Let’s walk through some examples!
Zombie Rick is a trader who believes ETH Gas prices will rise in January and decides to buy the uGAS-JAN21 token. He connects his wallet to Uniswap and sees that the price shows 1 uGAS-JAN21 = 0.070 ETH. This effectively means Zombie Rick is longing ETH Gas prices at 70 Gwei. He sells 7 ETH to buy 100 uGAS-JAN21 tokens. The ETH Gas prices rise in January for a 30-day median price of 100 Gwei. Zombie Rick’s uGAS-JAN21 tokens are now worth 0.100 ETH each. He sells his 100 uGAS-JAN21 tokens for 10 ETH in return for a profit of 3 ETH.
Zombie Glenn is an active farmer who carries out many transactions to manage his crypto portfolio. It’s early December and he sees that the uGAS-JAN21 token is trading at 70 Gwei. He wants to lock in that price for his gas usage in the month of January. Zombie Glenn typically spends about 210,000,000 gas per month. Since each uGAS token is equivalent to 1,000,000 gas, Zombie Glenn needs to buy 210 uGAS-JAN21 tokens to fully hedge his usage. He sells 14.7 ETH to buy 210 uGAS-JAN21 tokens. Zombie Glenn continues his farming activity per usual in January and consumes 210,000,000 gas as expected. However, he paid on average 105 GWei on the price of gas for all these transactions in January which is much higher than where he saw gas prices in early December. Zombie Glenn held onto his 210 uGAS-JAN21 tokens through the token expiry at 00:00 UTC February 1, 2021. Since the 30-day median ETH Gas Price was 110 Gwei, Zombie Glenn can now redeem each uGAS-JAN21 token for 0.110 ETH and receives a total of 23.1 ETH — a profit of 8.4 ETH. This profit of 8.4 ETH is offset by the higher gas prices he paid in January. Effectively, Zombie Glenn used the uGAS-JAN21 token as a hedge for rising ETH gas prices.
Zombie Carol runs an Ethereum mining operation. She believes that ETH gas prices will decline in the next two months and would like to use the token as a hedge and secure her future revenues now. Zombie Carol mines on average 1,050,000,000 gas per month. Since each uGAS is equivalent to 1,000,000 gas, to fully hedge her revenue, Zombie Carol would need to mint and sell 1,050 uGAS-JAN21 tokens. Since the Global Collateralization Ratio is 2.5 when Zombie Carol attempts to mint, she needs to deposit 183.75 ETH in order to receive 1,050 uGAS-JAN21 tokens (2.5 x 1,050 tokens x 0.070 ETH per token.) Zombie Carol then connects to Uniswap and sells her 1,050 uGAS-JAN21 tokens for 0.070 ETH each and receives 73.5 ETH. Notice that net Zombie Carol is now committing 110.25 ETH (183.75 of WETH Collateral — 73.5 ETH received). And she could withdraw more collateral to be more capital efficient as long as she maintains the 1.25 Minimum Collateral Ratio. Unfortunately, ETH gas prices rise and the median price for the last 30 days of January is 110 Gwei — resulting in the uGAS-JAN21 token settling at 0.110. Zombie Carol takes a loss of 42 ETH (1,050 tokens x (0.070–0.110)). However, the higher gas prices in January resulted in higher revenues for her mining operation which offset the loss from her tokens. In the end, the uGAS token hedge resulted in Zombie Carol locking her mining revenues at 70 Gwei and provided her with certainty on her revenue amount.