Note: It was decided to wait for yesterday’s Skip announcement before posting this draft so that the community would be aware of next year’s plans. The discussion period will be shorter than usual to ensure that the results of the on-chain vote are available by 1-Jan-2025 and product development can proceed without pause. The Hydro team will respond to feedback as diligently as possible on this forum post and in the Hydro Telegram group. We will also organize a couple of Twitter spaces, and calls can already be booked with the Hydro team here. Edit 16-Dec: Following community feedback, the on-chain proposal is postponed to early January.
In November 2023, the Cosmos Hub funded Informal Systems for 2024. The Informal Hub team eliminated the Hub’s technical debt and shipped two products:
- Forge as a way to permissionlessly launch a chain, solving all the pain points of the past versions of ICS and making it possible for the Hub’s validators to run it in a few clicks.
- Hydro as the first decentralized market-maker. Hydro allocates liquidity through sequential auction rounds in which projects attract user votes with tributes
Through this process, it became obvious that the Hub needed consolidated leadership to realize its full potential and Informal recruited one of the best teams in the Interchain to take up the product ownership role. Although Informal’s Hub 2024 mandate officially ends on 31-Dec, with the recent success of the first pilot rounds, the Skip team asked the Hydro team to keep developing the product in 2025.
Since the Informal Hub team is under budget in Q4 2024 (see the breakdown in the Funding & reporting section - the Informal Hub team was also under budget in Q1 & Q2 2024 and returned these funds to the community pool), this proposal requests community approval to fund Hydro product development and some Hydro-focused grants for the first two quarters of 2025 by giving Informal a green light to re-assign the excess Q4 2024 budget to Hydro and approving the transfer of an additional 120,000 ATOM from the community pool
In addition, since we believe that Hydro could be partly self-funded in the second half of 2025, we’re requesting community approval to send Hydro’s PoL profits to an account collectively owned by Hydro’s voters but placed under the control of the Cosmos Hub community (see the Hydro Treasury section for details).
Note: This draft assumes ATOM at $10 - the proposal will be updated to match the actual price at the time it goes on-chain.
Hydro Roadmap
The Hydro litepaper was published in late May-2024 and the inaugural pilot round started on 6-Nov. To date, 10 projects have submitted bids and 8 third-party teams have also expressed interest in building DeFi apps on top of Hydro. The round 1 cap was reached within 24 hours and the round 2 cap in less than 4 minutes.
Before 2025, the Hydro team will also ship several major updates, including:
- Custom deployment duration: Projects can set their own export duration and voters can lock-in a fixed APR over several rounds without having to vote every time.
- Custom export floor: Projects can set a minimum PoL target. If their bid doesn’t get sufficient support to reach that target, their tribute is refunded.
- Metrics page: The position size, status and performance of each PoL deployment is tracked and displayed on a dedicated page.
- Rewards page: Voters can see their tribute rewards and personalized APRs (current & past rounds). They can claim and automatically swap tokens to ATOM.
- Airdrops page: Voters can see a list of upcoming airdrops for Hydro participants, and projects can easily access relevant data.
The custom deployment duration and custom export floor are critical for making Hydro more widely useful to larger projects. However, Hydro is still far from a finished product.
- It relies on a committee for risk management, whitelisting & performance monitoring.
- The incentive alignment between voters & the community pool is relatively weak.
The goal is to make Hydro a fully permissionless, automated, risk-minimizing & profit-maximizing system for efficient treasury management on a public blockchain. Hydro should be able to operate like Aave, Compound, or Curve: risk parameter approvals via governance votes, allocations via the auction system, and automatic deployments.
Over the first 6 months of 2025, the Hydro team plans to work on the following features:
| Feature | Description |
|---|---|
| Third-party integrations | Vote optimizers, automated hedging contracts, insurance premium or escrow contracts can be built on top of Hydro to enable new cases |
| Valence integration | The Hub retains ownership of Hydro’s liquidity, making the committee less of a bottleneck and increasing the overall security & efficiency of the system. |
| Token integrations | Hydro can be used for the deployment of new tokens ( NTRN, TIA, stables etc.), and projects can submit atomic bids to get both sides of an LP pair |
| Rev-sharing & penalities | Voters get a portion of the PoL yield. A portion of the users’ locked capital gets slashed when they vote for a project that underperforms. |
| Hydro governance | Hydro users can vote on governance proposals to define all of the protocol parameters and elect or remove committee members |
| Staking interface | Hydro users can stake, delegate, re-delegate, claim, swap and compound rewards directly from the Hydro interface |
| “Just-in-time” liquidity | Hydro provides insurance against liquidity crunches by ensuring that buckets can be deployed quickly to stabilize a position or market. |
Note that this is a working backlog that will be re-prioritized based on market signals and community feedback.
Budget
Product development
The Informal Hub team in 2024 consisted of 14 people, split between Forge, Hydro and Hub maintenance. For 2025, we believe it is possible to achieve our Hydro objectives with a reduced team of 6 Full-Time Equivalent staff: 1 Project Lead, 1 Technical Lead, 1 Product Lead, 2 Developers & 1 Growth Lead. We will use the same per-head total rate averages of $325K per year, which includes approximately $225K in salary (and relevant overhead such as employer taxes and benefits) and a standard margin to pay for operational expenses like legal, HR, finance as well as some profit buffer for the company. Like last year, these rates are aligned with the mid-point of market software development rates ($110-$220/hour)
The entire overhead margin will be paid out in ATOMs for alignment purposes. In addition, our proposal will not include any performance bonus (Informal & Hypha 2024 proposal did). See the FAQ section for more details on these decisions.
Hydro grants
To become a fully permissionless & automated protocol, Hydro requires several DeFi & security integrations. While Hydro’s core team itself could develop all the necessary features over time, a better option to achieve this goal as fast and cost-efficiently as possible is to enable other third-party teams to build products on top of Hydro.
| Category | Budget |
|---|---|
| Vote optimizers | Vote aggregators are smart contract applications that abstract the complexities of voting away from users, give them the benefits of long-term locking, provide them with a tradable liquid derivative, compete for maximal returns, etc. |
| Delta-neutral deployments | Automated strategies are required to avoid exposing the Hub deployments to impermanent loss. Hydro’s bidders can implement a delta-neutral strategy with a real-time adjustment mechanism via smart contracts, insurance, or over-collateralization |
| Permissionless deployments | The Hub retains direct ownership of the liquidity, progressively reducing the need for the Hydro committee to manually deploy funds, enabling shorter and more competitive rounds, and increasing the system’s overall security. |
| Security | Third-party audits for the features developed by the Hydro product team. Security monitoring, threat detection system, and bug-bountry program for finding and reporting vulnerabilities on PoL venues. |
Over the past couple of weeks, the Hydro team has been helping several Cosmos projects submit well-scoped grant proposals to the AADAO so their applications can be processed before the end of the program. However, new teams (or existing grantees) are likely to step forward with other innovative ideas in the coming months and beyond.
For that reason, the Hydro team is requesting a $350,000 budget to manage an ecosystem fund to support some of the initiatives listed in the table below (each item is a rough estimate and the final distribution may look significantly different). All outgoing transactions will be managed on-chain via DAO DAO and labelled for transparency.
| Initiative | Budget | Amount |
|---|---|---|
| Hydro committee | ~$90/h for six members for 6 months, 5-10h per member per month (adjusted up or down based on individual time commitment) | $40,000 |
| Vote optimizers | ~$30,000 for smart contract development or audits for two separate teams (adjusted up or down based on a statement of work) | $60,000 |
| Automated hedging | ~$30,000 for the smart contract development or audits (adjusted up or down based on a statement of work) | $30,000 |
| Insurance premiums | ~$30,000 for the smart contract development or audits (adjusted up or down based on a statement of work) | $30,000 |
| Valence integration | ~ $40,000 for a first integration of Valence into Hydro (adjusted up or down based on the exact scope) | $50,000 |
| Data services | ~ $20,000 for the tracking of PoL deployments & rewards (adjusted up or down based on development & indexing costs) | $20,000 |
| Security audits | ~ $25,000 per audit & 1 per quarter from a reputable firm (adjusted up or down based on the exact scope) | $50,000 |
| Bug bounties | ~ $10,000 per bug submission for up to five security issues during a six-month period | $50,000 |
| Miscellaneous | ~ $15,000 for IBC relaying, security monitoring, infrastructure costs, software licenses and other miscellaneous expenses | $20,000 |
Note that the Hydro team has also submitted a $350,000 grant application to the AADAO ; if the AADAO approves it (partly or fully), it’ll be discounted accordingly from the proposed budget.
Hydro treasury
The rewards generated by the Hub’s PoL deployments are currently in the custody of the Hydro committee. The Hydro product team is planning to build out a governance module and equip it with the ability to hold and manage funds.
The purpose of the Hydro treasury is two-fold:
- Ability to deploy the rewards via Hydro
- Ability to fund development teams
The Hydro treasury transforms Hydro into a self-funded project and may eliminate the need for more community pool requests to the Hub community pool. The treasury would remain under the control of the Cosmos Hub via two mechanisms to be built into Hydro governance:
- The ability for the Hub governance to veto any Hydro prop via an expedited proposal
- The ability for the Hub governance to send the Hydro treasury to the community pool
If this proposal passes, the Hydro product team will transfer pre-Hydro and pilot rounds PoL rewards to a new public DAO on DAO DAO and start building the Hydro governance module and treasury. The DAO will initially be controlled by the product team and ownership will be transferred to Hydro’s governance as soon as it is technically possible.
Funding & reporting
Proposal request
In its 2024 funding proposal, the Informal Hub team planned for a total team of 14 full-time equivalents (FTE) per quarter:
- In Q1 & Q2, the team was under budget and returned funds to the community pool
- In Q3, the team worked at full capacity to ship Forge & Hydro.
- In Q4, the team was under budget again, using only 10 FTE resources.
The excess budget represented by 4 FTE in Q4 is $325,000, and we suggest assigning this funding to cover Hydro product development in the first half of 2025. Assuming 1 ATOM is worth $10, the breakdown is the following:
| Budget line | In USD | In ATOM |
|---|---|---|
| Product development | $975,000 | 97,500 |
| Hydro grants | $350,000 | 35,000 |
| Reassigned 2024 funding | $-325,000 | -32,500 |
| Refundable 20% buffer | $200,000 | 20,000 |
| Total | $1,200,000 | 120,000 |
The funding request amount includes a 20% buffer to hedge against price movement:
- If the ATOM price is exactly the same at the time of the Q1 & Q2 transfers as when the prop went up for voting, the entire 20% buffer will be sent to the Hydro treasury
- If the ATOM price decreases less than 20%, the buffer will be used to cover the difference. If the ATOM price increases, the extra will be sent to the Hydro treasury.
- If the ATOM price goes down more than 20%, the Hydro product team will request the difference to be covered by the Hydro treasury (see the description below)
Sequence of events
If this proposal is approved, the funds will be transferred to a DAO DAO instance on the Cosmos Hub (the Hydro Funding DAO) with the following signers:
- Maghnus Mareneck from Skip
- Michael Greenberg from Allnodes
- Takumi from Game
- Vadim from Everstake
- Marius Abalaru from Dokia Capital
- Zafercan Cakir from Stake&Relax
Funding will be distributed on the following schedule:
| On 1-Jan | The total ask (including buffer) of 120,000 ATOMs is transferred from the community pool to the Funding DAO |
|---|---|
| Before 3-Jan | The Funding DAO converts (OTC deal or swap) 70,000 ATOM into 700,000 USDC and reserves 50,000 ATOM |
| Before 4-Jan | The Funding DAO sends 350,000 USDC & $150,000 in ATOM to the Hydro product team |
| On 1-Apr | The Funding DAO sends 350,000 USDC & $150,000 in ATOM to the Hydro product team and the remainder to the Hydro treasury |
A new separate entity will receive the distributed funds. This new company (name & domicile to be determined) will be created specifically for Hydro product development. As a company, Informal Systems will be focusing on engineering services, security audits and public good development for devcos and foundations with clear service agreements.
Undistributed funds can be clawed back at any point via a proposal submitted by any community member using the tooling introduced by Prop 972.
Reporting
A quarterly progress report will be shared on the Cosmos Hub forum by the Hydro development team, using the same format as the reporting done by the Informal Hub team (see Q1 2024, Q2 2024, Q3 2024)
Hub-alignment
Hydro aims to become an example of a sustainable ATOM-first project. For as long as the Hub chooses to support its product development:
ATOM as value-accrual token: While new integrations will bring liquidity buckets for other tokens (USDT, USDC, TIA, NTRN etc.), they will primarily be allocated by ATOM stakers. This will be the case for the USDC & NTRN, which are already available in the Cosmos Hub community pool. For a few other tokens, voting rights may be a requirement to seed a new bucket, but this will likely be for a limited number of projects.
ATOM as export token: Cosmos projects already express more interest in ATOM deployments than any other token. Demand is likely to increase further after the Skip team takes over as product owner. Hydro will leverage the strongest token in the ecosystem and create new distribution channels to make ATOM the dominant Interchain capital asset.
ATOM as governance token: Participants will be able to use their Hydro-locked ATOMs to vote on the protocol parameters, including revenue-sharing, whitelist management, committee members, caps, grants allocations etc. Once the Skip team sets a clear maintenance & security policy for CosmWasm on the Hub, the Hydro team is also planning to move the protocol to the Hub.
A new source of revenues: Once Hydro’s revenues are sufficient to cover product development and eliminate the need for more funding requests, a portion of Hydro’s profits will be sent back to the Hub community pool, making Hydro net profitable for the Hub (given the current size of PoL deployments, this is more likely to happen in 2026 than in 2025)
A technical partner for Skip: The Hydro engineering team has previously worked on the LSM integration and an LSM removal plan and will support Skip if they decide to implement all or some of these ideas. The Hydro team will also continue to support IBC expansion beyond Cosmos (starting with Starknet) so ATOM can be exported everywhere.
Governance votes
Yes: You approve the allocation of Informal Systems excess Q4 budget and an additional 120,000 ATOM from the community pool towards Hydro product development and integrations, and you approve the transfer of Hydro’s PoL rewards to the Hydro Treasury.
No: You do not approve the suggested budget allocation and / or the transfer of Hydro’s PoL rewards to the Hydro Treasury.
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
FAQ
Could Skip fund Hydro directly?
Skip will build revenue capture for ATOM by leveraging the Cosmos stack. They will use the ICF budget to bring back core development teams under a single organization with unified leadership. We’re very enthusiastic about that vision. Hydro is pursuing a complementary but distinct goal of exporting ATOM over the Interchain and making it the best capital asset. Both Skip & Hydro’s team believe that Hydro should be an example of an autonomous, self-funded ATOM-aligned project that inspires other teams to pursue a similar model in the future.
Will Hydro have a token?
It is the Hydro team’s unambiguous preference not to launch any token, and to use ATOM for value-capture & governance. As long as the Cosmos Hub chooses to support Hydro’s product development (initially via community grant, then indirectly through the Hydro treasury), there is no reason to divert any energy away from product building. In the event that the Hub decides to withdraw support for Hydro and a token becomes necessary, a significant share of the supply will be allocated to the ATOM community.
What’s the Hydro team’s upside?
It was decided to exclude upside from this proposal. This community pool funding gives the team a six-month runway to show that there is a clear path to turning Hydro into a sustainable, self-funded project. If Hydro can generate meaningful profits, the team is hopeful that the Hub community & Hydro participants will support using part of the treasury to add a long-term incentive mechanism for the product team.
Why did you remove the bonus?
Informal & Hypha 2024 proposal had a 100K ATOM performance bonus awarded quarterly based on a performance assessment by an Oversight Committee. However, the committee grading process did not work well. The goal over our upcoming six-month mandate is to build the foundation for an objective, data-driven performance system.
Will Hydro grants work like the AADAO?
Hydro grants will be a small-scale, Hydro-focused version of the AADAO operating with RFPs instead of open applications. If the program shows promises, the Hydro team may consider putting up a separate Cosmos Hub governance proposal to repurpose the AADAO Guernsey trust, website and other assets for the Hydro grant program.
What’s Hydro’s plan for the LSM?
The LSM is complex and relies on a forked Cosmos SDK. In the context of Hydro, the LSM limits governance participation by making users who tokenize their ATOM lose voting rights. The Hydro team is advocating for a phased removal and has suggested a replacement solution that would satisfy our use case.
though that is a key point in my view.