Hydrated Strategy pt. 2

Gm, I hope you liked my previous post in which I was trying to briefly explain where is currently whole crypto & defi space and how Hydration is fitting into their future as more relevant and mainly more successful project. Something what all HDX holders would deserve for strong long term support for which I and team are grateful. Saying (even honest) thank you is 1 thing, surviving ecosystem and other challenges and becoming successful is way harder. Most importantly not hopeless and impossible with healthy and great foundations we laid down earlier but now Hydration have to reach escape velocity in whatever (bearish/bullish/sideway) market conditions which will come next weeks, months and years. So later in the initial post I started to describe pillar(s) of our growth. More concretely was covered only 1st of 3 options/strategies with only brief hint of other 2 I would like to talk about today. 
During our trip in Buenos Aires we met team behind https://usedecentral.com/ RWA project from Brazil specialising in invoice financing for creators in Brazil. As these creators are getting paid by corporations and clients obviously not as fast as they need but in 90 days on average (pretty standard if you are dealing with corporations almost in any industry) they are coming for immediate liquidity to Decentral in exchange for their invoice sold to the company with discount which then translates to revenue covering all costs for currency hedging (as deposits are in US stable coins but creators are getting Brazil real) insurance fund, due diligence, other operational expenses and most importantly real yield for LPs of this product. I immediately liked this product because its solving real 2 issues for creators. Those are earlier mentioned long payment period but also high costs of money in Brazil as base rate in Brazil set by Brazilian central bank is currently 15%! Consumer loans and salary advancements products in Brazil are often reaching such high interest rates what is elsewhere considered as usury. Decentral team spot the opportunity to tap into crypto/DeFi liquidity which is usually pretty cheap (especially in comparison to Brazil economy) and I would say also under-utilised. So by offering 18% apr for 3 months lock up crypto LPs (or even our treasury at some conservative scale) can access very competitive stable yield which doesn’t rely on Saylors ability to raise gazillion of $ to prop up his Ponzi ehm questionable financial engineering or other hype/macro catalysts and hoping for growth of crypto prices because this space thinks they should be higher later :). What will come next will be formal partnership announcement between us, proposal for whitelisting and deployment of their deposit contract, blog & AMA with Decentral team providing all necessary details and answering all questions you want to hear answers for. After contract deployment you will be able to LP through Decentral UI if you are comfortable with it enough or wait for more Q&A. What must be collective decision will be discussion if we want to allocate some stable coin liquidity as protocol & treasury as well to diversify our sources of yield & revenues and also risks. 

Last but not least opportunity you might already spot coming is yield bearing token called PRIME representing tokenised US HELOCs (home equity line of credit) - loans against debt free (part) real estate in US. Figure Technologies, biggest non-banking institution operating it reached 21 bn $ loans originated which is impressive itself. Company got listed later last year on NASDAQ (ticker FIGR) which is noteworthy as no one wants to repeat 2008 :). There is deep due diligence process before IPO. Other important facts are yield of this instrument which is currently 8% APR coming from people repaying these loans guaranteed by value of their homes/apartments. US mortgage and HELOC rates got pretty high after FED dramatic increases of rates late 2022 and got stucked quite high. What’s very useful for us, that we don’t even have to do any BD in this case as anyone can mint this token on Solana with USDC and bridge it in couple seconds or minutes to Hydration via Wormhole. Most exciting here is economic potential for us. Unlike Sigil or Decentral opportunities PRIME can absorb very high multiples of what could absorb first 2 options. Yield is lowest on the other hand more composable (esp. for users) e.g. useable as collateral, which will enable looping (this can push your real yield to multiples of difference between borrow rate on Hydration e.g. 5% and native yield of PRIME 8% to 15%-20%+ territory without any incentives!). This will be the main generator of Hollar loans demand. Same strategy at Kamino fluctuates in yield because of floating interest rate for borrowing sometimes quite more or less but still above 5%. Fixed rate will bring some nice certainty here. Kind reminder that borrowing Hollar is mechanism with highest most scalable revenue margin within Hydration (same as in case of Aave and GHO loans). 100% vs 10% of paid interest. Permissionless access to relatively high yield backed by 1 of the highest quality collateral with ability to multiply it can become best savings product for everybody without exclusive access to financial opportunities or privileges requiring quite small effort to execute it and even smaller efforts for monitoring/babysitting such positions without taking excessive risks and going way too high on the risk curve. Over the time we will see FED pushing rates more down, which will decrease yield of PRIME as well but there are very few even no cuts expected this year to avoid overheating of US economy. 
Such yield generators described in pt. 1 and above can be used by our treasury but also individual users/organisations/projects/communities/products for:
 
- Covering costs (of life, development, marketing, growth, audits, hedging, insurances, etc.)
- Meaningful increase of reserves/other assets from yield while the principal is intact (DCAing into crypto majors BTC,ETH, other fiat stable coins - EUR,CHF and others, tokenised commodities, tokenised stocks, indices like S&P500 ,etc.) - btw these use cases are quite demanded product from HNWI (high net worth individuals) and corporations
- Buybacks, building out cash reserve or insurance funds
- Combination of all above

What to do about all 3 if there are no issues with any specific one and we as community would like and support them as treasury & product strategy? My suggestion would be to first utilise ~2.7m $ mix of (a)USDT & (a)USDC sitting in lending and SUSDS and SUSDE waiting for going into HSM in all 3 broken down like this: 

- 1.1m $ Sigil Stable (executed with applied suggestions from Giraffe as they were objectively good points to increase transparency)
- 1.1m $ PRIME
- 0.5m $ Decentral (this allocation will need separate community consideration as its quite different context and setup from 2 above)

This can be allocated over period of 2 weeks as reasonable start. I mentioned in pt. 1 “front loading” of yield to start grow POL & volumes quicker while crypto asset prices are clearly struggling against all other asset classes. What I meant by it was to take e.g. 3% of the principal and use it for DCAing (t)BTC, (G)ETH, (G)SOL, PAXG,  AAVE and SKY. Also probably during period of 2 weeks. I think I don’t need to explain why we should try to grow amount of protocol owned BTC. Giga ETH & SOL have long term potential to become another interesting looping strategies and source of yield with some deeper strategy and meaning I will explain other time. PAXG, representing tokenised gold is also more important than we could thought before as gold have crazy comeback as the main reserve asset, collateral and inflation hedge translated into serious demand from retail, rich people, funds, institutions and central banks all around the world. AAVE is the most dominant DeFi project which started with buybacks last year and will continue with them and overall domination this year. SKY is biggest decentralised credit provider with even stronger buybacks than AAVE translating to native yield of ~15% apr while both have no VC & team unlocks ahead of them anymore. Preparing this I originally put HDX instead of SKY and then replaced them. I care about HDX more about SKY obviously, but for HDX buybacks we can use pretty big amounts of H2O locked at (t&w)BTC & GETH and other LP positions which experienced quite big IL and buying anything else than HDX with H2O could damage Omnipool esp. in amounts which are accounted as IL on these positions. We can release it by reshuffling these positions in favour of using them as collateral to scale strategies above. More details on handling of execution parts of strategy will be provided after discussion of this part to include potential, objectively good/necessary suggestions like those which appeared under 1st pt.

Last point I have to highlight which could be lost within lines. This is not 1 off thing. This is not something only our treasury is supposed to do. This is not something I have aspiration to get into 2.7m $ or up to size of our HSM. This is also not where research and development for pushing forward of products and protocol will end. This is step 1 to kickstart private and public efforts to scale these strategies with LPs and POL to the point when R&D and project OPEX can be covered by them (my personal goal Q2) while growth will reach buybacks with material impact and volumes turning HDX and Hydration into successes in any market conditions possible. Outside competition and overall situation of Polkadot are harder than ever and none of them will get better anytime soon. There is still window of opportunity for us (otherwise I would go chill) which we can use if we will mobilise our existing resources and prove we can be part of on-chain future which is bright for those who will survive and will get there.



#251 Hydrated Strategy part 2