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A methodology for pricing gas options in blockchain protocols

Author

Listed:
  • Madrigal-Cianci, Juan P.
  • Maya, Camilo Monsalve
  • Breakey, Lachlan

Abstract

We propose a novel data-driven methodology for pricing derivatives on blockchain transaction fees in protocols that use an EIP-1559-like transaction fee mechanism. Our approach models the base fee process as a Markov chain driven by relative block usage, estimated from empirical data via a Gaussian Mixture Model. We then apply risk-neutral valuation through Monte Carlo simulations. Our results suggest that our approach captures observed fee volatility better than other available continuous-time models.

Suggested Citation

  • Madrigal-Cianci, Juan P. & Maya, Camilo Monsalve & Breakey, Lachlan, 2025. "A methodology for pricing gas options in blockchain protocols," Finance Research Letters, Elsevier, vol. 84(C).
    • Handle: RePEc:eee:finlet:v:84:y:2025:i:c:s1544612325009596
    DOI: 10.1016/j.frl.2025.107700
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    References listed on IDEAS

    as
    1. Tim Roughgarden, 2020. "Transaction Fee Mechanism Design for the Ethereum Blockchain: An Economic Analysis of EIP-1559," Papers 2012.00854, arXiv.org.
    2. Dowd, Kevin & Buckner, Dean & Blake, David & Fry, John, 2019. "The valuation of no-negative equity guarantees and equity release mortgages," Economics Letters, Elsevier, vol. 184(C).
    3. Bernhard K Meister & Henry CW Price, 2024. "Gas Fees on the Ethereum Blockchain: From Foundations to Derivatives Valuations," Papers 2406.06524, arXiv.org, revised Nov 2024.
    4. Urquhart, Andrew, 2022. "Under the hood of the Ethereum blockchain," Finance Research Letters, Elsevier, vol. 47(PA).
    Full references (including those not matched with items on IDEAS)

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