〰️Dynamic Fees

"What if the gas is too high, it will also drop in the next hour? Am I making free money then"? Or "gas is so cheap now, a huge minting event is upcoming - is this free money"?

Markets always have two different opinions. It's not as obvious it might seem. And when it is truly obvious, dynamic fees come into play. They are essentially Hedgehog Protocol's version of funding rates.

The dynamic fees ensure that collaterals are not exhausted in episodes of gas fee spikes or downturns, as well as they protect against a malicious attack. The fees effectively discourage redemptions during an under-collateralization spike and restrict potential heavy borrowing during events of high collateralization ratio.

That is, in events where there's a lot of demand for either the collateral or the BaseFee token—this might happen when the trade is obvious —market participants will induce the dynamic fees to reduce users' payoffs until the obvious trade is expensive enough to deter new users from either redeeming or borrowing during these events.