Hedging Against High Ethereum Gas Prices with On-Chain Derivatives

The Ethereum blockchain has emerged as the second most popular decentralized network after Bitcoin. Its implementation of smart contracts pioneered decentralized applications, and it became a cradle of Decentralized Finance (DeFi) amongst other fields. Despite substantial technological advancements aimed at optimizing transactional costs to withstand its growing adoption, including Layer-2 scaling solutions and protocol upgrades such as EIP-1559 and EIP-4844, the gas price remains volatile and unpredictable. This research presents a novel decentralized application enabling the issuance of a gas price derivative in the form of option contracts designed to hedge against high gas prices. We thoroughly analyze the mechanics of Ethereum's gas and the underlying economic process governing the price of gas. We design and implement a decentralized application that enables permissionless creation of such option contracts. These contracts allow users to purchase options on- demand and exercise them at a predefined block height for gas fee management.