Hello,

I would like to reflect and propose (what I think would be) the most logical progress on our Hydrated Strategy. If you re-read pt. 1 and pt. 2, pretty much most of the points happened — mostly in the broader crypto market (never-ending security breaches, bankruptcies and shutting down of projects), unfortunately. It's really hard to celebrate, as it makes things for us more challenging rather than easier. More positive validation was the broader focus and pivot of crypto, DeFi and Hydration itself towards RWAs and assets less or not at all correlated with crypto hype cycles, while generating higher yield than crypto native opportunities.

That and other parts related to Hydration played out quite well, but not at the scale needed. Definitely the most important part was to survive and not get hacked, what is and will be our priority forever. There was a period of time when literally every day some project was hacked and their users got hurt. You might have noticed quite widespread, extremely negative bias towards DeFi and the potential risk of getting hacked and losing whole or more of principal than potential yield could offset. That's a completely reasonable and logical stance. Ngl, 1 of the most frustrating feelings for me this year was realizing that even 20% APR possible on Hydration with PRIME is simply not enough for people.

Crypto prices and valuations being down in tens of % are contributing to the vicious cycle of lower activity and negative reflexivity I wrote about before. Stablecoin market caps plateaued or slightly decreased, cumulative TVL in DeFi is down ~30%. FUD over the whole industry is so strong I am surprised TVL is down "just" 30% in aggregate. The situation in Polkadot land and with its main ecosystem asset DOT is worse than anyone could imagine at the time of my previous posts.

Our team went through very deep restructuring in the meantime between these posts, to make sure that only people who are performing well and taking their tasks with as high responsibility as possible can continue with us. I am not taking resources of the project and its treasury as granted. Work in the investment space engraved in me "Fiduciary duty". If you don't know what it means, just google it.
So what went well? Not breaking under various challenges, higher cadence of releases and being directionally right. But 1 can be directionally right and still lose.

What didn't go well? In a nutshell, achieving higher traction on the 3 pillars of the new strategy, which would lead to higher loan originations and higher revenues. Fulfilment of these pillars was not meant to be a 1-time event but was supposed to be continuous. 1 additional failure, and the only point from Hydrated Strategy which wasn't even tried, is the idea of front loading yield in order to increase POL, DEX volumes & fees and ultimately HDX buybacks.

Why were those deployments not scaling more? In the case of Decentral, we deliberately took some time to see how the whole process and project works, as counter party risk is here bigger than in the other 2. Sigil struggles to generate yield, similarly to all their industry peers and the whole industry, even on par with risk free rate. HELOCs in the form of PRIME were the most successful pillar, but also plateaued at some point. Performance of PRIME also dropped from lucrative 8% down below 6%, from where it will probably go lower over time — either because there is simply bigger supply of liquidity than demand for HELOCs (what's happening now bc of frozen RE market in US and other reasons), or because of rate cuts which will come sooner or later.

The common denominator, or common wall we were hitting on all 3 pillars, is stable coin liquidity. Especially external stablecoins USDC/USDT, where we saw outflows because of crashing crypto prices. This was putting additional pressure on the peg of HOLLAR and stopping us from higher use of it as a credit line to deploy more in those 3 or others. A clear problem has luckily very few solutions. You can attract more liquidity only with:

1) Market leading yields — either via incentives (unsustainable and arguably a no go for HDX) or from very high utilisation of this liquidity willing to pay (cumulatively) a lot of fees/interest.

2) Unique product/market/asset which is hard to access elsewhere — e.g. decentralised swaps for ZEC via NEAR, or trading oil during "relevant" weekends on Hyperliquid.

 3) Recognition as a safe place to park your money — our forever priority, which we have to communicate louder. Yet there are things to improve as well, e.g. establishing a more proper insurance/solvency fund, further investments into security.

2 and 3 will take objectively more time, but before I will focus on the proposal for solving no. 1 (which was supposed to be the main point of this writing :) ) I will just quickly add that we have in the making an answer to no. 2, which will be the best crypto saving product, currently not to be seen anywhere, at least to my knowledge. I called it "Propeller" (working name for now) and we will explain and launch it sometime in summer. No. 3 I am imagining as a mix of BTC, ETH, PAXG, USDT/C sourced from our DEXes, so even the process of filling this insurance fund will be directly accretive to the platform, users and obviously HDX holders.

I am super excited to introduce our latest RWA strategy based on the Brazil stable coin BRL, issued by Crown. Avid readers might remember why we pushed RWAs esp. from Brazil already (tokenised invoice financing by Decentral). Very high base interest rate (SELIC), currently 14.25%, is unimaginable for Western economies, corporations and people, but an unfortunate reality for Brazil, with roots from the 1980s and other economically challenging decades after. Staked BRL (BRLV) is then giving access to yield coming from Brazil sovereign debt at this incredible rate. Staking is available only to KYCed and whitelisted addresses, what IGL passed a couple of weeks ago. Staking lives currently on Base. This yield can be claimed weekly in the form of USDT & USDC, which will be handy not "just" as revenues, but in times when HSM or money market will be experiencing liquidity crunches, as recently.

The holy grail of DeFi (or whole crypto) is to find use cases where all the immense aggregated liquidity and assets can find use, especially these days when demand for DeFi & crypto native primary demand drivers of rates and stablecoins — leverage & hedging — are tapped out. On the other hand, you have billions of $ stablecoins earning less than the $ risk free rate — 3.5% from US treasuries. For many other reasons not necessary to mention here, cost of capital on "Polkadot Island" and Hydration was higher recently, with Hollar stretched almost to maximum capacity, which is still too low a number. Borrowing rates were too high for too long for borrowing of USDC & USDT and the market was clearing it too slowly. Both are surprisingly small in total size, ~4.5m $+ together, which is, ehm, nothing.

Back to Crown and BRL(V) — I think this is currently the best RWA opportunity in every aspect:

very high yield - extremely scalable, almost no constraints on capacity

low credit risk — creditor is Brazil itself

low counterparty risk — underlying assets are held in a bankruptcy remote setup, at a regulated custodian, not directly by the company, to protect creditors in case of bankruptcy. Still very rare in RWA.

Analysing and reflecting on the reality of crypto, Hydration and Polkadot, I think the best way out from this precarious situation is to tap into PRIME as a source of liquidity, rather than a source of yield as until now. Borrowing even (relatively) small amounts of USDT/USDC/HOLLAR is not very feasible and useful at the end of the day with current liquidity & peg constraints. On the other hand, there is ~9m of PRIME mostly supplied, not expecting any additional yield on top of its primary utility. Borrowing PRIME would mean total borrowing costs will be PRIME yield + borrow rate of PRIME, but PRIME yield is fairly stable. Even if it will stop trending down (hopefully for PRIME loopers), the upper bound will certainly not overcome 8%.
By collateralising the BRL(V) treasury position managed by IGL (lil bit similarly as we did with the Sigil position), this would allow us to mobilise this liquidity very quickly and most importantly loop it. Even with very conservative parameters and assumptions — e.g. real yield 13.5%, total borrow cost 7.5% and max LTV 85% — we are getting to net 32%+ APR, which is providing enough yield and cushion for price changes in BRL itself, with yearly vol of ~14%. In the not so distant future we will be able to hedge this position. We can process this within a month or 2, during which we would be able to start increasing HSM & POL reserves by new inflows of USDT & USDC for HSM, and DCAveraged BTC, ETH, PAXG and maybe HDX :). For easier imagination, ~9m (looped) $ via this strategy will earn ~2.4m $, which is more than fully covering current R&D costs of 1.8m/y (by 30%).

I hope it's clear that these are not supposed to be final numbers, but a point from which we can reach escape velocity and re-accelerate traction before the next bull run, which will come sooner or later. It's not enough to just survive extinction level events and continue in the race — but to continue well resourced, not on fumes. Ideally when most of the space and world will be chilling during summer. But we can use this time of big apathy and uncertainty more productively. Once retail or (semi)professional institutional/fund analysts will come back to work sometime in September, trying to find some gem before the end of 2026, Hydration and HDX might be in a better spot and more ready to shine.


#262 Hydrated strategy pt. 3