Dear frens,
The launch of the HydraDX Omnipool is planned to happen tomorrow (Jan 06th). This historic milestone marks the start of our exciting journey, the goal of which is to bring an ocean of liquidity to Polkadot.
During the initial launch phase, however, liquidity in the Omnipool will not be quite the ocean we envisage. Instead, it will resemble something like a sizable pond - following the launch strategy which was adopted by the HydraDX Community, we will be initializing the Omnipool with a TVL of $125k. The time has come to spark the discussion and decide - collectively - how to manage the HydraDX protocol owned liquidity (POL) and how to further drive liquidity expansion in the Omnipool.
This post begins by setting the stage for the discussion with a small reflection on the current state of liquidity in our broader ecosystem. After that, we would like to share with you two proposals that will direct our actions during Q1 2023. The first one concerns the diversification of a part of the HydraDX protocol owned liquidity (POL, currently standing at ~22M DAI) and its deployal into the Omnipool. The second proposal addresses the broader strategy for attracting liquidity into the Omnipool during Q1.
State of Bridges
In the absence of abundant Polkadot-native liquidity, there are not many options to set the flywheel into motion other than to bridge it from the Ethereum ecosystem. Bridges, however, pose obvious risks as demonstrated by the hacks of Nomad and Wormhole, both of which happened in 2022 (together with a dozen others).
Despite great demand in our ecosystem, we still don’t have a fully trustless Polkadot <> Ethereum bridge. Snowfork is a promising project which aspires to achieve exactly this, however its delivery has been delayed until at least Q3 2023. This forces us to look into less ideal solutions for bridging some of our POL into the Omnipool. For the initial tranche of DAI, our Protocol made the collective decision to use the Wormhole bridge. This is also the proposed option for deploying Ethereum-native liquidity during Q1 2023 (see proposal below).
Despite two exploits (one by white, one by a black hat), Wormhole has proven its remarkable capability to swiftly recover $300M+ of stolen collateral and compensate its users. Besides that, their past mistakes have made way for a much needed push to introduce more robust security practices, monitoring, alerting and others (you can find out more in this great podcast). Finally, it is worth mentioning that their operational side is supported by some industry leaders including Jump Crypto (the crypto arm of one of the biggest market makers in the world) and the so-called Wormhole Guardians.
Ultimately, the key to staying safu is diversification not only across assets but also across bridges. For this reason, we would propose to use other (trustless) bridge solutions as they become available in the future - such as Snowfork or the exciting zk-based Wormhole (in their later roadmap).
State of Stables
Also with respect to stables, the key strategy is diversification (and patience). There is unfortunately still no robust native stablecoin. Acala - one of the oldest and most promising DeFi projects in the ecosystem - aspired to solve this with aUSD, a stablecoin which is collateralized by a bucket of decentralized assets such as ACA, DOT and its derivatives (from crowdloans or staking).
Just weeks before the aUSD exploit happened, we were actually discussing internally to address the concerns of increasing centralization of DAI by swapping a chunk of our POL to aUSD and feeding these assets into our cutting-edge stabeswap subpools. This would allow swapping pegged assets using stableswap curves (similar to Curve finance) while utilizing other curves for exchanging less correlated assets (e.g. DOT or ETH), thereby effectively merging two different types of swap into a single trading pool. The rest is unfortunately a sad story and we wish the Acala team a speedy recovery, they can always count on our support.
After years of gaining legitimacy and surviving the Black Thursday 2020, DAI has traditionally been seen as a robust stablecoin. This view, however, is also subject to change. In the reality of 2022, more than half of the collateral used to mint DAI is composed of non-trustless USDC. The whole industry can only hope that Circle - the issuer of USDC, is not pushed by the US government to shut down its operations in the light of the 2022 events.
Speaking of USDC, you might have noticed the announcement from Circle about coming to Polkadot. Having native USDC would be beneficial as far as minimizing bridge risk is concerned. However, Circle later backtracked and decided to delay the plans well into 2023 - buying themselves additional time to monitor the state of the crypto ecosystem as a whole.
Diversifying and Deploying POL in Q1
During Q1 2023, our proposal would be to diversify up to 7.7M DAI (out of ~22M DAI, not counting HDX in Treasury) into other stables and large-cap coins, and to transfer this liquidity to the account of the HydraDX Treasury as preparation for its deployal into the Omnipool. Here is a granular breakdown per asset:
ETH
Swap up to 2.2M DAI into ETH using an Ethereum-based DEX;
Bridge the amount to Acala using Wormhole, transfer it via XCM to the HydraDX Treasury account;
Deploy the amount into the Omnipool.
WBTC
Swap up to 1.1M DAI into WBTC using an Ethereum-based DEX;
Bridge the amount to Acala using Wormhole, transfer it via XCM to the HydraDX Treasury account;
Deploy the amount into the Omnipool.
USDC (native)
Explore mechanisms to swap up to 2.2M DAI into native USDC. The mechanism will be subject to approval by the community prior to execution;
Deploy the amount into the Omnipool.
USDT (native)
Explore mechanisms to swap up to 2.2M DAI into native USDT. The mechanism will be subject to approval by the community prior to execution;
Deploy the amount into the Omnipool.
DAI
Bridge up to 2.2M DAI to Acala using Wormhole, transfer it via XCM to the HydraDX Treasury account;
Deploy the amount into the Omnipool.
HDX
Deploy up to $500k worth of HDX from the HydraDX Treasury into the Omnipool.
The strategy for diversifying the POL during Q1 is open for discussion in this thread on our democracy forum and will be subject to a community vote in a public referendum after a reasonable time has passed.
Strategy for Omnipool Liquidity in Q1
Deployment of POL is only part of our strategy to attract liquidity during Q1. Our soft target is to have somewhere between $10M and $15M TVL in the Omnipool by the end of March. Here is a rough breakdown of the current plan:
In line with the value proposition of the HydraDX Omnipool, part of our strategy is to attract liquidity from large LPs such as treasuries of other projects, and our first target is no other than the Polkadot Treasury. We are currently working on a proposal for the Polkadot governance which, if passed, would LP a large amount of DOT into the Omnipool in a completely trustless and non-custodial manner, using Vertical Message Passing (VMP).
The liquidity landscape painted above will set the stage for the next stage of Omnipool expansion (Q2 and beyond). This is where the potential of our next-gen AMM starts to unfold. The expanding liquidity layer is expected to attract LPing by the treasuries of other projects and DAOs which are looking for a cost-effective and trustless (via XCM) way of market making for their tokens. With more (high-quality) altcoins entering the HydraDX Omnipool, and trustless bridge solutions and native stables becoming available, the time would be right to consider deploying the remainder of our POL.
While the broad Q1 strategy does not need to undergo a democracy vote, we still would like to consult your opinion which you can voice in this thread on our governance forum.
Trustless liquidity is cool,
Are you ready for the Omnipool?
– the HydraDX team
Hydrating the Omnipool
"and its deployal into the Omnipool" should be 'deployment'... deployal is not a word. Not being a nit picky, just trying to help with optics/professionalism.
https://hydradxcn.substack.com/p/hydrating-the-omnipool
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