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A methodology for pricing gas options in blockchain protocols

Author

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  • 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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