allBTC deployment via Hydro
Hello, Patrick here from the Hydro team. This is a proposal draft. After getting feedback from the Osmosis community here on the forum, we’ll publish it on-chain. Special thanks to Johnny Wyles and Robo McGobo for their initial feedback on this proposal!
Summary
This proposal aims to allocate a portion of allBTC from the Osmosis community pool into Hydro, a decentralized liquidity management platform, in order to generate additional yield for those OSMO stakers, expand access to Osmosis Alloyed Assets across the Interchain ecosystem, and incentivize OSMO staking and lockup.
Currently, the community pool holds 0.34 allBTC, which remains idle. Rather than leaving these assets unused, we propose deploying 0.25 allBTC into Hydro’s decentralized bidding system, where IBC-connected DeFi protocols can compete for this protocol-owned liquidity by offering rewards to OSMO stakers. Putting tokens to work in DeFi protocols will increase the value of the Osmosis community’s holdings, as opposed to losing value via inflation dilution.
Hydro has a short but solid track record, having successfully completed four rounds of ATOM liquidity deployment to 12 participating projects, including Nolus, Mars, Drop, Demex, Neptune, Shade, Stride, White Whale, Phoenix Directive, Margined, Inter Protocol, and Amulet. These deployments can be seen on Hydro’s metrics page.
To date, Hydro has solely distributed ATOM from the Cosmos Hub community pool, but it is now looking to extend support to other IBC-compatible assets, like allBTC. A proposal to distribute USDC from the Cosmos Hub community pool recently passed, and this Osmosis proposal now marks the first proposed deployment of an asset from a source other than the Cosmos Hub community pool.
How it Would Work
- A bucket of liquidity, such as allBTC from the Osmosis community pool, is transferred to the custody of the Hydro committee.
- DeFi projects (pre-approved by the Hydro committee based on a risk assessment) bid for this liquidity. They bid by requesting a specific amount of liquidity, and offering a “tribute” in return, which is typically paid in the project’s native token.
- Hydro users vote on projects by staking and locking eligible tokens, such as OSMO/stOSMO. We intend to start off supporting native unstaked OSMO for lockups, and then adding support for stOSMO, bOSMO, qOSMO, and ampOSMO over time,
- At the end of an auction round, winning projects are awarded the liquidity, and OSMO stakers that voted for the winning projects are awarded the tribute. (Eventually Hydro will also distribute a portion of the yield earned from external incentives/swap fees that the deployment earns, which will increase Hydro user’s yields even further.)
- Liquidity remains within the custody of Hydro for the duration of the round’s deployment period, after which it is withdrawn and becomes available for further bids.
- The liquidity can be returned to the Osmosis community pool at any time the community wishes via a signaling proposal.
For more detailed information about how Hydro works, see the Hydro website and documentation.
Why Hydro (and not individual deployments) ?
Using Hydro to manage liquidity deployments presents several major benefits over traditional methods of community pool asset management:
- Automation: Hydro automates the process of deploying and retrieving liquidity from DeFi protocols. Rather than dealing with multiple on-chain governance props, involving multi-sigs with multiple parties that must be trusted, the Osmosis community can deploy liquidity to Hydro once, and let it manage ongoing deployments over time.
- Security: With Hydro, assets can easily be clawed back if necessary, so minimal trust in the DeFi protocols receiving the liquidity is required. Additionally, the Hydro committee performs a risk assessment on all DeFi protocols before allowing them to bid, and sets restrictions such as the maximum percentage of a liquidity pool that deployed assets can make up, to ensure that assets are at minimal risk of things like impermanent loss.
- Competitive: OSMO holders choose which projects will receive the liquidity, metrics are provided to show the yield generated for holders, and if holders aren’t satisfied with the results, the liquidity can be distributed to a different project in the next round of bidding.
- Reduced sell pressure: With traditional community pool management via on-chain governance, stakers can vote on a proposal, and then immediately un-bond their tokens. With Hydro, stakers are incentivized to lock up their tokens for longer periods of time, in order to earn additional yield. This can help reduce selling pressure for native tokens like OSMO.
Implementation
- Transfer 0.25 allBTC from the Osmosis community pool to the Hydro committee’s address: osmo1cuwe7dzgpemwxqzpkhyjwfeev2hcgd9de8xp566hrly6wtpcrc7qgp9jdx
- Begin the Hydro bidding process, allowing protocols to compete for this liquidity.
- Deploy allBTC liquidity to winning bidders
- Monitor and assess returns generated through tributes and rewards.
- Provide the community with a post-deployment report on performance, feasibility, and lessons learned.
Benefits
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Additional yield for stakers: The OSMO holders who participate in Hydro get an additional yield on their staked OSMO - so far the additional Hydro APR has always remained above 10%.
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Expand access to Osmosis Alloyed Assets: Improve allBTC liquidity outside of Osmosis, increasing the adoption and awareness of Osmosis Alloyed Assets.
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Reduced selling pressure for OSMO: OSMO holders are incentivized to not only stake, but also lock-up their staked tokens on Hydro for a period of time, in order to earn additional yield.
One thing to keep in mind, given the small amount of allBTC that would be deployed, the amount of yield earned from these deployments will likely be small as well. We see this as an initial test of deploying Osmosis community pool assets through Hydro, and if it goes well, we could add additional assets in the future, which could earn much higher yields.
Additionally, Hydro is working on an integration with Magma (https://www.magma.eco/), the yield-optimizing liquidity vaults product built on Osmosis. We’re looking forward to working with the Osmosis community more in the future!
Governance
Yes: You approve the transfer of 0.25 allBTC from the community pool to the Hydro committee for deployment into Interchain DeFi applications via the Hydro protocol.
No: You do not approve the transfer.
No with Veto: You indicate that this proposal either (1) is deemed to be spam, i.e., irrelevant to Osmosis, (2) disproportionately infringes on minority interests, or (3) violates or encourages violation of the rules of engagement as currently set out by Osmosis.
Abstain: You wish to contribute to the quorum, but you decline to vote either for or against.
We’re excited to work with the Osmosis community! Let us know if you have any questions or other feedback.