens to fully hedge his usage. He sells 14.7 ETH to buy 210 uGAS-JAN21 tokens.
Zombie Glenn continues his farming activity per usual in January and consumes 210,000,000 gas as expected. However, he paid on average 105 GWei on the price of gas for all these transactions in January which is much higher than where he saw gas prices in early December.
Zombie Glenn held onto his 210 uGAS-JAN21 tokens through the token expiry at 00:00 UTC February 1, 2021.
Since the 30-day median ETH Gas Price was 110 Gwei, Zombie Glenn can now redeem each uGAS-JAN21 token for 0.110 ETH and receives a total of 23.1 ETH — a profit of 8.4 ETH. This profit of 8.4 ETH is offset by the higher gas prices he paid in January.
Effectively, Zombie Glenn used the uGAS-JAN21 token as a hedge for rising ETH gas prices.
Zombie Carol the Miner
Zombie Carol runs an Ethereum mining operation. She believes that ETH gas prices will decline in the next two months and would like to use the token as a hedge and secure her future revenues now.
Zombie Carol mines on average 1,050,000,000 gas per month. Since each uGAS is equivalent to 1,000,000 gas, to fully hedge her revenue, Zombie Carol would need to mint and sell 1,050 uGAS-JAN21 tokens.
Since the Global Collateralization Ratio is 2.5 when Zombie Carol attempts to mint, she needs to deposit 183.75 ETH in order to receive 1,050 uGAS-JAN21 tokens (2.5 x 1,050 tokens x 0.070 ETH per token.)
Zombie Carol then connects to Uniswap and sells her 1,050 uGAS-JAN21 tokens for 0.070 ETH each and receives 73.5 ETH. Notice that net Zombie Carol is now committing 110.25 ETH (183.75 of WETH Collateral — 73.5 ETH received). And she could withdraw more collateral to be more capital efficient as long as she maintains the 1.25 Minimum Collateral Ratio.
Unfortunately, ETH gas prices rise and the median price for the last 30 days of January is 110 Gwei — resulting in the uGAS-JAN21 token settling at 0.110. Zombie Carol takes a loss of 42 ETH (1,050 tokens x (0.070–0.110)).
However, the higher gas prices in January resulted in higher revenues for her mining operation which offset the loss from her tokens. In the end, the uGAS token hedge resulted in Zombie Carol locking her mining revenues at 70 Gwei and provided her with certainty on her revenue amount.
Are the Liquidity Mining rewards associated with uGas?
Starting with the uGAS-FEB21 token, all developer mining rewards earned from uGAS tokens will be transferred to and managed by the YAM community. For the first 3 months of this partnership, UMA and YAM have decided the YAM treasury will keep 10% of these rewards as a management fee. The remaining 90% will be distributed to the community with 40% of the rewards given to dApp mining (more details below) and 50% allocated to liquidity mining. The YAM community has the freedom to modify this split as needed. It is expected that the YAM treasury will hold our UMA tokens and establish a position within UMA’s governance, as traditionally this has been done with other governance tokens they have mined.
Developer Mining Reward Structure
- 10% YAM Finance Treasury
- 40% dApp Mining (Degenerative.Finance app)
- 50% Liquidity Mining (End users)
Over the coming weeks, Yam will develop and offer additional DeFi degen oriented derivatives, ultimately becoming the go-to source for exotic DeFi derivatives.
Warning: This is an experimental token — users should proceed with extreme caution. Although the EMP contract has been audited in detail by OpenZeppelin, the application of this contract on a volatile price identifier such as Ethereum gas prices is novel and unpredictable in a live market. Users should take time to understand the token and ask questions on the Yam Discord.