Swaps and Options on Ethereum Gas Fees: A Framework for Risk Management in DeFi

Abstract

The rapid expansion of blockchain-based applications and decentralized fi nance (DeFi) has led to a substantial increase in demand for block space, resulting in pronounced volatility in transaction costs, commonly referred to as gas fees. Such volatility introduces significant budgetary and operational risks for a wide range of market participants, including protocol developers, arbitrageurs, mar ket makers, and institutional users. In this paper, we develop a comprehensive theoretical and computational framework for the valuation of derivatives written on Ethereum gas fees. We focus in particular on swaps based on average gas costs and European-style options on gas fee levels. Our approach yields tractable (semi-)analytical pricing formulas for these instruments, allowing for explicit de composition into hedgeable and non-hedgeable risk components. The proposed framework not only provides practical tools for managing transaction cost risk but also lays the foundation for the development of a new class of derivatives markets centered on blockchain base fees.