Hydrated Strategy

Hello everyone, I owe you many things but most importantly better view into what I consider as a most viable strategy with highest potential for Hydration to succeed as a project, protocol and DAO. Excuse me it didn’t come sooner and it could. On the other hand you might be sure it was forming for long time, so no reactionary move. Some parts pretty much from our humble beginnings in 2019 & 2020 other parts form due to regulatory, macro and other big changes coming from late 2024. On 1 hand it’s nice to see it being validated, on other hand it sucks we couldn’t and won’t get credit for it. But its my fault I am owning it so w/o further ado let’s see what we can do about it in shortest possible time and improve our position in most important metrics like volumes, revenues and treasury/balance sheet while we will be running our marathon to Hydrated Future. Today I will cover mostly the short term plan. I want to open discussion about it and ultimately seek your support for what will you read bellow. Let’s get into it.   10th of October was hardest wake up call for crypto (industry?) right after FTX collapse and Covid crash. Until then various structural issues was easier to ignore as DAT madness looked like so much needed inflow of new liquidity into crypto assets esp. into alt coins in late stage of this mania. As VCs are structural sellers of alts (because they are investing in seed/series A rounds and usually not being tokens from open market) and retail got burned previous cycles by ICOs, rugs, scams, hacks, memecoins,  prospect of new marginal buyer which don’t sell was giving many people and foundations new hope. After this day crypto assets were trending down, alts got immediately repriced on lower floors looking for bottom. But bottom is for many just bottoming. Many crypto projects are running out of funds and energy. Capital and talent is moving to other industries. Projects (not just) around us are imploding or going bust. Last 2 months were pretty hard on ourselves bc of unnecessary liquidations caused by Binance malfunction followed by liquidity drainage from crypto, big migrations, preparation of big releases and accommodation of new team members. It was not easy to keep morale high as majority of people are pessimistic about crypto or even extremely cynical. Trip to Argentina (my 3rd time) for Devconnect just proved to me what I was thinking and preparing ourselves for. Mainly:

1. Everything (all sorts of infrastructure) is becoming extremely commoditised. Profit margins/revenue streams for most crypto companies and projects will go lower rather than  higher. Last months are very harsh wake up call for many, which don’t even have any meaningful revenue streams at all and can’t even have.

 2. Institualisation of crypto and Silicon Valley-fication. Well funded startups/corporations will poach talent but most importantly they will heavily subsidise use cases (like Uber) in order to crush competition to earn highest market share possible in super aggressive way. That’s why point 1 will happen more often at higher scale.

 3. Bc of 1 & 2, more companies, startups will die which is already happening. Those who will survive will look for tools and solutions making their life easier and projects more profitable. Times of fucking around for years without providing strong utility which improve someone’s life and she/he is willing to pay for it are over. Suddenly everybody care about boomers metrics and revenues, as it should be. On the other hand mistakes in crypto can be fatal so safety must be priority and will be differentiator. It already is. That’s why new defi projects are struggling to take market share from incumbents despite being more nimble or innovative . On the other hand hacks waiting to be exploited even 5y (as we saw recently with Balancer) are holding us back from higher usage of crypto. Blowouts of centralised providers and entities like we saw in 2022 and recent market meltdown caused by Binance left people and institutions more in discomfort and huge uncertainty for using crypto still present after 15 years of industry in the making is making huge disservice to all. That’s why we implemented rate limiter for suspicious deposits and withdrawals blocking potential hackers to run away with all funds they stole. We are also working on mechanisms which could block suspicious transactions like mint of gazillion shares from small initial position. Optimising whole chain for users funds security is key differentiator impossible/hard to replicate by generalised  smart contract chains like Ethereum, Solana but we might see it becoming standard on some L2s and app-chains. So we have to be vocal about it way more. Btw when I was explaining & pitching Hydration in Buenos Aires recently I started with our primer on security and materialising it into as robust solutions as possible. (Un)surprisingly that got biggest interest from rest of the protocol and project. Executive of 1 the top industry player in market making and (even DeFi) liquidity provisioning stopped me in the middle and just said that’s big differentiator already for them. Hopefully strong enough we will engage with them in multiple areas not just market making but also treasury management. More on it later bellow. 

If you survived this bearish slop till now, you might be asking where can Hydration fit in future and if it even can dream about better days. As everything is becoming very generic and cheap commodity there are very few things with which Hydration can stood out from others. Hydration unlike others, have very direct and meaningful value capture mechanisms. 1st green tick. This was easy :). What’s not so easy is to find and provide services/properties hard/impossible to replicate even by better funded competition with meaningful/justifiable profit margin. I was pretty vocal for long time, that highest profit margin use case in crypto is being big enough stablecoin provider. I would slightly alter it for being credit provider (as just minting stable coins don’t do anything and stable coins must have demand to be used like every product) which is extremely helpful and valuable for those in need for credit/liquidity. DeFi (also CeFi) projects and protocols can provide credit mostly in 2 directions. 1st one are crypto native use cases where credit can be provided are mostly:

- good old one well known overcollateralized borrowing and lending,  - various vaults, tokenised (partially/fully) on-chain strategies

- “RWA” use cases with complete/mostly off-chain, trusted execution and operation. While me & we were historically championing and proud decentralisation, trustless, DAO, other buzzword, maxis, current onchain economy is pretty weak objectively + very circular and reflexive in its own nature. That means that very handful of projects and use cases can create & capture value from providing useful services and satisfying some sort of demand for not just purely speculative use case but something worth of paying with out taking asset prices much into account. 
Tldr use cases when user is not using onchain credit or features like swaps, derivatives, transfers not just for more leverage or trading. Those are too dependant on crypto asset prices as at higher prices users are doing them more, more often at bigger scale. 

When prices are down on-chain economy have literally deep recession. I am not a trader nor traveler from the future. On the other hand it’s not easy and realistic to expect very quick and easy recovery of crypto prices and liquidity back to levels before 10th of October. If it happen great, but here are my recommendations which we can turn to great strategy and execute on it together. Whatever will markets do next weeks and months Hydration have to grow faster and not just survive but thrive. Thriving not just surviving means generating enough revenue despite market conditions to cover OPEX  (currently at ~250k/mo) which have to slightly grow to solve long standing gaps like missing marketing team or at least talent, BD/Sales (for institutional partnerships/listings, integrations like CEX and others), strengthening research, esp. on risk management side, build up of insurance fund, keeping current talent but finding also more contributors outside while protocol will increase HDX buybacks as all of us feel HDX shouldn’t sit here.  Gravity of crypto & ecosystem issues are hard to overcome tho. Connecting all of the above and mixing from it energy drink which will hydrate our lovely treasury (currently sitting at ~14m $ in other assets than HDX) my proposal would consist of:   

1. Using Hydration money market as credit facility for lending/liquidity providing into opportunities like crypto delta neutral/stablecoin yield focused hedge funds, RWAs or vaults curated by most legitimate risk curators. 1 such funds operates very much in our waters and proximity and we are happy to have them around. I am talking about Sigil “Stable” Fund, sub-fund of Sigil Fund by one and only Fiskantes. This funds whole focus is to aggregated stable coins from their clients & LPs and provide best risk adjusted yield for them. They are doing more than well, but most importantly its in operation from 2021 till now w/o any drama, issues, significant drawdowns or scars which is rarely clean history for such fund in such industry. For the record, I came up with this idea because I think it’s the easiest & fastest (& right?) thing to do with feature set and liquidity we have today not sometimes in distant and uncertain future. To make it clearer Hydration can find service provider utilising our liquidity outside of Hydration and beyond single blockchain ecosystem. R&D provider of Hydration - Intergalactic LTD, is already using Sigil Stable for treasury management of funds selected and approved for development this year which helps with expenditures as monthly yield is around 1%, drawdown in worst day (multiple times mentioned 10th of October) for many funds and companies was 0.3% which was extremely calming to hear day after :). As IGL is already onboarded, DAO funds can quickly passed through it as its executor and provider in other more or less sensitive cases without onboarding of new client which can take multiple days, more like weeks. From mechanical/practical/operational view we can create synthetic collateral valued (priced manually based on account statements w/o risk of being liquidated by another vicious dumps from cex/oracle malfunction) and represented by position at Sigil held and maintained by IGL borrowing against it initially combinations of USDT & C  and later Hollar with primer on keeping healthy rates and most importantly pegs. Higher utilisation of first 2 stable coins will lead to better organic rates for lenders while making Hollar borrow rate more attractive. Interest earned on usdt & c will be making Hollar peg more robust literally by every block (due to interest accrual and rebasement effects increasing amounts of non Hollar stable coins continuously).  As current yields are nothing crazy and we don’t want to go further down the risk curve, yields in this setup will be accruing mildly. Considerable middle ground can be front loading the yield, assuming it will be generated in future anyway and use e.g. 1% of position already at the beginning for DCA of BTC, GETH and HDX. There are way more combinations of assets (more tokenised gold? DOT after Hard Pressure? GSOL for looping SOL? AAVE? (G)HYPE?), amounts and other parameters. Having and option to accumulate more of high quality assets into POL (protocol owned liquidity) w/o additional external funding is something for what would other projects kill, but I know its not very standard and without various risks. But I don’t see any more potential and viable strategy with current features, liquidity, overall sentiment, flows and state of whole crypto market doable in 2-3(!) weeks. Shortly after we can extend same opportunity of collateralising deposit in Sigil Stable (or other similar fund) to HNWI (high networth individuals), companies, other treasuries or crypto/macro/hedge funds if they will pass KYC & AML requirements. Last but not least, main mother fund acquired non trivial position purely from open market in late 2023 and never sold so skin in the game is more than strong in this case. 

Obviously we can’t rely just on 1 fund so we will seek for another opportunities in order to decrease counter party risk and diversify sources of yield as every fund works and earns differently. As I mentioned earlier these funds are always looking for more capital and they are also investing into tokens (if they are really happy about co-op and they see bigger opportunity) + they can open doors elsewhere. My 2nd option would be market maker mentioned earlier in part about security as they are also borrowing liquidity from various sources but for slightly lower yield and lockup on the other hand good mutually beneficial relationship with 1 of the TOP market maker is a good trade off. I will disclose the name only if such option will come to materialisation.   

As big part of this post was taken by intro to ours and overall situation I will leave other points from short term strategy (mainly 2 exciting RWA products coming soon to Hydration) for pt. 2. I don’t want to overload you with informations and it will be counter productive if discussion under such post(s) would take too many angles and directions. I will also provide outlook for mid-long term strategy in pt. 3, but pt.1 & pt.2 are constrained pretty much “just” by liquidity and social consensus of all of us token holders if we are willing to take this path. On the other hand new products and features will be constrained by workforce, budgets, sentiment, crypto cycles and liquidity on Hydration and broader ecosystem as well.    Looking forward to read your feedback and questions, 

Your servant Jakub

#250 Hydrated Strategy