Increasing cost protection
Protecting against increasing costs
Last updated
Protecting against increasing costs
Last updated
Bob is developing a smart contract and plans to deploy it in a month. He is concerned that the ETH gas price may go up by then increasing deployment costs. He would like to lock in a gas fee at a maximum of 150 Gwei.
Bob would like to create a position that increases in value as the ETH gas price exceeds 150 Gwei thereby neutralizing the increase in deployment costs. The strategy is illustrated below:
Alice is willing to take the other side as she believes that the ETH gas price will remain below 150 Gwei due to reduced activity in the prevailing bearish market environment.
Bob uses the DIVA App to configure a contingent pool that gives him the desired long position.
After creating the pool, Bob sells all 5 short position tokens minted for a total of WETH 4.8 and keeps the long position tokens.
1) ETH Gas Price <= 150 Gwei:
Bob paid a protection premium of WETH 0.2 (5 initially deposited and 4.8 received back due to the sale of the short side) and didn't receive any payout from his long position as the gas price ended up below 150 Gwei. -> net loss for Bob: WETH 0.2 -> net gain for Alice: WETH 0.2
2) ETH/USD = 350 Gwei:
Bob paid a protection premium of WETH 0.2 and can redeem all his initially deposited collateral of WETH 5 as the gas price ended up above the cap: -> net gain for Bob: WETH 4.8 (which he uses to neutralize the increased deployment costs) -> net loss for Alice: WETH 4.8
