HydraDX — the Uniswap killer?
We are pleased to introduce you to the HydraDX, a revolutionary cross-chain liquidity protocol that can become the next big thing after Uniswap took the cryptospace like a storm. First, we will have a look at how current decentralized exchanges work, what are their drawbacks, and then explain what makes HydraDX so special.
Decentralized exchange landscape
One of the first DEXes ever invented was the IDEX. IDEX was based on the same principle as centralized exchanges that is called order book matching. Both sellers and buyers are creating orders (bid or ask) and there’s an order book kept by an exchange that matches orders with each other. This means you can trade any asset as long as there's a supply and demand for it.
This works really well in the centralized world but it turned out that it’s not that good fit for the a fully decentralized platform. Systems based on the order book tend to be slow because the order book has to be kept on the blockchain and updated with each bid or ask. Also, it’s a great fit for big exchanges with huge liquidity but many (if not most) trading pairs on smaller exchanges are rather illiquid.
So, in order to solve all these problems and to allow people to trade freely in a decentralized manner, the AMM was born.
Automated Market Maker
You can imagine AMM as a trading robot that will always give you a price for a trading pair when you ask for it. There’s no concept of an order book and you always trade against the liquidity pool (you can say the exchange/protocol itself) with the price determined by the algorithm, not against asks or bids from the real people.
Liquidity pool
Liquidity is the most important thing when it comes to trading and it usually comes in the form of a pool that is comprised of the token pair (ETH/DAI or ETH/UNI).
That’s why various AMM based DEXes employ so called liquidity providers — entities that put their tokens into the pool and they in turn receive rewards for doing so in the form of fees. Being a liquidity provider can be very profitable but it also has its drawbacks.
Now you can see how the AMM based exchanges achieves (ideally) high liquidity with even some obscure trading pairs. People just bring their assets to the exchange, put them into the pool, and start earning fees while others can trade against this pool.
Drawbacks of current protocols
While Uniswap is one of the most popular exchanges out there (recently even outperformed Coinbase in the daily volume), it has a lot of downsides as well so let’s discuss the most important ones.
Slippage
Large orders can heavily affect the price of the asset being bought. Imagine you want to buy 100 ETH for 100,000 DAI — while the order executes, the price of ETH goes higher and higher and you can actually end up with only 80 ETH (or less) for your 100,000 DAI. This is simply how the algorithm works and it can easily cause a slippage even with small orders if the liquidity is low.
Impermanent loss
Let’s look at an example of how the liquidity providers suffer from this problem. If they deposit their tokens to the pool (say in a ratio 1:100 ETH/DAI) and price of the ETH on the outer markets suddenly changes to 110 DAI, it causes arbitrageurs (entities which makes profit out of different prices between markets) to buy cheap ETH from the pool (where the price is still 100 DAI).
This obviously creates a loss for the liquidity provider and they would earn more by just holding their ETH rather than putting it into the pool.
Front-running
In order to understand this scenario, we have to briefly remind ourselves how transactions are being broadcasted to the network. Every transaction is picked up by the miner (or validator), put into the transaction pool and broadcasted to the network once the block time passes — and new block is created and validated by the rest of the network.
Front-running means that if the miner sees a big order on a DEX, he can actually creates its own buy order and put it before yours into transaction pool because he knows that your order will drive the price higher (remember the slippage problem?).
Enter HydraDX
HydraDX is trying to solve all the aforementioned problems with a really innovative approach. Instead of having multiple dual pools like Uniswap or multiple tokens in the pool (up to 8) like in the case of Balancer, HydraDX created a single pool for all the assets called the Omnipool.
Omnipool
There are two sides to HydraDX omnipool —the liquidity provider and the protocol. The core idea is to have a base asset (HDX), which is minted and held by the protocol. This asset will represent 50% of the initial value of the liquidity pool. The other 50% of the initial value is provided by the liquidity providers in different assets. The 1:1 ratio is kept algorithmically; as assets are added or withdrawn, native tokens are minted or burned accordingly.
HDX tokens remain within the pool until they are bought. HDX can be exchanged for other tokens inside of the pool and can be traded freely outside of the protocol.
In the omnipool, various assets can be priced against one another since they are all priced against a trade-able base asset (HDX). This enables HDX to act as a price oracle, massively decreasing liquidity scattering.
As you can see, this actually solves the slippage in the neat way since there’s a single pool with enormous liquidity, even the huge orders are not bound to cause a problems.
Notable features
On top of the unique omnipool solution, HydraDX adds a lot of additional features that bring significant enhancements over the existing protocols — so let’s mention here a few.
Order matching
Hydra will have an order matching engine connected to AMM pool via the oracle —this means that asks and bids going to the same block can be matched and exchanged without actually going to the liquidity pool. This is another way how to prevent slippage and in the future, it can be also scaled via the off-chain workers.
Transaction fees
It will be possible to pay transaction fees in any currency, not just the HDX.
Dollar Cost Averaging
Something really recommended to all (especially) beginner investors — don’t try to catch the dips, just buy the asset you want regularly regardless of its price. HydraDX will actually automate this process so you don’t have to think about this anymore!
Future
There are various features being currently tested and consider for future development of the platform
- zkRollups for transaction better integration with Ethereum and scaling
- Testing different token distribution models on Kusama
- Front-running resistance that will prevent validators from putting their transactions ahead of a big orders
- Other financial instruments — lending, derivates, synthetics and other!
Bootstrapping liquidity
As you probably understood during the course of the article, liquidity is a key thing when we deal with trading and exchanges. But the liquidity is not going to just magically appear out of the thin air, it has to be carefully bootstrapped by both the team and the community, and this where the idea of optimal distribution came from.
Liquidity bootstrapping pool
HydraDX team chose a LBP model coming from a Balancer instead of a Uniswap one to bootstrap its liquidity. The LBP has several advantages
- No need to keep 50:50 ratio of tokens in the pool as with Uniswap
- Additional programmability
- Utilization of the continuous sell pressure to prevent front-running and and pumps & dumps schemes
The purpose is to find a natural price for the HDX token and also to distribute 5% of the total supply to the community. It is not meant as a public sale but rather a price discovery together with creating initial liquidity for the exchange.
There was already one LBP happened during the bootstrap of the PERP and we suggest all readers to have a look how the process looked like.
LBP Date
New announcement just came out, LBP will start from the 8th of February! Please refer to the official article, team will post more details soon and we will keep you informed :-)
Tokenomics
- 5% LBP on Balancer
- 5% Stakenet & Incentivized Testnet rewards
- 15% founding team & investors (locked, stake-able, 18 months of vesting)
- 75% liquidity mining & staking rewards
Conclusion
We believe that decentralized exchanges and liquidity pools are one of the cornerstones of cryptocurrency ecosystems. So far, all the exchanges based on the AMM had their flaws but HydraDX is set to change this once and for all. The idea is great, the team is skillful, the future path is clearly set and we are confident that this project will become one of the most revolutionary ones within the decentralized finance space.
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