Hedgehog, a protocol for hedging against crypto transaction fees, raises pre-seed round

Hedgehog, a protocol that provides tools for dealing with fluctuating prices for crypto transactions, has raised $1.5 million in a pre-seed round.

Venture capital firms Marshland Capital, Tenzor Capital, Prometeus Ventures, 3Commas Capital and Nothing Research participated in the round.

Angel investors included Vasiliy Shapovalov, co-founder of Lido Finance; Banteg, a pseudonymous developer at Yearn Finance; and ivangbi, a pseudonymous core contributor to Gearbox.

Hedgehog aims to tackle the problem of highly fluctuating crypto transaction fees, which can be very expensive for protocols and companies. While the transaction fees for Ethereum have been like this as low as a dollar sometimes they increase significantly during periods of high demand. The current fee is $25 for a simple transaction and more than $100 for more complex transactions.

Hedgehog’s core goal is to create an asset with a price that reflects current transaction fees on Ethereum. Specifically, it will reflect the moving average price over the last 50 blocks in the blockchain. Once such an asset is created, anyone can long or short it to hedge against future transaction costs.

How does it work?

The idea behind Hedgehog is similar to that of DAI, a decentralized stablecoin whose value is pegged to a dollar.

DAI is created when crypto tokens are locked in a vault. There is overcollateralization, which means that the value of the crypto in the vault is much greater than the value of the amount of DAI created. It also has a minting and redemption process that creates an arbitrage opportunity designed to keep the asset’s value at $1.

Hedgehog works similarly, using vaults with overcollateralization to create a derivative token called BaseFee. The only difference is that instead of pegging the asset to the dollar, it uses the arbitrage mechanism to keep it pegged to the average transaction cost.

While the protocol is currently designed to reflect transaction fee prices, it can be applied to create other on-chain derivatives – as long as there is enough demand.