ATOM Wars: Re-routing PoL deployments through Hydro

Hub Proposals Signaling/Text
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Note: This is a revised version of Seeding Hydro’s buckets, which itself followed previous discussions on A new strategy for liquidity injections and Introducing the Hydro auction platform

SUMMARY

Community discussions following Seeding Hydro’s bucket surfaced a clear preference for rerouting existing PoL deployments into Hydro before exporting any additional funds from the Cosmos Hub community pool.

Consequently, the on-chain proposal will no longer be a community spend proposal but rather a signaling proposal that requests members of the different multi-sigs involved in the existing PoL deployments to transfer fund custody to the Hydro committee.

It suggests the following updates to the Hydro launch plan presented in the previous post :

  • Making LST buckets dynamic (i.e liquid-staking based on market demand)
  • Using LSM shares to vote from day-one (instead of stATOM)

REROUTING EXISTING EXPORTS

We initially believed that the Hub community would prefer to see Hydro proven out before reclaiming PoL funds. Based on feedback on the previous forum post and discussions with stakeholders, it appears that there is already broad support to begin a cohesive and strategic approach to liquidity management.

We are aware that this liquidity is important for many projects and that brutal claw-backs may trigger a number of issues in Cosmos DeFi (major slippage, liquidations, problems with borrowing & minting caps etc.)

We therefore suggest the following framework:

  • The position is transferred from the ad-hoc multisig to the Hydro committee
  • The project participates in the auction process and wins a certain amount of votes
  • When the previous round completes, the multisig unwinds/rebalances as normal
  • Based on the amount of support received, the position is adjusted accordingly

The least disruptive process may vary slightly based on the way in which PoL exports are currently managed. For example, the Osmosis PoL from Prop 858 is managed by a DAO on Osmosis. If this proposal passes, the existing custodians can simply transfer control of the DAO to the Hydro committee. The Informal team will work with each of the custodians to transfer the liquidity to Hydro while minimizing disruptions on the positions.

The current PoL exports are the following:

  • Osmosis: 900,000 ATOM in the stATOM / ATOM pool on Osmosis, custodied by a multisig composed Zaki Manian (Iqlusion), Valentin Pletnev (Quasar), Joni Z (AADAO), Masha (Everstake) and Johnny Wyles (Osmosis)
  • Agoric: 188,768 ATOM liquid-staked & deposited in an Inter Protocol vault to mint IST, custodied by Zaki Manian (Iqlusion), Riley Edmunds (Stride), Dean Tribble (Agoric), Josh Lee (Keplr), Bart Van der Voort, Carter Woetzel (Shade), Jack Zampolin (Stangelove)
  • Stride: 450,000 ATOM in the stATOM/ATOM pool on Astroport’s Neutron deployment, custodied by the AADAO
  • pStake: 600,000 ATOM in the stkATOM/ATOM pool on Astroport and the stkATOM/ATOM pool on Dexter, custodied by Avril Dutheil (Neutron), Clemens Scarpatetti (Cryptocrew), Sanjeev Rao (Leap Wallet), Michael NG (StakeWithUs), Mikhil Pandey (Persistence)

Note: The pStake team has already expressed its intention to return the funds. The Stride team has posted a draft proposal for the PoL export related to their ICS agreement. Other teams (such as Mars) have posted (or are planning to post) new proposals but have committed to re-reroute these funds to Hydro once it is deployed on Neutron’s mainnet.

USING A SINGLE ATOM BUCKET

The second update involves launching with a single ATOM bucket instead of separate ATOM and stATOM buckets. While an stATOM bucket may seem logical due to stATOM’s significant use in DeFi and its prominence as a target for existing PoL proposals, a system can be implemented to dynamically convert ATOM to stATOM as needed.

This approach still presents challenges:

  • Bidders would need to wait the 21-day un-staking period to return ATOM to the ATOM bucket instead of stATOM to the stATOM bucket.
  • Bidders would be forced to continuously enter or exit LST positions through swaps, incurring losses. This would likely make the bid unattractive from an export performance perspective.

Our new proposed solution is to accept the LSTs instead of ATOM upon return. This market-based approach would organically establish LST buckets based on demand, eliminating the need for the Hub to convert ATOMs into liquid-staking tokens with insufficient demand.

It should be noted that this solution comes with additional risks. For instance, a liquid-staking protocol may put up a very attractive bid to convert a large part of the ATOM into their LST and initiate a large LST bucket, in the absence of real market demand for it. For that reason:

  • The Hydro committee will actively monitor the auction performance for all LST buckets and if needed swap back some of the derivatives into native ATOM
  • If needed, the Hydro committee may also decide to create a new tranche into the ATOM bucket for LSTs, which would effectively cap the amount that could be converted

While the above initially requires more active management from the Hydro committee, it does seem to be the best way to let the market decide the appropriate size of any LST buckets during the Hydro launch phase.

LAUNCHING WITH LSM SHARES

The third update involves postponing the Hydro v1 launch to integrate LSM shares from the outset. LSM shares introduce technical complexity because each tokenization event creates a distinct share denomination making them non fungible. Over time, each share denomination may become worth less than the underlying ATOMs due to slashing events. This necessitates querying the Hub via Interchain Query (ICQ) to determine the weights between LSM shares and handle potentially fluctuating ratios. Our initial plan was to launch with stATOM, the liquid staking ATOM issued by Stride, to circumvent this complexity.

However, based on community feedback, we have now prioritized LSM integration. We anticipate that this change will cause a few weeks’ delay.

COMMITTEE MEMBERS

To better distinguish the responsibilities of the developer (Informal) and the monitoring body (committee), Thyborg (yours truly, currently writing this) will not join the Hydro committee.

The Hydro committee’s success hinges on the inclusion of members with deep expertise in specific areas. This talent pool is limited, and primarily found within high-profile Cosmos projects. While we envision all Hydro committee positions becoming full-time roles in the future, we still feel it’s premature to request community funding for 6 full-time positions before the project demonstrates its value.

We are grateful that the initial committee members have agreed to work unpaid for the first few months as Hydro establishes itself. Afterward, we will develop a compensation scheme based on the committee’s performance (measured by auction profitability and liquidity export effectiveness) and seek community approval through a separate proposal.

It should also be noted that future versions of Hydro will incorporate a governance module and integration with the Valence protocol built by Timewave Labs, transforming the Hydro committee into an advisory body with limited decision-making authority. The Hydro governance will also have the power to replace committee members through voting.

GOVERNANCE VOTES

Yes: You signal your support for the transfer of custody of the Cosmos Hub community pool PoL deployments approved prior to this proposal to the Hydro committee for the purpose of running a competitive bidding process as per the mechanics described in the Hydro litepaper

No: You do not signal your support for the transfer of custody of the Cosmos Hub community pool PoL deployments to the Hydro committee

No with veto: You indicate that this proposal either (1) is deemed to be spam, i.e., irrelevant to Cosmos Hub, (2) disproportionately infringes on minority interests, or (3) violates or encourages violation of the rules of engagement as currently set out by Cosmos Hub

Abstain: You wish to contribute to the quorum but you decline to vote either for or against

2 Likes
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Still NO.

Hydro is fundamentally an artifice.
With minimal code implementations at its core imv.

Despite being presented as community spend/signaling proposal, what the community is actually being asked to vote on and authorize is a POL governance structure.

This is not so much “launch” of a platform as it is a continuation of the same committee-based power structures that have consistently failed users.

The code-based elements of Hydro seem to be limited to smart contracts for auction mechanics and basic liquidity deployment algorithms.

Whereas. the true functioning of Hydro as a “system” relies substantially on committee discretion and control, e.g.,:

  • Whitelist management for assets and actions
  • Performance monitoring and intervention
  • Decision-making on liquidity allocation and reallocation
  • Risk assessment and mitigation
  • Oversight of auction processes
  • Proposal development and execution

Crucially, even the code aspects of Hydro are ultimately dependent on and subjugated to committee choice and power.

This imbalance exposes Hydro’s true nature: just another jargon thick attempt to manipulate vast community resources under the pretense of “tech”.

In essence, the committee is the protocol. And that’s the problem.
And this proposal merely seeks permission to govern hub resources without established rules or structures.

If a committee-based solution is unavoidable, it raises the question of whether such a “system” is worth adopting at all. Should a committee prove necessary, it’s crucial that all members undergo thorough vetting, and that the committee be properly established as a DAO from the outset. This would require a public charter, bylaws, and a transparent framework for governance, operations, accountability, and oversight from D1.

At minimum, it’s imperative that no signaling or community spend prop be advanced until a comprehensive governance framework for the committee is shared.

Moreover, detailed disclosure statements from all potential committee members must be made public and independently verified.

Beyond these centralization concerns – imo, Hydro creates both artificial demand for ATOM and an artificial marketplace for POL allocation – introducing risks of significant market distortions and inefficient resource allocation. This dual artificiality seems silly, and more frankly, utterly useless.

P.S.: Thyborg’s reasoning wrt committee selection is riddled with logical fallacies. He commits a clear false equivalence by erroneously equating association with “high-profile” projects to expertise in POL management. This flawed logic is compounded by a false dilemma argument used to justify why certain individuals were chosen because they’re supposedly the only valid and therefore viable options pulled from a very small talent pool.

Interestingly, if one were to accept this kind of reasoning, one would then have to acknowledge an inherent contradiction: the very false dilemma used to justify the committee’s composition also inherently limits Hydro’s ability to scale lol.

As the complexity and volume of POL management inevitably increase, this narrow, poorly-justified selection of decision-makers will likely prove inadequate. The limited pool of expertise and perspectives in Cosmos will hinder Hydro’s capacity to adapt and grow effectively.

Such self-imposed fallacies undermine the credibility of the Hydro proposal.
Real limitations to innovations in Cosmos begin and end with informal reasons.

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On behalf of the PRO Delegators’ validator, we fully endorse the proposal to reallocate the previously deployed liquidity to the upcoming Hydro platform. We recognize the author’s concern that a direct claw-back could lead to inevitable negative side effects and, thus, support the proposed nuanced, intermediate solution to facilitate the transition. The Hydro committee will oversee the transition period and remain accountable until the funds are deployed in a fully trustless manner on the Hydro platform.

Some community members have consistently opposed the Hydro protocol, as highlighted by recent comments questioning the necessity of creating a liquidity auction platform altogether… However, we contend that the real illusion is what has been perceived as “free liquidity” from the Hub until now. Hydro offers a viable solution to this existing issue, acknowledging that liquidity allocation inherently carries risks, thus can’t be free. Taking funds from the community pool in the millions without rational compensation is unacceptable, and Hydro addresses this concern. The auction system is community-based, allowing everyone to participate. It is not a committee-driven platform; rather, the committee’s role is to monitor and report to the community.

The committee is specifically designed to address these challenges and provide guidance to community members interested in participating in Hydro. Regular users might lack the necessary technical and financial risk management knowledge. From our perspective, certain edge cases necessitate a committee. We have long advocated for creating a grant committee and have been vocal supporters of the @ATOMAcceleratorDAO . It is crucial to have a robust grant environment, requiring expertise and qualified reviewers to function effectively and avoid miscalculated use of community funds. We view liquidity allocation as another domain needing specialized and competent guidance due to its inherent complexities and risks.

One of the primary concerns raised by the community has been the inclusion of LSM shares. We are pleased to see that Hydro has addressed this by planning to include all LSM shares from the launch date. We commend this decision and appreciate the associated delay to ensure proper integration.

CONCLUSION:

It is important to remember that this proposal is not about debating the merits of the Hydro platform itself. Instead, it focuses on the support for transferring custody of the Cosmos Hub community pool’s previously approved PoL deployments to the Hydro committee. This transfer aims to facilitate a competitive bidding process as outlined in the Hydro litepaper. On behalf of the PRO Delegators’ validator, we express our full support for this initiative.

Many of the existing PoL beneficiaries have already expressed their acceptance of this transition, and we welcome their decision. The concept of “free liquidity” is a misconception; liquidity allocation always involves risk and should be managed carefully.

Thanks for reading,
Govmos.
pro-delegators-sign

4 Likes
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Thank you, Thyborg for presenting a reworked version upon receiving/implementing community feedback.

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Parties invovled:

• Zaki Manian (Osmosis/Agoric: Iqlusion)
• Valentin Plentev (Quasar)
• Joni Z (AADAO)
• Masha (Everstake)
• Johnny Wyles (Osmosis)
• Riley Edmunds (Stride)
• Dean Tribble (Agoric)
• Josh Lee (Keplr)
• Bart Van der Voort
• Carter Woetzel (Shade)
• Jack Zampolin (Strangelove)
• Avril Dutheil (Neutron)
• Clemens Scarpatetti (Cryptocrew)
• Sanjeev Rao (Leap Wallet)
• Michael NG (StateWithUs)
• Mikhil Pandey (Persistence)

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“…to the Hydro committee.” I understand this proposal initially aims to reallocate funds, but by rerouting the focus, are you not acknowledging the Hydro committee indeed has arguable merits?

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These rightful concerns, directly above, inevitably points to the need for the previously proposed Constitution, or something similar, to firmly stand on together.

BD is absolutely needed/called upon, and all these props are interesting at face value, but imagine having pooled, and more importantly prioritized collectively, focus/resources on said Constitution to help steward an even more accountable, decentralized, fruitful, secure, and simple path moving forward.

Additionally, this phrase "claw back," which seems to be gaining traction in the ecosystem, though not an advocate of the concept, could easily be utilized towards funds from passed proposals with idle ATOMS, without having to manipulate ones way towards anything CP related.

With all that said, unfortunately, considering the list at top, inevitably leads one to believe all of this is a means to manipulate into existence further centralized control, which is complete opposite of what the Cosmos Hub was made for.

Please note: In no way am I attempting to discredit the involved parties listed at the top of this direct post.

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There are many projects that announced to use Hydro, this is organic demand for the Hydro product and atom. Still yes.

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If a carton of eggs has an “organic” label stamped onto it, does that make it truly “organic” and void of any artificial properties?

Curious who “many projects” refer to, because if I understand correctly, the issue at hand is not Hydro as a conceptual product, more so the underlying recycling of funds/power to benefit the existing centralized committee(s).

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Note that these people are part of the existing multi-sigs that control the funds (i.e they are the current custodians).

If this prop passes, the Hydro committee will be the new custodian for all the existing PoL deployments. And once Timewave integrations start rolling out, custody will be transferred to Hydro voters (i.e anyone who lock their LSM shares into Hydro)

In other words, Hydro has a path to PoL decentralization (the current approach doesn’t)

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You’re spot on. What’s important is that Hydro is strictly better than the current PoL approach

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Hydro v1 is strictly better than the current situation

Hydro’s endgame is to operate like Aave, Compound, Curve etc.

  • Parameter approvals via governance votes
  • Allocations through the auction system
  • Automatic PoL deployments via Timewave

It’d be great to be able to snap our fingers and start with a fully permissionless, risk-minimizing & profit-maximizing system but sadly that’s not how product development works

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It is not a best solution out there, but definitely it is an improvement to make the PoL decentralized. It is a more systematic and transparent approach.

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Hi @Thyborg,

I’m happy to see that you’re now considering using LSM shares from day-one.

What do you think about using Moonkitt’s LSM wallet for use with Hydro. We can do custom dev, if necessary.

Feel free to contact me on Twitter or Telegram

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@Govmos Isn’t it a COI if you vote yes on this prop being a committee member who is going to get paid in the future?

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Additionally, you said in the validator review that Hydro committee members will be accountable until the funds are deployed. Are all the committee members KYC? Who is holding the KYC record ICF or Informal?

@Govmos

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The Govmos Initiative is comprised of individuals who contribute independently and hold unique viewpoints on governance reforms. Phil_RX may be affiliated with our initiative and is a potential future committee member. However, Govmos’ collective stance does not necessarily align with Phil’s individual perspective.

Regarding Hydro, we’ve consistently advocated for a financial risk committee to oversee intricate Protocol owned Liquidity (PoL) allocations. This commitment predates Hydro’s inception and was proposed before one of our members was suggested for a seat. To substantiate our independence, we encourage revisiting our earlier posts on the subject:

We actually believe that the reason why Phil was demanded to seat is a consequence of our long term contributions in the domain not the opposite. Nevertheless, we value community input and are open to abstaining PRO Delegators’ from votes if our association raises conflict of interest concerns.

To conclude about Know Your Customer (KYC) , we would argue that the proposed committee participants are well-established, long-term contributors to the Cosmos Hub and active community members. Their individual reputations are inherently tied to the success of the Hub. Should the community mandate verification for participants beyond their long lasting reputation, we would fully support this measure.

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I admire your work on this topic, I pointed it out as Phil_rex the proposed committee member is also a core member of PRO Delegators while some people might be okay with this I shared my discomfort in regards to COI.

While you are right about the legacy of the committee member and tied interests with the HUB, I believe this also sets a precedent for future committee members; some might not be as vested as current members. Secondly, the funds in control might exceed the vested interests in the cosmos hub. I think it is important to KYC committee members and Informal/ICF should hold a private record.

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@Thyborg,

Thank you for taking the time to clarify.

@Govmos,

Agreed that your participation, through vote, is a direct COI and sincerely appreciative of your humble stance to abstain, alleviating the COI concerns.

Cheers to making steps toward a truer, decentralized Cosmos Hub.

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Your perspective has been noted and we will proceed accordingly, without further deliberation. We uphold our commitment to comply with community requests.

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Thank you, much appreciated.

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Hope all are well.

I find it very intriguing that governance discussions have been re-routed from this more pressing matter to a more grandiose pursuit, i.e. the “merge.” Prop #955 has seven days remaining.

Though its understood some centralization is needed for “faster” development, is it not the case that the merit of Hydro’s committee is still in deep question? Despite the proposed path to PoL leading to a more “decentralized” version, within this system are we not relying on this same, rebranded committee’s track record manipulating itself into deeper governance control?

Please do not misunderstand! I would love to be proven wrong here and cheer on for the success of Hydro, as I’d like to assume we all want ATOM to thrive and continue to steward its greatness.

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Hello,

At this point, it’ll be assumed Hydro will pass, regardless what anyone tries to say. Clearly there are those “in power” here, without any regard to minority concerns.

Will root for Hydro’s success, despite differences, but if it ends up with no real fruit, I think it is more than fair to request that current leadership disband, and or completely restructure, the recycling, insider committees.