HydraDX Omnipool

Published on: 07.01.2023
HydraDX Omnipool

Hydrating the Omnipool

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 they 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, they 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.

Despite great demand in the ecosystem, they still don’t have a fully trustless Polkadot <> Ethereum bridge. Snowfork 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, they 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. There is unfortunately still no robust native stablecoin. Acala – 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 & its derivatives.

Just weeks before the aUSD exploit happened, they were actually discussing internally to address the concerns of increasing centralization of DAI by swapping a chunk of the 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.

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. The 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. They 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 their 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.

About HydraDX

HydraDX a next-gen DeFi protocol which is designed to bring an ocean of liquidity to Polkadot. Their  tool for the job the HydraDX Omnipool – an AMM which unlocks unparalleled efficiencies by combining all assets in a single trading pool.

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