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

Hedgehog, a protocol providing tools for dealing with fluctuating crypto transaction fee prices, 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 address the issue of wildly fluctuating crypto transaction fees, which can be very expensive for protocols and businesses to deal with. While Ethereum transaction fees have been as low as a dollar at times, they rise considerably during periods of high demand. Current fees are $25 for a simple transaction and over $100 for more complex transactions.

The core goal with Hedgehog is to create an asset with a price that mirrors current transaction fee prices 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 fee prices.

How does it work?

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

DAI is created when crypto tokens are locked up in a vault. It is overcollateralized, meaning 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 value of the asset pegged to $1.

Hedgehog operates in the same way, using overcollateralized vaults 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 tied to the average transaction fee price.

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