Blockspace as a Commodity

Gift Economy

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In prehistoric times, barter was the main facility that humanity leveraged to exchange goods and services between each other before the invention of modern-day currency. To no surprise, these exchanges were mainly settled in commodities, the basic fungible goods that have a certain value given their usefulness to the person on the other side of the bargain.

Commodity trading is arguably the most natural and important market given that it brings fungibility and financialization to fundamental life resources such as wheat and oil, but also to coveted precious metals like gold and copper. As commodity markets matured and became more sophisticated, so did the types and complexity of financial instruments available to help diversify risks. Commodity production and consumption fluctuate based on their dependence on a wide range of physical phenomenons that can only be financially stabilised by the implementation of a robust commodity market.

Blockspace as a Commodity

For the past couple of years, the average digital footprint left by Metaverse dwellers has skyrocketed and has seen the value of their data sharply increase. As the paradigm shifted toward users owning a stake of the platforms they use and the data they create, the adoption of cryptonetworks rose and so did the economic activity within them.

All public blockchains settle on blockspace, the de facto commodity that powers all cryptonetworks. In the blockspace market, miners are the producers, mining pools are the auctioneers, and users are the bidders. After a user initiates a transaction on Ethereum, it is propagated P2P between nodes with a tariff attached to it called the gas fee. This fee signals the desire to purchase blockspace, which allows the transaction to be processed and included in subsequent blocks. When on-chain activities increase, network fees increase, and when the value of the block subsidy and fees increase, more miners are motivated to outcompete each other on appending the next block to the blockchain.

📌 Fundamentally, blockspace is the representative unit of a shared layer of computation and state across multiple users.

The ultimate purpose of the entire mining industry is serving as a decentralised transparent clearinghouse for a single commodity: the blockspace. In the Ethereum blockchain, the three sources of revenue for providing blockspace are:

1. Coinbase rewards composed by 2 Ether per block plus Uncle block rewards;
2. Transaction fees (Gas fee);
3. Miner/Maximal Extractable Value (MEV).

All these revenue streams are dependent on both Ether’s price and user demand. As fees go up, miners are more compelled to participate in the blockspace market by dedicating processing power to the total Ethereum’s hashrate. However, unlike most commodity markets, more producers does not equate to an increase in the supply of blockspace since it is determined by the block size, which is limited.

Since blockspace is a commodity, it can be used as a basis for various complex financial instruments — either to hedge against production costs or to enhance miner’s returns. Such financialization ultimately leads to a more comprehensive and efficient capital market, akin to how all important commodities have evolved throughout history. This is exactly the premises Alkimiya is being built upon.

Consensus Capital Market

Alkimiya is a permissionless consensus capital market where consensus producers (miners) can hedge against blockspace and hashrate volatility by selling commodity swaps, enabling users to restructure the contracts into yield-generating assets backed by the cash flow generated from block rewards and transaction fees. Miners can sell their hashpower through these swaps to lock-in future expected revenue, similar to how cloud mining platforms used to rent out their hashpower back in 2018 - nobody uses these services anymore.

The primary reason for participation in consensus production is to capture the profit margin between block rewards and the costs of resources. As competition for block production ramp up, the costs increase while the expected revenue is hard to manage due to token price variations, block production algorithmic network difficulty and network fees. To avert and overcome these hardships, the protocol is currently developing two types of products, Silica & Hash Vaults.

❄️ Silica

The Silica contracts are commodity swaps arranged between a seller and a buyer, whereby a floating price based on the mining rewards either produced by the amount of hashpower allocated to block production or transaction fees generated, is traded for a fixed price over a specified period of time. Since Silica contracts are coin-settled, both the buyer and seller just need to deliver the correct amount of tokens to fulfil the contract’s specifications, allowing anyone to sell these swaps without necessarily owning the “physical” hashpower.

Due to the non-custodial nature of Silica, the seller will only receive payments each day after delivering the required amount of mining rewards. There are two distinct types of contracts:

• ⚒ ETH & wBTC Mining Swap Contracts‍
  • Swap commodity contracts agreeing to receive ETH or wBTC mining rewards in exchange for an upfront payment. The seller creates a contract that forwards all mining rewards from mining x Gh/s on Ethereum or y Th/s on Bitcoin over the course of $z$ days in exchange for a fixed payment from the buyers.

• ⛽️ ETH Gas Swap Contracts‍
  • Swap commodity contract agreeing to receive ETH transaction fees in exchange for an upfront payment. The seller creates a contract that forwards all transaction fees - mining reward minus block subsidies- from mining x Gh/s on Ethereum over the course of z days in exchange for a fixed payment from the buyers.

⎈ Hash Vaults

Hash Vaults are simply a pool of various Silica contracts that contain additional logic to enable composability. Just as the Credit Default Swap (CDS) indices like CDX that track and measure the total returns for the various segments of the bond issuer market in TradFi, Hash Vaults repackage these commodity swaps into more useful assets like fixed-income bonds, convertible bonds or perpetual swaps.

Unlike most yield generating products collateralised by a basket of coins, the cash flow of a Hash Vault is secured by the underlying hashpower, which represents the economic activities accrued on the blockchain.

Thesis

What makes this new protocol so interesting you might ask? Only select few applications in crypto find any semblance to product market fit or solve any real problem - Alkimiya is building a product that checks both boxes. Commercialising blockspace as a commodity could become a critical component to how many enterprises and protocols develop their product from a user perspective standpoint.

Centralised exchanges are constantly changing their withdrawal fees due to network congestion, which leads to a poor UX that can make said platforms untenable to use at times due to high costs. If these entities know approximately how much blockspace they take up on average, they could hedge those costs by buying blockspace swaps equivalent to this percentage in validation power for a fixed price, stabilising the passed on end-user network fee. Say Binance uses on average 1% of Ethereum’s daily blockspace. Then, theoretically, they could buy swaps equivalent to 1% of the entire network validation power thus isolating the network activity and eliminating the volatility of network fees.

In addition, during times of high market volatility and on-chain activity like token airdrop events or NFT mints, the value of blockspace exponentially rises, taking at times a couple of days for the network to fully clear the queued and clogged transactions. Investing in blockspace via swap-integrated products allows buyers to take a directional bet on any event-driven trade that could congest the network and profit off of them.

The protocol is still in v1 and under development with no live token but it has been heavily hinted that they will have one in the future. With the current deployed version on AVAX mainnet, they plan to further stress test the protocol and to launch Ether Staking Silica & Gas Swaps to better accommodate the Ethereum’s Merge with improved UI/UX and gas optimisation on Ethereum Mainnet.

Commoditising blockspace is a complex problem that has yet to be done - we will be watching closely from the sidelines how Alkimiya can make blockspace as the primary commodity of the metaverse!

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