Hedgy, Inc., a San Francisco, Calif.-based, Boost VC-accelerated startup, has launched a block chain-enabled, over-the-counter hedging product for commercial bitcoin miners. MegaBigPower, a Wenatchee, Wash.-based bitcoin miner, and Crypto Facilities, a London-based derivatives broker, will offer a smart contract for hedging bitcoin mining proceeds at a fixed price for delivery on a future date.

In traditional finance, the product operates like a forward contract.

Hedgy, by utilizing the bitcoin blockchain, programs contracts to “self enforce” and settle as soon as contract terms are agreed on. The process is unprecedented in the multi-trillion-dollar derivatives market, the company noted.

Math-based commercial contracts

Hedgy serves as the “oracle,” a third party that signs a claim about the state of the world. The state in this case is a price index called “TradeBlock XBX time-weighted average price of bitcoin.”

“At Hedgy, we envision a world where commercial contracts are executed and enforced by the laws of math,” said Matt Slater, CEO of Hedgy, “not the flaws of man.”

Hedgy is using its smart contracts to help bitcoin miners lock in the value of their bitcoin. This way the miners can operate under certain price guarantees. Increasing electricity costs, hardware obsolescence and fluctuating prices are among the major problems bitcoin miners face concerning profitability.

As prices continue to stagnate around two-year lows, bitcoin miners are being forced to find new business strategies to insure against downside risk.

“I believe Hedgy’s smart contracts are the future of finance because they reduce downside risk for all parties in an extremely efficient and programmable way,” said Dave Carlson, founder and CEO of MegaBigPower.

Also read: New bitcoin derivatives brokerage launched by ex-Goldman Sachs director

Derivatives move onto the blockchain

At present, Hedgy only supports over-the-counter bespoke forward contracts. They are exploring additional ways to put other derivative instruments onto the blockchain using smart contracts.

“The Hedgy team has engineered an excellent product that mitigates a key issue in bitcoin trading: counterparty credit risk,” said Dr. Timo Schlaefer, co-founder of Crypto Facilities. “It really takes the whole space to the next level. Their market is one of the few we are comfortable taking exposure on, and we work with them to facilitate transactions of any size.”

Hedgy recently closed a $1.2 million series seed round from Tim Draper, Marc Benioff, Sand Hill Angels and eight others. Rounding out the Hedgy advisory board are Bill Barhydt, founder and CEO of ABRA, Ryan X. Charles, a bitcoin engineer previously at BitPay, Reddit and now BitGo, and Carlson.