Gas Fees on the Ethereum Blockchain: From Foundations to Derivatives Valuations

ArXiv ID: 2406.06524 “View on arXiv”

Authors: Unknown

Abstract

The gas fee, paid for inclusion in the blockchain, is analyzed in two parts. First, we consider how effort in terms of resources required to process and store a transaction turns into a gas limit, which, through a fee, comprised of the base and priority fee in the current version of Ethereum, is converted into the cost paid by the user. We adhere closely to the Ethereum protocol to simplify the analysis and to constrain the design choices when considering multidimensional gas. Second, we assume that the gas price is given deus ex machina by a fractional Ornstein-Uhlenbeck process and evaluate various derivatives. These contracts can, for example, mitigate gas cost volatility. The ability to price and trade forwards besides the existing spot inclusion into the blockchain could enable users to hedge against future cost fluctuations. Overall, this paper offers a comprehensive analysis of gas fee dynamics on the Ethereum blockchain, integrating supply-side constraints with demand-side modelling to enhance the predictability and stability of transaction costs.

Keywords: Gas Fees, Fractional Ornstein-Uhlenbeck Process, Ethereum, Derivatives Pricing, Blockchain Transaction Costs, Cryptocurrencies

Complexity vs Empirical Score

  • Math Complexity: 7.0/10
  • Empirical Rigor: 3.0/10
  • Quadrant: Lab Rats
  • Why: The paper employs advanced stochastic calculus (fractional Ornstein-Uhlenbeck process) and optimization theory, but its empirical component is limited to descriptive data extraction from a database with no backtesting or implementation details.
  flowchart TD
    A["Research Goal: Analyze Ethereum Gas Fees<br>for Derivatives Valuation"] --> B
    
    subgraph B ["Part 1: Protocol & Constraints"]
        B1["Analyze Ethereum Protocol<br>Resource Processing & Storage"]
        B2["Derive Gas Limit & Cost<br>Base + Priority Fee Structure"]
    end

    B --> C["Data: Fractional Ornstein-Uhlenbeck Process<br>for Gas Price Modeling"]

    C --> D{"Computational Process"}
    D --> E["Price Derivatives<br>Forwards & Options"]
    D --> F["Hedge Volatility<br>Mitigate Cost Fluctuations"]

    E & F --> G["Key Outcome: Predictable & Stable<br>Transaction Costs"]