Grant request - Hedgehog Protocol

Title: Hedgehog Protocol

Description: Gas derivative protocol focusing on AA (account abstraction) wallets, L2 rollups and similar 4337 paymaster use cases for hedging BaseFee. Overall, Hedgehog Protocol is building a secure infrastructure for on-chain financial derivatives that can go beyond Ethereum BaseFee: including Bitcoin hashrate, EigenLayer hedging, and even end user speculation.

See the deck: DocSend.

Why is this important for RP?
What problem does this solve?
What is the expected outcome for RP?

Hedgehog Protocols opens up a new frontier for rETH holders to:

  • Hedge against BaseFee volatility, because that’s where a part of the yield for ETH stakers comes from, obviously, including rETH;
  • For sophisticated stakers and especially node providers: hedge their costs;
  • For both categories above: utilize their rETH in LSDfi (Hedgehog);
  • Hedgehog plans to utilize its own and external incentives to drive deposits into CDP and AMM → thus driving demand & supply of rETH up.
  • Increase the share of rETH in LSDfi protocols and rETH volumes.
  • Increase the share and liquidity of rETH on L2 rollups because (we shall be deploying on Optimism or Arbitrum) at the end of Q4.

Overall, considering the adoption of account abstraction and future updates of Ethereum - this will bring more liquidity to Rocket Pool staking while allowing users to speculate on gas prices by trading or hedging against it. Both B2B and B2C!

Full Description
How is this implemented? Who is involved? Are there any trade-offs to consider?

Paymasters, 4337, account abstraction, rollups - these are the main topics of today which we strongly believe will continue growing in importance & relevance as more users get onboarded to the Optimism ecosystem and Ethereum in general. And they all spend gas! Hedgehog plans to deliver a crucial component to all this: hedging gas costs via a free composable protocol that anyone can participate in.

While the idea of a token tied to the BaseFee price has been around, no solution has made it as accessible and functional for both B2B and B2C users as we aim to do. And there previously was lack of organic flow as the AA and rollups didn’t exist, so the potential was only CEXes which aren’t DeFi-native unlike the others.

Collateralized debt position allows various scenarios of usage, which we will overview in the coming articles. Let’s keep it simple: open a CDP with your LSD (rETH) and receive a corresponding amount of ERC-20 BaseFee tokens based on the ~50 blocks LMA. Then you can speculate, hedge, and trade. The deck goes more in-depth.

  • Protocol design: the model is based on CDPs, previously pioneered by Liquity and Synthetix to an extent - yet none of them offer on-chain native derivatives or even have the opportunity to do so. Safe, tested, familiar to users.
  • The CDP model makes it familiar for many DeFi participants, making the learning curve not as steep as the alternative solutions.
  • The ~50 blocks LMA eliminates the ability of manipulation by attackers and smoothes outlier blocks to prevent black swan events.
  • The redemptions (Liquity design) make the BaseFee arbitrage between the secondary market AMM and the Hedgehog protocol itself - more secure. That, in turn, drives more volumes and thus makes the AMM a better LP offering. And it also makes gas trading more interesting.

Third-party protocols can leverage Hedgehog Protocol to hedge gas costs. That could be AA wallets, AA service providers like paymasters, exchanges like CEXes, hedge funds doing delta-neutral strategies on-chain, deployers of NFT / DeFi protocols and so on. Everybody needs gas (hedging) if done right!

Happy to share in-depth math analysis with you if you want!

Estimated cost (denominated in RPL)
Is this a grant or a one-off bounty?

How much would it cost to put into place?

And how much to maintain?

To successfully implement and launch Hedgehog Protocol, one could consider the costs across several key areas. These include development costs for securing a top-tier security audit, ongoing protocol maintenance and oracle updates, broad community engagement efforts, educational initiatives, and marketing strategies to drive adoption. Our grant request reflects these calculated expenditures necessary for the secure and successful launch of our project.

What is relevant from the points mentioned above are a security audit with a top-tier firm (as we take user safety super seriously) and ongoing protocol maintenance which comes in the form of our on-chain oracle updates. The former would cost upwards to $100k at least, while the latter could range at about $10K monthly depending on gas volatility. The rest like design, coding, marketing, and things like that - would be out of our own pocket and incentives.

We will build and launch the protocol regardless, so anything not covered by grants - we will cover ourselves! However, to speed up the development and prioritize rETH in our architecture - a grant would go a long way! Depending on the RP willingness to support Hedgehog, we can prioritize rETH over other LSDs in the next protocol versions, which could also mean more emissions to the RP CDP/AMM.

We can go with a one-off grant or shard it to multiple milestone-based grants. Our approach is flexible and always open to discussion and suggestions. Happy to address any questions and provide further details on any topic of interest! F.e.:

  • A long-term 5,000 RPL grant split into a few stages based on the KPIs you would like to put in place. We are also ok with vesting, we don’t need to be selling the grant right away. We want to stay aligned.
  • A one-off 1,000 RPL grant based on simple requests you want to dictate, but in this case you might be less involved given a small size, relatively speaking.
  • A large 10,000+ long-term RPL grant that will go to users of the protocol instead of the developers of the protocol (Optimism calls it a Growth Grant vs Builder Grant), essentially directly contributing to rETH usage

We are open to any of this, we just want to build, launch, and push this further!

ps: We can have a vesting contract, a joint multisig, KPIs… all is fine with us.

Overall, we anticipate Hedgehog Protocol to deliver substantial benefits to RocketPool in the form of increased user adoption and transaction volumes. Beyond delivering our protocol and growing it (which naturally means exposure in B2C and B2B for RocketPool), we are happy to add any other pointers you’d like us to work on - in order to be even more symbiotic.

Happy to chat any time and do a call!

Let us know your thoughts and priorities.

A few things…

  • Please follow Grants / Bounties to see when grant applications are being taken. Fine to chat other times, but we do run in cycles.
  • This sounds like you’re asking us to fund development of a protocol, because it would use rETH as collateral and thus create some marginal demand. The other bullets you included as advantages feel like specific aspects of that.
    • We have not historically funded the creation of other protocols. For context, what we’ve offered has been more like (a) 100-200 RPL of liquidity help if they pair against rETH, (b) community amplification if the community thinks the project is good/cool.
    • One more bit of context: our net spend on the RP dev team is just over 2400 RPL per 4 weeks.
    • If the protocol were good, you or anyone who else could simply swap in wstETH using the same contracts. I’m not sure there’s much clear benefit to RP in such a case.
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