Thanks to Barnabe Monnot (@barnabemonnot), Lane Rettig (@lrettig), James Prestwich (@_prestwich), Yuki Yuminaga (@ballsyalchemist), Sydney Huang (@0xSydney), and Neel Somani (@neelsalami) for the comments, collaboration, and review.

tl;dr: I am developing financial markets for Ethereum blobspace, designed to increase efficiency around price discovery and improve the user and developer experience for data publication on Ethereum. Blob gas fees skyrocketed over 10,000%. Volatile price fluctuations continue to pose significant challenges for rollups and are a critical hurdle towards usable and scalable Ethereum DA.

Prerequisite: Introduction to Blobspace in Ethereum

You can skip reading this section if you are already familiar with EIP-4844 and the concept of blobspace.

Blobspace emerges as Ethereum's most significant upgrade since EIP-1559. Introduced in EIP-4844, blobs are a new data structure (~125 KB per blob) designed to enable Ethereum to handle large volumes of data more efficiently by allowing shard chains to publish and manage these blobs. The aim is to target an average of 3 blobs (375 KB) per block, with a maximum limit of 6 blobs per block. Incorporating blobs has allowed Ethereum to enhance the throughput and efficiency of rollups and Layer 2 scaling solutions, providing a more cost-effective way to publish transaction data on-chain.

As part of this, the pricing mechanism for blob data resources became separate from that of standard gas metering to ensure that the network maintains balanced congestion across both execution and data publication costs. Fees for blobspace are modified based on the total gas used relative to the target, to ensure consistency regardless of transaction distribution across blocks. Each blob must be purchased in its entirety, and the fees are adjusted exponentially based on demand, leading to rapid price spikes when blobs are fully utilized. The mechanism is in principle similar to EIP-1559. If you’re interested in reading more about how pricing works for blobs, check out this primer by Davide Crapis.

There are approximately 30 to 40 live rollups already, and demand for blobspace is expected to increase as Ethereum progresses in its transition towards a Layer 2-centric ecosystem.

Blob prices meet reality

Though no dedicated markets currently exist for blob price speculation, we are already seeing tangible interest in speculation on the costs of blob gas fees. Currently (April 2024), users on Polymarket predict blobs will continue to cost <0.001 ETH one month after EIP-4844.

The first notable instance of a fee spike resulted in a 10,000%+ increase when EthScriptions launched a way to mint inscriptions on blobs (“blobscriptions”), and the network was spammed. This occurred two weeks after blobs went live in the Dencun upgrade, and blobs rose from being nearly free of cost (at one wei, or approximately $0.01) to costing a fee of 585 gwei (approximately $300):

This shift, as noted by Vitalik, signifies the activation of the fee market - the transition from blobs being an underutilized, nearly free resource to one where active demand influences pricing.

Solution: A blobspace derivatives market

Addressing this volatility in blobspace pricing is crucial. Without intervention, the fluctuating costs of this essential infrastructure could negatively impact the ecosystem, leading to several potential adverse outcomes:

1. New projects may face a higher barrier to entry because of unpredictable expenses.

2. Decentralized applications could experience potential service disruptions or finality delays.

3. Operational costs for rollups that depend on Ethereum data availability may rise, and mispricings could render it uneconomical for rollups to post on a regular cadence.

I am building a derivatives market for the price of blobspace as a strategic hedge against these volatility challenges.

Throughout history, traditional commodity markets have often been subject to significant volatility due to external events. The introduction of derivatives has played a pivotal role in mitigating these risks for both producers and consumers by enabling broader price discovery. Similarly to trading of commodities futures, the establishment of a derivatives market for blobspace fees promises to bring about continuous and flexible trading opportunities, allowing for leveraged positions that can lead to more efficient market dynamics.

Gas derivatives markets have been analyzed by many researchers. Julian Ma writes about careful design when structuring on-chain derivatives for a well-functioning market. The wrong trade-offs could lead to contract exploitation and adversely affect the network. You can read his write-up here.

Market Structure

An effective blobspace derivatives market would be designed to provide continuous market insights for improved price discovery, offer cost management solutions for developers with significant data publication requirements, and ensure enhanced stability and predictability in the costs associated with blobspace.

Historically, blockspace derivatives on both Bitcoin and Ethereum received criticism because it was unclear who would participate on either the short or long side of the marketplace. The main participants in a blobspace derivatives market involve buyers who have a need to interact with the market to manage the risk in their businesses and sellers who speculate and take asymmetric pricing risk.

Buyers involve Layer 2s, rollups, developers, and decentralized applications which require blobs to post their data on Ethereum. These actors may want to secure a predictable fixed cost for their future blobspace consumption. In doing so, they avoid exposure to the dynamic price changes in the spot market. This enhances the end user experience for rollups by offering more stability and reliability in the costs of forward positions.

Sellers are anticipated to be speculators initially populating the short side of the market. Engaging as sellers offers them the advantage of collecting premiums when prices are mean-reverting. The distribution of bets on Polymarket indicates that speculators might be confident in selling despite buys from rollups and other natural purchasers of blobspace.

Why would a speculator choose to participate in this market over others? Here they have the advantage of making informed predictions about price movements based on when blobspace is likely to be congested.

Forward contracts

The first offering is a type of derivative product that offers synthetic exposure to the blob gas fee through forward contracts. These contracts facilitate long and short positions, offering a mechanism for future risk management.

Taking a short position means you agree to "sell" blobspace at a future date at a currently agreed upon price, exposing yourself to the risk of selling future blockspace too cheaply.

Taking a long position means you agree to purchase blobspace at a future date at a currently agreed upon fixed price, exposing yourself to the risk of overpaying if the market price falls.

These forward contracts will be offered through a decentralized, non-custodial exchange operating on the Ethereum base layer, ensuring trustless trade settlement and liquidation.

Physical delivery

At launch, the derivatives market will be entirely cash settled. This initially avoids the difficult problem of ensuring physical delivery of the blobs. Part of this research project involves scoping out how to enforce the physical delivery of blobs.

Since proposers emerge as obvious participants in the blobspace market, they could run services for L2s and consumers of blob space to provide physical delivery of blobspace. In the slot auction model, builders can secure the right from the proposer to construct a single block, and could obtain a “one-slot” blobspace forward position from the proposer. When a forward contract reaches settlement, the proposer would allocate the agreed-upon blob publication directly to the contract holder. A framework like PEPC-DVT may provide the necessary tools for proposers to make enforceable commitments to deliver blob space (see more on PEPC-DVT here).

Manipulation

The blob gas base fee is prone to manipulation by anyone originating large volumes of blob-carrying transactions. Builders also have the potential to manipulate the blob base fee by selectively censoring or including blobs in specific blocks. The cost of manipulation can be bounded similarly to Julian Ma's analysis here.

Note on Blockspace Derivatives

Blockspace derivatives have not seen significant adoption on Ethereum due primarily to the substantial compute overhead they introduce. This overhead leads to only marginal performance enhancements at the cost of increased latency and execution expenses, which is particularly disadvantageous for searchers and builders who operate under tight time constraints where any delay can result in profit losses.

In contrast, Layer 2 solutions like rollups, which process transactions off-chain but commit data to L1 in batches, do not face these same race constraints. This implies that blobspace derivatives have fewer headwinds than blockspace derivatives. On the other hand, proposers are motivated to include fewer blobs because increased block propagation times can impact the timing of MEV extraction games.

What’s next?

I am incredibly excited about the future of Ethereum DA. However, its success depends on our collective efforts to innovate to meet current demands as well as future challenges. The development of financialized blobspace derivatives is the first step to creating efficient markets and a resilient ecosystem.

I have quit my engineering job at Apple to go full force on this. If you're interested in getting involved, feel free to reach out on Twitter (@tamarajtran) or via email at tamarajtran [at] outlook.com. I would love to connect with other engineers working in the space and hear the community's thoughts on this.