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ORIGINAL RESEARCH article

Front. Blockchain
Sec. Blockchain Economics
Volume 7 - 2024 | doi: 10.3389/fbloc.2024.1462666

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

Provisionally accepted
Bernhard Meister Bernhard Meister 1Henry Price Henry Price 2*
  • 1 Fast Eagle, Vienna, Austria
  • 2 Imperial College London, London, United Kingdom

The final, formatted version of the article will be published soon.

    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: Ethereum, Gas Fees, Blockchain, Ornstein-Uhlenbeck process, Multidimensional Gas, derivatives valuation, Fractional Brownian motion

    Received: 10 Jul 2024; Accepted: 30 Sep 2024.

    Copyright: © 2024 Meister and Price. This is an open-access article distributed under the terms of the Creative Commons Attribution License (CC BY). The use, distribution or reproduction in other forums is permitted, provided the original author(s) or licensor are credited and that the original publication in this journal is cited, in accordance with accepted academic practice. No use, distribution or reproduction is permitted which does not comply with these terms.

    * Correspondence: Henry Price, Imperial College London, London, United Kingdom

    Disclaimer: All claims expressed in this article are solely those of the authors and do not necessarily represent those of their affiliated organizations, or those of the publisher, the editors and the reviewers. Any product that may be evaluated in this article or claim that may be made by its manufacturer is not guaranteed or endorsed by the publisher.