ATOM Wars: Seeding Hydro's buckets

Hub Proposals Community Spend
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Note: This governance proposal is the product of two previous discussions on the topic of the ATOM Wars: A new strategy for liquidity injections and Introducing the Hydro auction platform

This proposal requests approval on the transfer of 1M ATOMs from the Cosmos Hub community pool to the Hydro committee. 500K ATOMs will be used to seed an ATOM liquidity bucket and 500K ATOMs will be liquid staked with Stride to seed an stATOM liquidity bucket.

Should Hydro’s performance be deemed satisfactory, more proposals for other transfers and other tokens may follow. Should it be deemed insufficient, the complete amount (plus or minus any gains/losses) will be returned to the community pool.

STRATEGIC GOALS

ICS Synergies: Chains want ICS agreements not only to bolster their security but also to align with the Hub & tap into its resources and user base. Hydro enhances ICS by streamlining protocol-owned liquidity allocation to consumer chains, thereby reducing governance friction & making sure the Hub continues to be the best place to launch a chain

Value Accrual: Hydro generates value through the tributes paid by bidders and the yield from deploying liquidity into DeFi protocols. It leverages the Cosmos Hub’s strengths in liquidity, governance, and community engagement, ensuring consistent value accrual for ATOM over the long term.

Interchain Capital: ATOM serves as a crucial asset within the Cosmos Hub’s Interchain Security system. By supplying other projects with liquid collateral, ATOM proves its viability as capital in industrial settings. Hydro enhances this by establishing many distribution channels and strong payment rails for ATOM.

DPS monetization : The concept of “drama per second” (DPS) has historically hindered progress and affected ATOM’s financial outlook. Hydro shifts this dynamic by turning contention into competition over liquidity, leveraging drama to boost ATOM’s value and drive positive outcomes for the ecosystem.

PROPOSAL DETAILS

Hydro is a set of smart contracts already deployed on the Neutron testnet and has been audited by Oak Security (public report will be posted here once available). It allows projects to bid for deployments of protocol-owned liquidity under the control and for the benefit of all ATOM holders. The exact mechanics of Hydro have been previously described in this litepaper.

The litepaper describes the Hydro governance process, which includes the formation of a ‘monitoring committee’ whose responsibility include tracking the performance of all liquidity exports and providing guidance regarding the whitelisting of assets & deployment scenarios.

The Hydro committee will be setup with 7 members whose names & biographies are listed in the second annex. It may be expanded or downsized later on based on Hydro’s success. The committee will be created on-chain via a deployment of DAO DAO either on Neutron or the Cosmos Hub (this depends on the timeline for Hub deployment).

The ATOM liquidity bucket

Native ATOM is used in liquidity pools across the ecosystem. At the time of writing this, ATOM is the second largest token in terms of liquidity and among the top in terms of volume traded on Osmosis. On Astroport, ATOM accounts for a large share of the total TVL and ranks among the top tokens in trading volume. Across the rest of the Cosmos ecosystem, native ATOMs are deployed in other 15 dApps (including Archway, Canto, Dymension, Injective, Kava, UX, etc.)

Native ATOM also opens a way for other liquid staking providers such as Drop, Persistence, Quicksilver, and Eris to participate in the system.

The stATOM liquidity bucket

stATOM is issued by Stride. Stride is the leading liquid staking provider within Cosmos, with nearly 120K liquid staking users, locking close to $100M in assets. Stride is currently one of the first two chains using the Cosmos Hub’s interchain security product. An stATOM liquidy bucket has the following Hydro-related benefits (as opposed to a bigger native ATOM liquidity bucket):

  • DeFi market: The demand for stATOM in the Cosmos DeFi market is stronger than native ATOM’s demand. Stride has integrated its derivatives into 21 projects across Cosmos (12 of them for stATOM), which are all potential participants in the ATOM Wars.
  • Hurdle rate: ATOM holders face inflation dilution. This is not the case for stATOM holders. DeFi users favor liquid staking derivatives for their investments. A liquidity bucket with stATOMs addresses this problem.
  • BD support: The Stride team will be incentivized to promote ATOM Wars to its integration partners. This creates a positive spiral by stimulating competition for funds, and increasing hATOM holders revenues.
  • Staking APR: The ATOMs in the Community Pool are currently being diluted by the yearly inflation rate (currently at 10%). Using Stride means that the community pool now gets a staking APR as well.

The stATOM liquidity bucket has a number of other positive effects:

  • The stATOM liquidity bucket represents a significant TVL increase for Stride, proving again that the Hub is committed to the success of its consumer chains Broad stATOM adoption & additional liquidity will reduce costs for traders and liquidity providers, making stATOM a useful medium of exchange.
  • Stride shares 15% of its revenues with the Cosmos Hub. Extra fees for Stride means extra revenues for the Cosmos Hub.
  • This analysis by Stride showed that the stATOM/ATOM pool in Osmosis generated $109K per year to the Hub from swap fees.

Future liquidity buckets

The creation of a new liquidity bucket is a very powerful way to strengthen the alignment of the Cosmos Hub with its consumer chains and support their growth. A Neutron liquidity bucket with exclusive access for Neutron projects makes sense. Taking into account the Strategic guidelines posted by the Neutron team, the Cosmos Hub may use some of its NTRN holdings (currently 40M NTRN, valued at $18.7 million) to support NTRN liquidity on Neutron.

Preview of the Hydro’s user dashboard where voters will view bids & rewards*
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Governance Votes: Yes - You support the transfer of 1M ATOMs from the community pool to the Hydro committee // No - You do not support the transfer of 1M ATOMs from the community pool 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

ANNEX 1: HYDRO COMMITTEE ROLES

The Hydro committee’s main tasks are monitoring and advisory. After the launch of the Hydro governance module in a future release, the committee will have direct decision-making authority and simply informs & reports to Hydro’s and Cosmos Hub voters. With Hydro 1.0, however, the committee does have an executive role in deploying liquidity & managing exports.

The committee consists of seven members, each assigned a specific role to ensure an efficient and focused fulfillment of duties. The committee members must be able to reach consensus on every individual topic (whitelist, auctions & exports performance, security triggers etc. - see litepaper) and make its recommendations as a group.

At launch, the work performed by the committee will be done on a voluntary basis. However, as Hydro gains momentum and the workload involved becomes significant, a compensation scheme will be worked out. Compensation will be a function of the committee’s performance (particularly measured by the profitability of auctions & liquidity exports) and efforts.

Role 1 - Liquidity export performance: Responsible for tracking the performance of liquidity exports. This involves ensuring that 1- the allocated funds are being utilized as intended and 2- they yield the anticipated returns. If the export fails to meet the promised standard, the committee may suggest clawing it back.

Role 2 - Whitelist management: Responsible for liaising with applicants and providing feedback on whitelist update proposals for assets & actions. This process involves considering both qualitative criteria (e.g reputation) and quantitative data (e.g. market performance metrics).

Role 3 - Auction performance: Responsible for monitoring the performance of auctions on the Hydro platform and detecting possible signs of manipulation and collusion. The member may also propose changes to the auctions or call for additional research on their design

Role 4 - Export deployment: Responsible for ensuring the efficient and cost-effective deployment of liquidity exports across the IBC ecosystem and beyond. That means minimizing price impact, swap fees, possibly bridging fees to other ecosystems and so on.

Role 5 - Security monitoring: Responsible for security emergency response and coordination with the general Cosmos Hub community. If malicious activity or risk is detected, the member may initiate a veto proposal and the imposing of sanctions on offending parties.

Role 6 - Ecosystem growth: Responsible for identifying new opportunities for collaboration and user adoption. This includes liaising with potential bidders, ecosystem partners and the developer community to build integration with Hydro (such as vote aggregators for instance).

Role 7 - Committee leadership: Responsible for the supervision of the Hydro monitoring committee. This includes the coordination of written reports from the other committee members to the Hydro’s governing body, as well as enhancements proposals for Hydro and the broader ATOM Wars project.

ANNEX 2: HYDRO 1.0 COMMITTEE MEMBERS

Robo McGobo for liquidity export performance: Robo is a long-time community contributor to a number of Cosmos Ecosystem protocols. He works on growth & BD at Stride Labs and leads grants at Osmosis and dYdX grants programs.

Phil RX for whitelist management: Phil has extensive experience in risk management, advises multiple crypto projects and co-founded PRO Delegators, a Swiss validation company. He also leads the Govmos initiative, a prime contributor to Cosmos governance.

Trix for auction performance: Trix is a systems design fanatic who planted his roots in Cosmos in 2020 within Terra & Apollo. He is the founder of Membrane, a stablecoin laboratory on Osmosis.

Jonny Wiles for export deployment: Johnny has been a contributor to Osmosis since its launch. He works in governance facilitation at the Osmosis Foundation where he strives to establish robust governance processes.

Andres for security monitoring: Andres Monty is a blockchain security expert and Co-founder & CEO of Range, a security and risk platform for the interchain. Before that, he was a lead security auditor at Oak Security.

Carter for ecosystem growth: Carter is a long time Cosmos ecosystem builder & contributor. He is the lead researcher at Shade Protocol and is also on the Strategic Committee at AADAO.

Thyborg for committee leadership: Thyborg is Director of Strategy at Informal Systems. He will coordinate the committee during the initial launch phase and step down afterwards.

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Sounds great. You guys have really put some thought in to making this work, and there should be some incoming demand early.

What’s the timeline for other liquid staking protocols to be used? I recall Stride’s early exclusivity being partially a matter of convenience for V1’s implementation.

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This is super exciting. Well done to all your involved in reaching this stage.

Can I ask about existing POL. I assume the intention is to revoke the existing deals and trust that parties like Persistence, Stride, Agoric and Osmosis all use Hydro. I would full support this.

Obviously there are number of different interests at play which is understandable in a project as complex as this. The good thing is that all of the people involved are professionals with great reputations. Are all members in agreement with returning all POL to the Hub’s CP? And if so when are we likely to see proposals for such returns?

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how is the hub suppose to be in the market of selling security when it’s happy for it’s governance to be undermined? community pools should never be used to dilute existing stake holders, the fact that this needs to be pointed out is astounding.

As i stressed before there should be multiple lst providers including from the start.
we once again find ourselves with a committee with members with extreme conflict of interest. I warned some months ago that the optics here will be bad, and they are. congrats.

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Can we slowly reclaim the millions of ATOM just freely given out for POL and have chains actually use Hydro?

Otherwise the chains/apps with a headstart don’t even need to use it.

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Can we slowly reclaim the millions of ATOM just freely given out for POL and have chains actually use Hydro?

Otherwise the chains/apps with a headstart don’t even need to use it.

why not do this first and use this instead of 18% of the CP.

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I’d assume we’ll be seeing props go up soon to start the clawback process. No more free lunches after Hydro.

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Liquidity and friction? Idk.

Idc how its done tbh, as long as it we’re done with the free lunch.

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Thank you sir, and that’s correct, we’re already researching the best way to make it possible to lock ATOM into Hydro through LSM shares instead of stATOM

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Absolutely. We need Hydro to launch first, but I’ve explained below how we intend to re-route all exports through Hydro

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We did consider this option but some of these exports are currently used in Cosmos DeFi to backstop liquidations, support caps etc. so it would affect all of these projects negatively. It is a lot easier to claw back & re-route once Hydro is up-and-running

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Yes this is the plan, and as far as I know everyone is in agreement, as long as this is done carefully to avoid negatively affecting the projects that currently benefit from the PoL deployments

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Regarding the lock-in period of 1 year is a bit too long
Income that is not as expected, profit settlement, and urgent need for funds will make the pledge more unstable.
I think a 1-3 month lockdown is enough to run this flywheel
Loyalty is not about who is locked up for a long time
The most important thing is to be able to participate for a long time. This model mainly promotes atoms. The profit is too small to mention, so there is no need for long-term locking.
The locked profits will decrease as the number of people increases, and there is no guarantee that profits will always remain high.
Then locking it down for a long time will be counterproductive.
Otherwise, you can try a lock-in period of 1-3 years
balanced game :joy:

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The whole idea looks good, But it gives uneven advantages to Stride.

  • 500K ATOM will generate roughly 70K Atom a year in staking reward and Stride will charge us 10% for that, and HUB will get 15% of that 10% you highlighted.
  • Stride does not stake with a reasonable amount of val set but instead they stake with 32 val only. They have implemented a system on Osmosis to stake with most of the set why not on HUB?
  • Why not stkAtom and qAtom?

That is true, but CP gets filled per block basis more than the staking reward. vaguest argument.?1?

Again I want to mention, that Stride is not an NPO/NGO we all so want success for. it has no doubt added value in the ecosystem but don’t give them favours over others, this is nepotism.

I will Vote no because it gives unjustifiable advantages to Stride.

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Is there a technical reason why you need a second bucket, instead of just dynamically converting ATOM to stATOM when a specific proposal requires it, or just allowing the counterparty DeFi users to do that conversion themselves? (Like in leveraged staking, where users borrow ATOM to stake as stATOM to deposit as collateral to borrow more ATOM against to stake…)

How is the Community Pool being diluted? There’s currently over 250 million ATOM staked, and the Community Tax takes 10% of the 10% inflation rate, so the Community Pool is already receiving over 2.5 million ATOM inflationary rewards per year.

Ignoring Stride’s cut and any compounding, staking 500k ATOM in this stATOM liquidity bucket would give the CP about 50k additional ATOM per year.

Edit: It’d be a noticeable boost to Stride’s TVL, but it’d only bump the Community Pool’s total inflationary income by about 2%, the equivalent of raising the Community Tax from 10% to 10.2%.

(Edited because I foolishly glanced at CoinMarketCap to check the circulating supply of stATOM, but it was inaccurate; CoinGecko, by contrast, does list 3.2 million stATOM circulating, backed by over 4.5 million ATOM.)

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I love the idea of Hydro, or ATOM Wars, and was really excited for this prop to go live, as Astrovault intends to participate.

Some concerns however; this was supposed to protect ATOM liquidity from what’s happened with Stride. The opposite seems to be the case and is very concerning. This should be a signaling prop to clawback existing POL and they can lease it from the community pool through Hydro.

Additionally there are extremely strong conflicts of interest in the committees. In general that’s inevitable as people with experience should be the ones leading the charge… but with an “executive role” in allocating liquidity, this seems a lot like the same people pushing their same projects at the expense of the community pool.

REALLY hoping for different as this is a very promising move for POL direction. I hope this is amended.

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This is the right way to do it.

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The community pool is backstopping liquidations…

Ya that’s a problem. If they want collateral they can get it through Hydro right?

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It sounds like a nice idea to get this show on the road.

However, the naming of the persons of the committee worries me enormously. We are always wondering why the Cosmos-ecosystem hasn’t got massive traction yet. One element is the need for abstracting away from all different appchains on a UX-level so that users don’t feel the underlying infrastructure.

The second point on top of that is the expectancy that people can do 3-4 full-time jobs AT THE SAME TIME. I see names in this list who are already fully loaded with the tasks they have and we are going to add MORE? How the h*ll are those people expected to do a proper job at any of these assignments?

I have heard the excuse of having a small pond to fish from for capable people, but not allowing new names to enter the sets also doesn’t grow the pond, does it?

I have started preaching exclusivity in roles for chains/projects already during the first iteration of the Osmosis Support Lab and I am going to shake that tree on a very short notice on some other subjects as well. It would be cool however if that mistake would not be made here and we would see some fresh and willing names who can add value to the Cosmos-ecosystem as well.

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This seems like a really good feedback, we definitely need to consider that idea

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