Thanks @RoboMcGobo for driving this. As discussed together, I would like to provide the research firms that are considering submitting a proposal some context about Hydro, which I think can be a useful component of the new tokenomics.
Hydro’s development started in late 2024 at Informal Systems, one of the core contributors to the Cosmos tech stack. The Hydro team spun out of Informal and received funding for Q1 & Q2 from the Hub community pool via Prop 986. In Q3 & Q4, Hydro has operated from the yield generated on ATOM liquidity deployments. Hydro doesn’t have its own token and hasn’t raised external capital.
Since its mainnet launch in late 2024, Hydro has deployed over 4 million ATOM across 20+ Cosmos DeFi protocols through sequential monthly allocation rounds. Protocols request liquidity and offer incentives, ATOM holders vote on allocations and receive the incentives, and Hydro deploys the capital. The model works well, but it does require protocols to submit requests for liquidity in order for capital to be deployed. This means there may be other DeFi opportunities available, potentially offering higher yield, that this system is not able to take advantage of.
To address it, Hydro has built a new product called Inflow. The Inflow vaults automatically deploy capital across market-neutral DeFi strategies, including venues outside of Cosmos. Examples of strategies include LST redemption rate arbitrage, leveraged staking, perp arbitrage, and borrowing and lending arbitrage. Beyond these strategies, Hydro uses its Riptide feature to enable deployments into higher yield (but often market-exposed) strategies while insuring the deposits against potential losses.
The vaults have been operating in private beta for the past few months with promising results:
- ATOM vault: 19.94%
- BTC vault: 4.56%
- USD vault: 9.01%
The vaults are taking advantage of situations like LST de-pegs and market crashes. For example, during a recent de-peg of dATOM, the Inflow ATOM Vault was able to generate >30% APY by arbitraging the difference between the market rate and the redemption rate. As another example, after the Mars lending market suffered an exploit on Neutron, Hydro withdrew its liquidity and redeployed on Osmosis to take advantage of the temporary interest rate spike caused by the liquidity shortage, illustrating the “First out, First back in” strategy that we’re implementing across all deployments.
Hydro also plans to launch a Hub-native, zero-fee ATOM liquid staking token that combines a standard LST model with DeFi-integrated vault shares designed for different liquidity and risk profiles. The core token, hATOM, is designed for institutional users. Variants with 1-day, 24-day, and 90-day withdrawal windows enable progressively higher-yield strategies. All versions are fully backed by ATOM, transparently verifiable on-chain, and can always be converted into hATOM either directly or via Hydro-managed internal liquidity pools. All hATOM variants will be usable as collateral in lending markets with unified liquidation paths.
We have two initial suggestions regarding the new ATOM tokenomics, intended as a starting point to stimulate further discussion (we welcome extensions or variations on the ideas presented).
1- Deploy a portion of ATOM’s inflation to the Inflow ATOM vault
The vault would automatically deploy ATOM into DeFi protocols to improve ATOM’s liquidity and earn optimized yield. The yield generated by the vault would be partially inflationary (as the vault utilizes LSTs) and partly non-inflationary (generated via market mechanisms such as fees, incentives, interest rates, arbitrage etc.). For example, when the vault deploys ATOM and an ATOM LST into a concentrated liquidity position on a DEX, it earns staking rewards from the LST, and also earns swap fees from the pool from traders wanting to quickly exit their staked position. As ATOM’s inflation rate drops (as we expect it will happen through the tokenomics changes), the share of non-inflationary yield will become a much larger percentage of it. Both inflationary and non-inflationary yield will be auto-compounded by the vault, and a set amount of ATOM can be burned per month to provide price support.
2- Sell ATOM when it outperforms, buy when it underperforms
When ATOM outperforms the market, a portion of the community pool (managed by Hydro) would be automatically sold into BTC and USD and deposited into Hydro’s BTC and USD Inflow vaults, which will generate non-inflationary (strictly comes from market activity) yield via DeFi deployments. This would be governed by very explicit rules. As an example, when the ATOM / BTC pair is trading above its 200-day moving average and ATOM / USD is also above its own 200-day moving average, Hydro reduces ATOM exposure and reallocates into BTC and USD. Conversely, when the ATOM / BTC pair falls below its 200-day moving average, Hydro would use the BTC and USD yield to buy-back & burn ATOM, which helps defend certain price levels in downturns and improve confidence in the token.
As Cosmos Labs gets more institutions to use the Cosmos stack, and as these institutions bring tokenized real‑world assets like stocks, bonds, and commodities on-chain, we expect new DeFi protocols will launch on these institutional chains to utilize them. A great example is Arc, launched by Circle (after acquiring Informal System’s Malachite team) to bring more global economic activity on-chain. Hydro will be ready to deploy ATOM, hATOM, BTC and stablecoins to these new protocols and pair them with institutional assets. The more Cosmos Labs is successful at expanding the core infrastructure, the more Hydro will be able to act as a liquidity layer and yield engine that feeds value back into ATOM.
Looking forward to working with you!