In light of recent discussions about the need and feasibility of creating a blockspace derivatives protocol, we at Hedged Labs are eager to join this conversation.
In this article we explain our approach to this subject and at the end briefly introduce Gazelle, a modular gas abstraction layer creating frictionless UX through predictable gas subscriptions.
Decentralized Cloud
Blockchains merge the accessibility of cloud technology with the benefits of decentralization, representing a new type of computing platform. In the past, many doubted that PCs would become commonplace in households and businesses, similar to the initial skepticism surrounding mainframes. The shift to cloud-based computing enabled users to outsource storage and computation, leading to the rise of giants such as AWS and Azure. Today, we are at the dawn of the Blockchain-as-a-Service era.
The modular unbundling of Data Availability, Settlement, and Execution Layers is paving the way for scalable, distributed computing. Last year, we saw a surge of interest in Rollup-as-a-Service (RaaS) infrastructure projects, which gathered significant funding to develop platforms for highly customizable blockchain applications. Leading Layer 2 protocols, including Arbitrum, Optimism, zkSync, and Polygon, are actively developing their RaaS offerings.
While RaaS-based decentralized applications gain in customizability, they lose in interoperability. The demand for full software control by enterprises and the potential for seamless interoperability between decentralized applications hint at a future of low-friction, trust-minimized global commerce. Recent advancements in cross-chain intent-based solutions are closing the interoperability gap, solidifying RaaS as the preferred technology for the decentralized cloud. However, intent adoption increases complexity, as solvers must manage multiple gas tokens across different chains while navigating their directional risk.
Blob markets
Large rollups can compete effectively in the blob markets for preferential block space access, thanks to their substantial ETH treasuries. In contrast, RaaS providers or applications operating within this model face disadvantages. These include less frequent opportunities to fill whole blobs and the need to manage their Ethereum inventory exposure for ongoing gas payments. Another operational risk stems from rollup revenue primarily deriving from the differential in traded gas prices, denominated in the base asset. We believe RaaS will greatly benefit from outsourcing asset exposure and inventory management, improving the user experience for infrastructure operators.
At Gazelle, we are convinced that businesses will adopt decentralized applications and choose RaaS for its flexibility to meet their specific needs while ensuring the highest security standards through settlements on Ethereum.
Potential of blockchains in Cloud and AI
A recent Citrix survey of 350 IT leaders about their cloud computing strategies revealed that 93% had engaged in cloud repatriation projects over the past three years, driven by complexity, unexpected costs, performance issues, compatibility problems, and service downtime. This underscores the current user experience challenges with centralized clouds, hinting at the significant potential for blockchain technology, despite current barriers to its adoption.
According to VanEck's 'Crypto AI Revenue Predictions by 2030' report, crypto Infrastructure-as-a-Service plays a crucial role in leveraging crypto's social and financial coordination benefits to democratize access to computing, addressing pain points faced by AI developers such as vendor lock-in, security concerns, limited compute availability, and poor latency. The report forecasts that blockchain-enabled computing and storage could generate revenues of $1.9 billion by 2030. The high throughput and low cost of RaaS-based applications, along with their customizable execution environments and full sovereignty for upgrades, make them ideal for running decentralized AI networks.
Block Space as a Business Model
Galaxy Digital recently suggested that block space is emerging as a pivotal new business model in the crypto space. Users annually spend between $3 billion and $10 billion on block space, primarily to access Ethereum’s block space, which costs between $1 million and $10 million daily. This spending highlights the value users place on accessing secure blockchain resources.
Block space expenses are currently borne by consumers, reflecting the volatile costs of accessing decentralized computational resources directly. However, Account Abstraction could soon lead to a shift where applications cover users' gas costs, aligning more with the IaaS and PaaS models seen today. Hedging gas costs paid to L1, would enable RaaS-based apps to explore new monetization models for their users, fixing a key variable in their operational expenses equation.
Lessons from Internet Pricing
Finally, drawing from academic literature on internet adoption and pricing, we compare the demand and pricing of utilities like broadband internet to the gas expenditures of Web3 users. Both represent discretionary spending with strong utility functions and inelastic demand. The user-perceived utility is nonlinear, and consumer behavior shows a strong preference for flat-rate pricing, particularly among low-income groups. Network effects enhance this inelasticity, whether due to switching costs, blockchain network non-equivalence, DeFi liquidity stickiness, or the need to adapt to new user interfaces. Unlike Web2 users, who are accustomed to consistent costs for online services, the volatile nature of gas prices complicates their transition to Web3. Intangible benefits, such as replacing cumbersome Web3 wallet interactions with more familiar Web2 browsing experiences, could provide as much or more value as further fee reductions.
Gazelle's Vision
How do we address this UX challenge? We aim to create a gas derivative marketplace that facilitates stable costs by matching buyers and sellers, addressing the demand for stability highlighted above. Despite the lack of a natural short side in the market since the introduction of EIP-1559, and the unattractiveness of paying high yields to hedge, appropriate risk profile and reward for the short side can be achieved. At Gazelle, we've designed a product that offers attractive, scalable ETH-denominated yield for depositors taking on short risk while ensuring reasonable prices for long-side participants, through advanced pricing techniques based on spectral analysis. The volatility of gas prices primarily presents a UX issue; thus, we also focus our efforts on creating a one-click hedged-gas transaction submission while minimizing the impact of our hedging system gas overhead on standard transaction flows to enhance user experiences further.
In the coming weeks and months, we will provide more detailed blog posts about Gazelle's design and how it addresses common issues observed with other gas derivatives protocols. By bundling additional services on top of gas hedging, including transaction delivery and enhanced security assumptions, we aim to deliver unmatched transaction submission UX.
References
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"Read Write Own" Chris Dixon. https://readwriteown.com/
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"Why Companies Are Leaving the Cloud." InfoWorld. https://www.infoworld.com/article/3712861/why-companies-are-leaving-the-cloud.html
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"VanEck's Crypto AI Revenue Predictions by 2030." VanEck. https://www.vaneck.com/us/en/blogs/digital-assets/matthew-sigel-vanecks-crypto-ai-revenue-predictions-by-2030/
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"Block Space: The Best New Business Model in Crypto." Galaxy Digital. https://www.galaxy.com/insights/perspectives/block-space-the-best-new-business-model-in-crypto/
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"EIP-4844: What Does It Mean for L2 Users?" Offchain Labs. https://medium.com/offchainlabs/eip-4844-what-does-it-mean-for-l2-users-5e86ebc4c028