HydraDX: Bringing Cross-Chain Liquidity Infrastructure to Polkadot

HydraDX is a parachain that aims to bring cross-chain liquidity infrastructure to Polkadot. It is important for HydraDX because it allows different blockchains to interact with each other and access liquidity, which is crucial for the development of the blockchain ecosystem. In this article, we will explain what HydraDX is, why it is important, and how it works. We will also take a look at their governance structure and token utility.

HydraDX is a Substrate-based cross-chain liquidity platform. The HydraDX Omnipool is the first of its kind multi-asset liquidity pool with the objective of providing frictionless access to all crypto assets. HydraDX’s native token HDX is used as a proxy for assessing the relative value of various assets in the Omnipool, which is achieved through smart contracts.

What is HydraDX?

Hydra is a decentralized liquidity protocol that intends to become the ideal DEX in order to help bring DeFi into the mainstream. HydraDX was created with the goal of providing frictionless liquidity in the DeFi market by utilizing a common liquidity pool to host all assets. While other decentralized exchanges have flaws, such as high trading fees, high slippage, and fragmented liquidity HydraDX strives to correct them using some of the concepts they develop such as the Omnipool.

HydraDX is a Substrate-based, permissionless, and open protocol run by a powerful community of validators, liquidity providers, and platform users on the Polkadot ecosystem. HydraDX takes advantage of Polkadot’s excellent security, flexibility, and speed because it is created as a parachain.

The protocol is based on a proprietary digital currency known as HDX, which is used to incentivize certain parts of the platform. It has a variable supply linked to the amount of liquidity stored in the network.

A Brief History of HydraDX

HydraDX is a blockchain-powered trading platform founded by the Zee Prime team. Gregus Jakub, a member of the Zee Prime team, was HydraDX’s co-founder. Michael Brhel, Matti Gags, and Fiskantes are other senior HydraDX developers. Financial backing from organizations including DFG Group, CMS Holdings

HydraDX was initially conceived in early 2019 and entered development when the tooling became available to construct on Polkadot. At about the same time, the team created a proof of concept similarly to Uniswap. The project had great progress in Q3, including the establishment of an asset registry while they waited for cross-chain messaging parsing. They also created tools to compare different automated market makers (AMM), produced a basic governance framework, and began laying down plans for future use-cases.

In Q4 2020, the developers created a hack-net alongside other projects, such as finalizing the constant function market maker (CFMM) design. Around this time, they also debuted transaction payments in various cryptocurrencies beyond the protocol’s scope, allowing users to take advantage of their choices. The rollout of an in-block order matching feature was another important development in Q4.

At the same time, recent news from the HydraDX development team include completing the protocol’s core pool model, linking to the Rococo testnet, and conducting the first cross-chain token transfer. The protocol has also joined Berkley Blockchain Accelerator. HydraDX recently won a parachain slot in one of the initial 10 Polkadot parachain auctions.

How does HydraDX work?

The financial sector is on the verge of a new stage in its evolution – DeFi. Since DeFi is still in its infancy, certain flaws have emerged now and again. Despite these growing pains, DeFi is here to stay, which is why it’s critical to comprehend the fundamentals of the first generation of decentralized exchanges (DEXs). You can fully appreciate HydraDX’s advancements after you’ve mastered the basics of a DEX.

Order-book-based Decentralized exchanges use an order matching method that keeps track of all orders and matches up pending bids and asks with incoming purchases. On-chain order books are used by DEXs, which means block data is updated every time there’s an ask or bid. Order matching can be sluggish and wasteful, especially on smaller exchanges with limited supply and demand. By acting as an intermediary between traders, automated market makers (AMMs) address those problems by purchasing in a mathematical pricing strategy and performing the role of an intermediator.

Unfortunately, the AMM method has disadvantages, such as price slippage caused by the AMMs algorithm, which generates higher transaction costs. When prices in the market are volatile, miners experience exceptional losses. However, when big orders allow them to earn more rewards, miners and validators may also take advantage of the increased revenue.

Fragmented liquidity pools are used by decentralized exchanges, which negatively affects the liquidity and encourages higher fees. These problems make it more difficult for the AMM to work as intended. As a result, HydraDX takes a different approach by using an “Omni-pool” for all assets rather than many paired pools.

The Omni-pool model necessitates the creation and holding of an underlying asset, in this case, HydraDX’s native token HDX. The asset contributes half of the liquidity on the protocol, with the remaining half kept in various assets supplied by liquidity providers. The HydraDX’s HDX is used as the foundation for pricing on the protocol, making asset valuation easy. The technique aids in the reduction of diversification within the pool.

The protocol includes other features in addition to Omni-pool, including an order matching engine that is linked to the AMM pool. The matching engine’s function is to allow for simple and free bid/ask matchings without requiring a user to join the liquidity pool. This method also helps to avoid slippage, and the platform’s adaptability is aided by the ability to pay fees in tokens other than HDX.

HydraDX Main Use-cases

According to the HydraDX, there are three main use-cases that the team is targetting with their design.

Decentralized Exchange

The first use-case is to provide the necessary infrastructure for a decentralized exchange. This includes both the immediate asset exchange (aka swap) as well as liquidity provision. Instead of users keeping their assets idle in their wallets, they can provide assets to the liquidity pools to earn a portion of the fees as well as HDX.

Liquidity Bootstrapping

The Hydra Platform is a self-sustaining ecosystem that allows individuals to launch their own pools, develop their pools, provide liquidity for new projects and establish price discovery. New HydraDX pools can be created by entrepreneurs/communities, giving them initial liquidity for their token and starting price discovery.

HydraDX can function as a “middleware” for dapps or wallets, allowing seamless token exchange. Developers may integrate HydraDX pools into their incentive systems, rewards for liquidity mining, or affiliate programs to reduce trading fees or other purposes (e.g., lending/borrowing).

Streaming Tokens

Streaming tokens are required for a variety of functions. Every parachain needs to amass $DOT in order to keep their parachain slot, or $ETH in order to make smart contract calls/actions.

HydraDX integration enables these organizations to purchase assets automatically as needed, without having to hold substantial reserves upfront, resulting in more efficient financial procedures. Hydra may be used by investors to optimize their portfolio with continuous purchasing and dollar cost averaging, or using automatic rebalancing.

HydraDX token Utility

HydraDX’s final design is not finalized yet, hence, the information around token utility will be updated in the near future. As of now, what we know is that HDX is a native token of HydraDX. It will be used for governance purposes, where HDX token holders will be allowed to propose changes to the protocol as well as to elect council members.

Furthermore, since HydraDX is a proof-of-stake blockchain, HDX will also be used for staking and securing the network.

According to the HydraDX official docs, HDX will also be used to minimize trading costs and will also provide its holders with a lower over-collateralization ratio.

HydraDX Governance

HydraDX’s goal is to implement a completely decentralized governance structure. Following a democratic procedure, which is powered by the Substrate democracy module, all protocol changes are made democratically. The referendum serves as the mechanism for reaching consensus among stakeholders.

The HydraDX Council and Technical Committee, like Polkadot’s Council and Technical Committee, are two of the main governance actors.

HydraDX Council

The HydraDX Council presently has 13 members. A minority of 6 seats is set aside for the project’s founders and investors (4 individuals + 2 investors). The remaining 7 spots are picked by HDX token owners as a whole.

The HydraDX Council’s responsibilities include administering a variety of day-to-day governance activities. The Council, for instance, manages the Treasury and approves or rejects Treasury proposals.

The HydraDX Council also has a role in the vote’s referendum process. The Council can start a poll if enough of its members agree (super-majority) and no member exercises a veto; otherwise, it is necessary for at least 60% of the members to call for one. If a member uses his or her veto, the proposal must be resubmitted following the cool-down period. A member cannot use his or her veto on the same proposal twice.

Any proposed referendum may also be revoked with a two-thirds supermajority of Council votes. This may be used as a backup option to prevent malevolent proposals or modifications that might introduce bugs into the code.

The community may vote in Council elections by locking a certain quantity of HDX tokens. Locked assets are not transferable and will be used in the subsequent election cycles (until canceled). In addition, voters can choose more than one candidate in order of preference. The election algorithm then distributes all votes to determine the ideal allocation of the available Council seats to the candidates with the greatest community support.

Finally, the HydraDX Council is in charge of selecting the Technical Committee.

HydraDX Technical Committee

The Technical Committee is a group of core developers with considerable expertise that was established by the HydraDX Council. Its primary duty is to keep the protocol’s technical stability.

The Technical Committee has the authority to issue emergency referenda, which are fast-tracked and voted on simultaneously with any other ongoing referenda. This enables the Committee to act swiftly and deliver vital (code) changes.

The Technical Committee also has the authority to invalidate referendum proposals that are deemed harmful to the protocol. The Committee must unanimously agree to cancel a referendum proposal in order for it to be canceled.

Referenda

A referendum is a procedure in which people can put a proposal to a weighted, stake-based vote by the general public. The goal of the referendum is to determine if any suggested action affects the protocol (for example, a Treasury payout or even new runtime code).

In general, only one referendum is held at a time. Other pending referendum initiatives are placed in a queue. The proposed legislation is divided into two queues: public and Council proposals. Every three days, the referendum procedure selects the top proposal with the most backing from each queue, alternating between them.

There is a three-day enactment delay after a plebiscite has been passed and accepted. Before the decision is implemented, there is an additional 3-day enactment delay period following a referendum. An exception to these constraints applies when the Technical Committee requires that urgent protocol concerns be addressed as quickly as feasible in the form of emergency proposals.

Why is HydraDX so special?

It’s almost hard to discuss DeFi without discussing liquidity protocols. These techniques were designed to improve efficiency and usefulness in the industry’s early days, when trading on decentralized exchanges (DEXes) was difficult.

It’s simple to recall Uniswap, SushiSwap, Bancor, Balancer, and Curve as the most well-known liquidity protocols. None of them was designed to be cross-chain compatible, despite their popularity.

However, the growing competitiveness and demand for scalability are pushing platforms to adapt. While Curve developed a multi-chain strategy, protocols like SushiSwap, Bancor, and Balancer are all developing cross-chain capabilities.

In this case, HydraDX has a distinct edge over other liquidity protocols. The protocol was designed as a self-contained foundation layer with greater flexibility to adjust and fine-tune certain characteristics that will be important in the long run.

Most current liquidity protocols are based on the Ethereum network. As a result, all of these Ethereum-based initiatives inherit the network’s structural restrictions, which is not the case with Polkadot parachains that can be customized.

Conclusion

HydraDX is a parachain that aims to bring cross-chain liquidity infrastructure to Polkadot. It is important because it was designed as a self-contained foundation layer with greater flexibility to adjust and fine-tune certain characteristics that will be important in the long run.

Most current liquidity protocols are based on the Ethereum network (or EVM compatible), and as a result, all of these Ethereum-based initiatives inherit the network’s structural restrictions. Polkadot parachains do not have this issue as they can be customized to the needs of the project.

HydraDX seems a very promising project, and it will be interesting to see how it develops in the future.

Aris Ioannou
Aris Ioannouhttps://coinavalon.io
Aris created Coinavalon with the purpose of helping the average person navigate the decentralized web. Aris has been passively in the space since 2017 and full time since late 2020. Before Coinavalon, Aris worked as a Business & IT Architect in the financial services sector. Aris holds an MSc in Advanced Computing from Imperial College London, a BSc in Computer Engineering from University of Cyprus and currently pursuing an MBA degree from CIIM.

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