Discussion: gas token farming strategy for yETH vaults

I’m kicking off a discussion for a new ETH vault strategy, based on arbitrage in the gas token markets.

Brief. Create a strategy for the ETH vault for autonomous gas token minting/burning. Operate it using a Gnosis prediction market.

Users already compete for blockspace in a bidding auction for gas (ie. by specifying the gasPrice in the tx). Expert arbitrageurs currently mint gas tokens, such as GST2 and CHI, when gas prices are “low”, and use them when gas prices are “high” in bespoke smart contracts (although I see 1inch has CHI integrated natively now). The gas tokens can be used to subsidise up to 50% the costs of a transaction. Given the massive deviation of gas prices from 50 - 1000 gwei recently, there is considerable profit here.

We could implement this as an ETH strategy, but how do we determine the future gas price, and thus know when gas is low and high? For this, we could possibly use a blend of Gnosis prediction markets and Uniswap TWAP price oracles.

Gnosis prediction markets are constructed from conditional tokens. Users put down collateral (say ETH), and they receive equal proportions YES and NO tokens for the event. After the event outcome is determined, the collateral is paid out to the holders of the correct outcome.

We could construct a regular prediction market that settles the prediction of “the gas price will be above x at block (now + 30 mins)”. The price of the conditional YES token represents the probability of this event, and thus, the probability of future gas price being more expensive than current gas price. Lastly, the oracle would not need to be human-arbitrated, as we can directly obtain the gas price within a transaction.

And so, our strategy would be minting when the prediction market predicts the price will be higher than it is now, and selling on Uniswap when the market predicts it will be lower.

Some open questions:

  • How do we fetch the conditional token price without price manipulation? The Gnosis docs for Automated Market Makers for Prediction Markets mention two forms of markets, Uniswap and the more traditional logarithmic market maker. Haven’t read too deeply into them.
  • Would it be more/less manipulable to use the instantaneous gas price, or the average gas price of the past 10 blocks, for the Gnosis prediction market?
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This is mostly beyond me on a technical level. But I think finding a prepaid gas token for the actual vaults is a no brainer.

Is there money to be made in the arbitrage of the different gas tokens?

They are getting rid of the ability for GasToken to work in the next hardfork, at least that is what Ali has said and what I have heard from the last core devs meeting.

EIP1559 makes sense for them to include this.

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Not only that, but considering how terrible they are for wasting/hogging block space, I can’t for a moment say I’d support helping make the market more efficient for them through arbitrage.

The gas token market is small enough such that there are already arbitrageurs anyways - people will sometimes use algos and bots with leading indicator strategies for an increase in network volatility- its just a gradual release from there to reap premiums - I’m sure it’s profitable but I also wouldn’t be shocked to find out it’s an easily saturated market