Synthetic Product to Fix Future Gas Fees or DeFi Platforms Eating the Fees of LPs

Gas fees are a huge pain point for the flow of capital into and among DeFi platforms. Non-whales will tend to stay in whatever DeFi platforms they stumble on first because, even if they later hear about a better DeFi project, they are subject to a cognitive bias called loss aversion - that is, people have a much stronger bias toward avoiding losses (in this case, the fees they have spent on wherever they originally put their capital) than seeking gains. I know it may not seem like it in DeFi right now but it is a real phenomenon. Loss aversion magnifies the impact of the drag of fees. Newer projects may struggle to gain LPs even if they are better or they have to offer increasingly enticing rewards (the latter of which is exactly the phenomenon I think we are seeing). This is not a good thing. We don’t want a system where first mover is such an advantage.

Here are some ideas I came up with to manage the high cost of gas fees other than the off-chain and zero knowledge stuff:

  • Synthetic product that locks future gas fees to specified amounts (honestly it is hard to see how this could work for non-whales but maybe a bunch of non-whales could be grouped into one contract)

  • Platforms could consider eating the fees of LPs. I imagine the first platform to do that would get a ton of liquidity. This may lead to all projects doing it (kind of like how Robinhood offering no fee stock trading led all the other platforms to offer it) which would free up capital to flow into better DeFi projects and also allow newer projects to not have to offer such enticing rewards possibly.

  • Is there any possibility of a competing smart contract platform? If I were to design one, I would aim to significantly reduce the number of interactions with smart contracts that lead to fees. It seems like any interaction with a smart contract involves at least two or three different fees (e.g., approve spend of DAI; deposit DAI; stake DAI). If you are borrowing that DAI, you have even more interactions to pay for in relation to the lending protocol before you even get to provide that DAI as liquidity.

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I think this is somewhat off-topic unless you’re proposing a specific yEarn product in the options/futures sector. Options particularly are tricky because the options contract needs to be updated regularly with a variable called “implied volatility” (IV) in order to adjust the pricing.

But FWIW, I’ve been working on a UMIP to add a gas price oracle feed to UMA, so that projects that want to create options/futures products can have a ticker to settle against upon expiry. It should go for a vote soon.