HydraDX is a cross-chain decentralized liquidity protocol that aims to become the ultimate DEX to help push DeFi into the mainstream. It was designed to facilitate frictionless liquidity in the DeFi space by leveraging a shared liquidity pool to host all assets. While other decentralized exchanges suffer from inefficiencies, such as high trading costs, HydraDX aims to address them through some innovations covered in this post.
HydraDX is a Substrate-based, permissionless, and open protocol on the Polkadot ecosystem governed by a strong community consisting of validators, liquidity providers, and platform users. Since HydraDX is built as a parachain, it leverages Polkadot's high security, flexibility, and speed.
The protocol is powered by a native token called HDX, which is used to incentivize some aspects of the platform. It has a variable supply based on the amount of liquidity locked in the protocol.
Conceptualized in early 2019, HydraDX moved into development when tooling became available to build on Polkadot. Around the same time, the team developed its proof of concept similar to that of Uniswap. The project had significant developments in Q3, which included creating an asset registry as they waited for a cross-chain messaging parsing. They also developed tools for comparing different automated market makers (AMM), introduced the basic governance framework, and started laying down plans for future use-cases.
The developers created a hack-net in Q4 2020 alongside other developments, such as finalizing the constant function market maker (CFMM) design. Around this time, they also introduced transaction payments in other tokens not native to the protocol, thus allowing users to exercise their preference. Another significant achievement in Q4 was the rollout of an in-block order matching facility.
The HydraDX team also announced more developments earlier this year, such as completing the protocol's core pool model, linking to the Rococo testnet, and running the first cross-chain transfer of tokens. The protocol also joined the Berkley blockchain accelerator. The team launched the incentivized testnet in Q2, and it has numerous other milestones scheduled before the end of the year according to its roadmap.
Led by Gregus Jakub, HydraDX was co-founded by the Zee Prime team. Jakub Panik later joined as technical co-founder and CTO. The other senior developers working on HydraDX include Michael Brhel, Matti Gags, and Fiskantes. The project has also attracted significant investment from institutions like DFG Group, CMS Holdings, Tenzor Capital, Hypersphere, and KR1 PLC.
Decentralized finance (DeFi) is the next evolution of the financial industry Since DeFi is still a nascent industry, some inefficiencies have come up now and then. However, even with its growing pains, DeFi is here to stay, which is why it's essential to understand the functions of the first wave of decentralized exchanges (DEXs). Once you've understood the basics of a DEX, you can fully appreciate the innovations of HydraDX.
Decentralized exchanges use an order matching algorithm that records all orders and matches existing orders with incoming orders. DEXs utilize order books stored on-chain, and block data gets updated every time there is an ask or bid. Unfortunately, order matching can be slow and inefficient, especially on small exchanges with insufficient supply and demand. Automated market makers (AMMs) solve those challenges by purchasing through an algorithmic price approach and acting as an intermediary between the traders.
Unfortunately, the AMM approach also has drawbacks, such as the price slippage caused by the AMMs algorithm, which generates higher transaction costs. Miners experience abnormal losses when there is increased price fluctuation in the market. However, miners and validators may also take advantage of the higher pricing when large orders allow them to generate more rewards.
Most decentralized exchanges use fragmented liquidity pools consisting of token pairs, which negatively impacts liquidity while encouraging higher fees. These challenges consequently make it more difficult for the AMM to function as intended. Therefore, HydraDX takes a different approach that involves having an ‘Omni-pool’ for all assets rather than having multiple paired pools.
The Omni-pool approach requires an underlying asset, in this case, HydraDX's native token HDX, to be minted and held within the protocol. The asset contributes 50 percent of the liquidity on the protocol, while the remaining 50 percent is held in different assets provided by liquidity suppliers. HDX is used as the basis for pricing on the protocol, making it easy to price assets against each other. The approach helps to reduce diversification within the pool.
In addition, the protocol has other features apart from Omni-pool, such as the order matching engine, which is linked to the AMM pool. The role of the matching engine is to enable easy and free matching of bids and asks without necessitating entry into the liquidity pool. This approach also helps to prevent slippage, and the ability to pay fees in tokens other than HDX also contributes to the platform's applicability.
One of the biggest selling points for HydraDX is the ability to control transaction costs. High transaction fees are one of the biggest challenges that crypto traders face, especially when transacting with DeFi platforms on networks such as Ethereum—having a decentralized exchange that addresses those challenges would create a better user experience and increase adoption.
The unique feature of the order matching engine and the lower fees make it possible for traders to execute automated trades without waiting for prices to drop to reduce their transaction costs.
In addition, HydraDX leverages Balancer's LBP to create the initial liquidity. DEXs that leverage AMMs are essential for DeFi, but are inefficient due to high fees and liquidity challenges. The team behind HydraDX aims to overcome those challenges and transform the protocol into the cornerstone of the DeFi world.
Another key feature of the HydraDX protocol is the ability to provide liquidity by contributing just one token. Participating as a liquidity provider usually requires crypto holders to stake a pair of crypto assets on a 1:1 ratio. Still, the mechanics of the HydraDX protocol feature the burning and minting of HDX to facilitate a balance of the tokens available on the protocol. In other words, users can provide one token that will be matched with HDX to provide liquidity.
HydraDX is designed as a decentralized exchange that solves some of the limitations of the early generation of DEXs. Its primary use case is to facilitate the swapping of cryptocurrencies between different blockchains. The biggest limitation for existing DEXs is that they have limited tokens available to trade, and the process may be costly as far as fees are concerned. These reasons make decentralized exchanges a less attractive option, but HydraDX aims to help overcome those challenges.
The ability to pool many different crypto tokens into one platform will be a great way to ensure that the protocol has many tokens available. Combine this with the fact that the protocol incentivizes users to provide liquidity will go a long way in encouraging a variety of tokens to be staked in the pool. The DEX incentivizes this approach by giving some rewards to those staking on the exchange. Liquidity providers earn a share of the transaction fees generated on the platform. This incentive structure makes HydraDX an attractive platform for anyone planning to earn passive income through their crypto holdings.
If you're interested in staking your HDX, we have easy-to-follow guides and information available for anyone. With staking, holders participate in finding new blocks on HydraDX. In addition, as explained above, they benefit from lowered over-collateralization ratio when borrowing and discount trading costs.
Unlike many crypto exchanges, which have lengthy procedures before listing a token, the HydraDX protocol makes it easy for users to add new tokens into the liquidity pool. In addition, the protocol's robust developments make it easy for its creators to integrate in-wallet swaps. Users can connect their crypto wallets directly to the HydraDX protocol through DEX aggregators.
HydraDX leverages community-based governance, which means the platform users make critical decisions regarding its operations and future development.
The HDX token can also be traded in exchange for other tokens and locked in a wallet. It is also a crucial part of the protocol because it can be staked to facilitate liquidity and governance. Aside from staking, other incentives include discount fees for holders when they pay for transaction fees using HDX.
Borrowers can also use the HDX token to lower their overcollateralization ratio. Anyone can earn rewards through the HydraDX platform by simply putting their crypto assets in the liquidity pool. This combination of incentive design and scalability explains why this protocol is one to keep an eye on.
The ability to swap any token at a small fee and stake to earn passive income is a huge selling point for any DeFi platform. But HydraDX's innovations address many of the problems and inefficiencies that plague today's DEXs are refreshing.
The project has a couple more milestones to reach before its mainnet launch anticipated for the end of 2021. Still, you can expect other implementations such as synthetics, derivatives, lending, and options facilities to make it an all-rounded platform.
If you’re interested in more about HydraDX please refer to the HydraDX subpage on the Staking Academy.
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Please note that none of this is to be considered financial nor investment advice. We highly advise you to always do your own research (’DYOR’) before interacting with any of the projects or tools we write about. Crypto is a highly dynamic and fast paced environment with lots of moving parts that can quickly change.