The Future is Hydrated

Proposal to Extend the Runway of HydraDX

Feb 22, 2023

This month marks the two-year anniversary of the HydraDX LBP. What had since followed was a historic chain of events: We witnessed the arrival of parachains to Polkadot, the delivery of XCM (v3 coming soon), and the Omnipool launch - our next-gen AMM designed to bring an ocean of liquidity to Polkadot.

Currently, we are in the process of shipping the last features which were promised for v1 (Liquidity Mining) together with some additional stuff that was added later to the list such as invariant curves for stablecoins (Stableswap). In parallel, we are deploying the fruits of our LBP success - at the time of writing, the Omnipool has a TVL of ~$5M which will grow to $10-15M by the end of Q1 2023.

With this set of basic yet outstanding features and a comfortable size of POL (protocol-owned liquidity), the HydraDX Omnipool is well on track to dominate the Polkadot AMM landscape. Quite a modest achievement - critics would say, pointing their fingers to the chart below.

Ultimately, the battle of AMMs which matters is ecosystem-agnostic - and it is also highly adversarial. Winning is not easy, but the effort is well worth it. Most importantly, the choices that we made and implemented during the past 2 years render HydraDX well equipped to take up the DeFi battle. The foresight to build an appchain is slowly validated by the market as projects like dYdX discover the limitations of non-DeFi optimized chains - long live the superapp thesis. With a strong foundation in place, we are preparing to ship an array of cutting-edge features which will boost the efficiency of the Omnipool, helping us lead the forefront of innovation in a sustainable manner.

Entering the next chapter of the journey will require additional funding. After considering the available options, we thought the best way forward would be to ask the community to repurpose a portion of the LBP funds to help us finance development of the HydraDX protocol during the upcoming two years. This post lays out the details. In the first part, we will take a look at the financials and the proposal. In the second part, we will present to you our plan for making the most progressive DEX future-proof - covering some of the exciting features in the pipeline.

Financials and Proposal

The costs for developing Omnipool v1 were covered entirely using the proceeds of two funding rounds which we executed in exchange for a share of the team tokens. In total, we raised less than 6M (since February 2020) - a relatively modest figure compared to some competitors whose seed rounds were in the tens of millions. These funds were used to sustain a team which at its peak was ~30 people strong, but also to cover the high costs associated with audits and to engage other external contractors to help deliver certain bits more quickly (e.g. UI).

In the past 4 months, we succeeded in bringing down our burn rate considerably - by almost a third. This was done following a combination of measures such as reducing the payroll workforce to the bare minimum and further cuts across the board. However, there is a limit to what we can reasonably achieve on the savings side without having to part with some of the talent which is essential to the success of our ambitious mission.

Moving forward, our estimate is that we will need an additional $5M to provide the Protocol with a comfortable runway for the upcoming 2 years. These funds would cover the costs for research, development, infrastructure or marketing (if needed). It is imperative to point out that these services are not to be carried out by Intergalactic alone - any other existing or future contractor could get involved after approval by the HydraDX community. Some of the funds would also be used to pay for audits - a very necessary expenditure which is currently holding us back from shipping some features. In parallel, we are also working on setting up an ecosystem initiative for helping parachains fund audits, but more on this later.

We have mentioned time and again that the LBP funds were earmarked for providing liquidity to the Omnipool. Accordingly, we did look for possible alternatives to secure the necessary funding. One such source could be the ~1.8B HDX which has been reserved for Growth initiatives. However, organizing a funding round in the current market conditions is not only hard but also extremely costly - the protocol would be essentially dumping HDX at the expense of all earlier investors.

Taking the above into consideration, we believe that a better course of action would be to save the HDX Growth allocation for later, and to repurpose a part of the LBP funds instead. In this light, we would like to propose the following to you, our dear community:

Put aside 5M DAI of the LBP funds, to be used for extending the runway of the HydraDX Protocol during the upcoming 2 years. The funds will be distributed by the HydraDX Council in installments equivalent to no more than a 6 months' runway.

The $5M that are requested for the upcoming 2 years represent roughly 22% of the 22M DAI HydraDX POL. The decision whether to approve this request will be made by all HDX holders in a democracy vote. Before we move forward to the voting procedure, however, we would like to answer any questions you may have - we have opened a thread on our democracy forum, and we are looking forward to having a fruitful discussion with you over there.

The Future is Hydrated

The additional runway of 2 years will provide the Protocol with the necessary time and resources to ship a second batch of features which will propel the value proposition of the current Omnipool implementation. As we continue improving our positioning on the AMM market, one of our main goals will come within reach: Sustainability, in this case meaning the ability to generate higher revenue for the HydraDX Protocol as compared to the costs of maintaining and developing it.

We are happy to share with you some of the upcoming features which are currently in our pipeline. Let’s start with dynamic fees - the ability to charge varying LP and protocol fees based on price and volume oracle data. This will allow both the protocol and LPs to become more profitable in times of volatility - which is the time when they are typically on the losing side. This will allow the Omnipool to offer more attractive LP returns without the need of wasteful Liquidity Mining rewards.

Next on the list, dollar-cost averaging (DCA) takes advantage of the low-fee environment in the HydraDX network to accumulate / distribute assets gradually over time. This helps minimize slippage, flatten out volatility and achieve better average pricing. DCA can be leveraged in the future by protocols (also by HydraDX itself for further growth) to gradually diversify their treasury into stablecoins and other assets - including directly swapping their rewards generated from LP fees into alternative assets.

Bonds - while useful at times, Liquidity Mining campaigns have proven to be a wasteful instrument for attracting liquidity, with the resulting growth often not being very “sticky”. Introducing bonds would allow the HydraDX protocol to accumulate large amounts of POL using the ~1.8B HDX earmarked for “Growth”. The current $22M from LBP proceeds could appear like a drop in the ocean compared to the potential that bonds bring into the game.

Money market - lending / borrowing is a very popular (and profitable) use case for crypto. Our AMM-specific blockchain allows HydraDX to vertically integrate all aspects of DeFi and therefore capture that value. A money market built on top of the Omnipool together with a HydraDX Liquidation engine could turn into a great instrument for attracting sustainable yields for the Protocol. It would also help LPs and bonds purchasers to remain liquid while they’re accruing incentives, trading fees and yields from lending.

Liquidation engine - our purpose-built blockchain allows us to prioritize certain transactions within blocks, enabling us to execute liquidations first. The reliable processing of liquidations unlocks a dramatic reduction in high overcollateralization ratios, high liquidation penalties and fees, turning it into a “holy grail” of crypto. Currently, the liquidation mechanisms used by the industry are inefficient because they rely heavily on liquidation bots and also because they compete with unrelated use cases (e.g. big NFT mints) - while in times of high volatility, prioritizing liquidations is essential for the financial health of the whole ecosystem. Having our own liquidation engine was key to our decision in the past to build on Polkadot. Instead of optimizing features to work on our chain, we can optimize our chain to serve the features we want - without any compromise. Combined with deep liquidity in the Omnipool, a liquidation engine can be extremely reliable and profitable both for HydraDX (POL), as well as for LPs.

Order batching - some of the HydraDX OGs may remember us showcasing in-mempool order matching back in the summer of 2020. Executing orders against each other before they hit the block allows to minimize both slippage and MEV, leading to improved execution prices. Furthermore, this feature also creates a new revenue stream for the Protocol by internalizing another non-extractive MEV type - backrunning. Different from frontrunning, backrunning is a desirable type of MEV because it pushes price back by trading in the opposite direction of previous trades. This would make sense in cases where a profit can be made by arbing against other venues. Obviously there is not an infinite amount of these opportunities and they can be lucrative during times of high volatility. The way for capturing them would be another new advanced development in the world of DeFi:

PFOF a.k.a Payment for ORDER FLOW - once order batching has done its job, we could auction the rights to have an exclusive look at the last state of the planned transaction order before executing the block, together with the right to include backrunning transactions. The result is net positive: for traders in that block (lower execution price), for backrunners, and for the Protocol. In TradFi, this superpower is reserved for the rich and famous, leading to a concentration of power and wealth. In DeFi it’s currently a bit better but still not as fair and transparent as we can make it.

HDX Staking - yes it’s true. We are currently looking into non-inflationary ways to incentivize long-term staking of HDX. Whilst the mechanisms are still under research and therefore not finalized, we believe there may be multiple ways to sustainably redistribute rewards from the Protocol operations to those who help us bring the HydraDX vision to life.

Final words: these and other upcoming features are designed to make the HydraDX Omnipool the go-to location for DeFi market participants. Sustainable and reliable yields for protocol & LPs, lower fees, lower slippage, higher capital efficiency, vertical integration of key alternative revenue streams, amassing POL to provide consistent and ultimately sticky liquidity to ride out any market conditions. The HydraDX Omnipool is destined to become a value-capture flywheel that exponentially snowballs - as it grows.

And so it unfolds,
the vision of HydraDX,
in mysterious ways,
it leads to the ultimate DEX.

– the HydraDX team