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DeFi users look for ways to hedge against high gas fees

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For DeFi users, how to reduce Gas fees?

Original title: "DeFi users looking for ways to hedge against high gas fees"

Original source: LongHash Blockchain Information

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Gas is regarded as "fuel" on the Ethereum blockchain and is used for transactions, execution of smart contracts, payment of storage fees, etc., and its fees vary according to network usage.

With the full firepower of Ethereum in the vertical field of DeFi (decentralized finance) in 2020, according to DeFiPulse, the total locked value of smart contracts (TVL ) up 20 times year-to-date. According to Etherscan data calculations, the 30-day average Ethereum Gas fee continued to rise in 2020 and hit a record high of 198.966 Gwei per month on September 25.

Most DeFi products use smart contracts to combine related development modules to build financial agreements. Users can use Interact with it in a "decentralized" way to obtain financial services (such as digital currency trading, lending and derivatives). To this day, these products are still experimental products, and the opposite of a lower-threshold access mechanism is more security risks and service fees.

Due to the increasing usage scenarios of products on the Ethereum chain, smart contracts interact more frequently between different protocols, making the Ethereum network become more congested.

Imagine the daily life of a blockchain geek: first convert Bitcoin and Ethereum to wBTC and wETH, and then Part of it is used to buy favorite tokens on aggregator platforms such as 1inch, part of it is deposited into the decentralized trading platform Uniswap for liquidity mining in exchange for LP governance tokens, and the last part is invested in DeFi protocols after "forks" one by one to try to earn get in return.

Glassnode data from the data analysis company, the number of Gas used in Ethereum transactions and the current proof of work support for the Ethereum blockchain The income of miners has surpassed the level of 2017 and reached a new high. Behind the attractive short-lived high annualized yield (APY) brought by one after another DeFi experimental product, in addition to the dividends enjoyed by early ecological participants, Ethereum miners, "scientists" and hackers also got a delicious share. cake.

Common products

Before 2020, few developers and traders mentioned the Gas issue, only similar entrepreneurial projects were held on the Ethereum Hackathon. Following the 3.12 black swan incident and the continuous upsurge of liquidity mining, users discovered that Gas fees directly affected their digital asset portfolios when decentralized financial transactions were blocked on a large scale.

The current blockchain development community has several common Gas solutions, usually Contract derivatives and smart contracts written using the Gas pricing mechanism are deducted and refunded.

The design of Gas contract derivatives is a zero-sum game based on the expected price of Gas between buyers and sellers, such as on-chain futures options class products. The uGas-JAN21 of UMA Protocol, which was launched recently, is a futures product. Within a week of its launch, the pool size reached 188 ETH, and there were about 27 user addresses.

The Chi GasToken designed by the 1inch team has 4504 user addresses and a pool size of about 1.2 million US dollars. These two types of solutions are currently in the early stages, but are gradually accepted by users.

Due to the unpredictability of Gas, it is dynamically calculated according to the situation of the mining pool, and its fluctuation is very large, sometimes it is a single-digit Gwei, and sometimes it exceeds 500 Gwei, so it also causes Some speculators have attracted attention, such as some DeFi "scientists" who are exploring ways to make money from Gas transactions in the community. However, the fact that the risk of "loss" can be transferred through multiple tools has a positive effect on ecological development, allowing DeFi users to manage Gas prices like investments.

Two major design directions

< p>There are currently two types of products that are popular in the market. The simpler one is to use the characteristics of the long-short zero-sum game of derivatives to match the expected price of Gas between buyers and sellers.

There is another type that uses the Gas pricing mechanism of the Ethereum Virtual Machine (EVM) more cleverly, and inserts " "burden reduction" codes such as cleaning/self-destructing contracts, cleaning and deleting storage, etc., to keep the code simple and receive Gas refunds. The tokenization of such smart contracts is called GasToken.

GasToken 1st and 2nd generation were proposed and developed by Lorenz Breidenbach and other programmers 3 years ago. At present, the more active one in the market is the GasToken-based 2-generation Chi launched by 1inch. According to the 1inch article, it improved the efficiency of GST2 by 10% through modification.

The chart below compares the market prices of Chi and UGas-JAN21 with the Ethereum Gas price. Although the two types of products cannot be fully linked to the daily gas price changes, they are related in terms of trends. For example, as the gas fee rose from August to September, the price of Chi also broke through a new high. The newly launched on-chain uGAS-JAN21 contract also remained at $40 after a brief increase in Gas in late November. With the reduction of the Gas rate, it returned to base. However, since the token price of uGAS-JAN21 represents the expected price of Ethereum Gas fees on January 21, 2021, it is not sensitive to changes in the current Gas fee rate, and even the changes are completely opposite.

Although the purpose of hedging Gas is to reduce the loss risk of on-chain operations, the price of its tokens is entirely based on market discovery. There are deviations and are "experimental" products.

Market Feedback

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The uGAS--JAN21 futures launched by the DeFi protocol UMA recently belongs to the first type of derivative design, with a market value of about 160,000 US dollars, which is one-tenth of Chi GasToken. The scale of DeFi users is larger.

These two types of Gas products are not designed for "investment transactions". The main logic is that when the Gas fee of Ethereum is low Mint Gas tokens, and sell (or burn) tokens at high prices to offset part of the transaction fees when the Ethereum network is congested. However, since they are all in ERC20 format and circulated on Uniswap, 1inch and Curve trading platforms, their price discovery is also affected by the secondary market.

Due to the short launch time and the lack of sample data, the Gas derivative uGAS--JAN21 is related to the Ethereum Gas price within a day The coefficient is 0.17, which is less than Chi Gastoken's 0.55, all of which are positive correlations.

The correlation coefficients are all positive, which means that the market prices of Chi and uGAS-JAN21 are consistent with the real Gas price changes, and the higher the coefficients, the more The higher the degree of correlation, the more sensitive the token market price is to the Gas price. Therefore, the current market price of Chi Gastoken with a larger user scale is closer to the change of the real Gas fee price.

As the basic ecology of DeFi becomes more and more complicated, the issue of Gas consumption has gradually never received attention and has become an important consideration for major developers. Fluctuating markets will cause a domino effect on the chain, and nearly 14 billion US dollars of DeFi assets are locked on the Ethereum chain. Gas is used as a "pass" for passing fees on the chain, and its risk management tools will become more and more important.