This proposal aims to improve liquidity for **HDX/USD** and **HDX/EUR** on Kraken.

Kraken is one of the most relevant fiat gateways for HDX. However, a listing only creates value if users can trade with reasonable size, low slippage and reliable order book depth. Better Kraken liquidity makes HDX more accessible to external traders and improves Hydration’s visibility outside the on-chain ecosystem.

CEX liquidity also matters beyond Kraken itself. Platforms like CoinGecko and CoinMarketCap score markets based on liquidity, volume, spread, order book depth and related market-quality metrics. Stronger Kraken liquidity can therefore improve both the actual trading experience and how HDX markets are perceived externally.

## Background

I have been providing HDX liquidity on Kraken for more than **9 months**. Without this liquidity, the Kraken HDX markets would likely have much wider spreads, often in the **10–20% range** and only a tiny fraction of the current order book depth.

![without_lp.png](https://subsquare.infura-ipfs.io/ipfs/QmaKkt79CMTcDQ133Zc2DGZz4XkXA1VUvq7bcF4xXHmGGe)

My current LP impact:

![current_lp.png](https://subsquare.infura-ipfs.io/ipfs/QmNhnRAbbhvdruhYRozq3fSKnTiS7nZPLkGTxKauFWdiBU)

That said, there is still significant room for improvement.

The main limitation today is not only inventory size, but inventory size under the constraint that the operation still needs to be at least slightly profitable after costs, including Hydration trading fees. With only my own capital, liquidity has to be managed defensively. Spreads cannot be pushed as low and visible depth cannot be made as strong, as they could be in an internalized Treasury-backed setup.

With Treasury-provided inventory, the liquidity function would be internalized for Hydration. The operation would no longer need to target the same margin a purely external market maker would require. It also would not need to calculate Kraken quotes as if Hydration trading fees must be recovered through wider spreads. Fees and execution costs would still be tracked for accounting and risk management, but they would no longer be treated as a required profit hurdle.

Current Kraken HDX market activity also shows the problem. Even after the latest HDX upmove, Kraken volume remained low and did not meaningfully recover alongside price. This suggests that Kraken is currently not functioning as a strong organic demand channel for HDX.

Low CEX volume is not neutral. It weakens external visibility, can become a delisting risk factor over time and hurts the chances of organic new exchange listings. New exchanges usually want to see existing market demand, liquid order books and credible trading activity. A thin Kraken market sends the opposite signal.

![chart.png](https://subsquare.infura-ipfs.io/ipfs/QmReEz8Pp5waRqQjfwcm8hFF5hurWvNUxm1oYzigYHpeZD)

This proposal aims to address that by letting the Treasury provide inventory while keeping full ownership of it.

## Request

I request Treasury-owned inventory for active Kraken liquidity provision:

- **8,000,000 HDX**
- **19,500 HOLLAR**
- **19,500 USDC**

This inventory remains **property of the Hydration Treasury** at all times. It is not compensation, a grant, or a transfer of ownership.

The inventory will be actively used for market making, so balances may vary over time depending on fills, rebalancing and market conditions. Parts of this inventory will be converted to EUR/EURC. Governance may request the remaining inventory back at any time.

## Operation Fee

I request an operation fee of **1,200 HOLLAR per month**.

The initial test period would run for **3 months**, resulting in a total operation fee of **3,600 HOLLAR**.

## Strategy

The strategy is to provide active liquidity on Kraken, especially within a **±2% band** around the current market price.

The focus is on:

- improving HDX/USD and HDX/EUR order book depth
- quoting close to the mid-price
- reducing spreads and slippage
- maximizing visible liquidity inside the target band
- attracting more external trading volume

**The strategy aims to quote at a minimal viable spread. Because this proposal internalizes the liquidity function for Hydration, the operation does not need to target the same profit margin as an external market maker. It also does not need to price Hydration trading fees into the Kraken spread as a required cost recovery component. This allows tighter spreads, deeper visible liquidity and a stronger focus on market quality.**

## Technical Setup

I have continuously upgraded my market making stack over time and further improvements are planned. Latest key improvements include:

- **Reactive risk controls**: the system watches Hydration mempool and DCA activity. Relevant pending swaps are dry-run before inclusion to estimate price impact, allowing Kraken quotes to be amended or cancelled before adverse on-chain flow lands.
- **Buffered hedge execution**: fills can be accumulated, netted and executed through a buffer instead of immediately hedging every fill separately. This reduces unnecessary Hydration trades and price impact to some degree.
- **Mutable hedge transactions**: Hydration hedge transactions support same-nonce replacement, best-block tracking, finality handling and reorg recovery. Pending hedges can be updated while still in the mempool where safe, including changes in size or even a full side flip if later fills reverse the net hedge requirement before inclusion.
- **Tip bidding for urgent execution**: configurable tip bidding can be used for urgent hedge execution when fast inclusion is needed.
- **Liquidity-first ladder placement**: the order ladder prioritizes the lowest viable spread while maximizing visible liquidity inside the target band. Orders are sized against executable hedge capacity, not only nominal balances.
- **More efficient Kraken order handling**: amend and batch operations are used where possible, reducing API churn and avoiding unnecessary cancel-replace cycles.
- **Paired capacity checks**: Kraken orders are limited by both Kraken-side balances and available Hydration hedge capacity, including open-order locks, pending hedges, fee reserves, safety margins and rebalance reservations.
- **Improved fill and hedge accounting**: Kraken private WebSocket fills are treated as authoritative. The system deduplicates fills, can backfill missed trades, ignores unrelated account fills and tracks hedge exposure through an explicit ledger.
- **Inventory rebalancing and recovery**: HDX and quote (USD) inventory rebalancing uses explicit planning, source-fund reservation, deposit confirmation, background execution and recovery journals.
- **Monitoring, security, operator tooling**: the stack includes dry-run mode, readiness checks, status commands, structured logs, heartbeat reporting, secret redaction, supply chain attack detection, lockfile verification and broader automated test coverage.

These upgrades are intended to make the operation safer, more reactive and more efficient while reducing the risk of funds getting stuck in failed or ambiguous states.

## Test Period

This proposal is limited to an initial **3-month test**.

After the test period, the results should be reviewed based on:

- HDX/USD and HDX/EUR volume
- average spread
- order book depth
- liquidity available within the ±2% band
- inventory changes
- operational issues and risks

Governance can then decide whether to continue, modify, expand, or stop the program.

## Risks

The main risks are:

- Kraken & 🦒 custody risk
- market-making losses
- inventory imbalance
- adverse selection during volatile markets
- API, infrastructure, or execution issues

The limited 3-month duration keeps this as a controlled experiment.

## Requested Decision

I ask governance to approve:

1. **8,000,000 HDX**, **19,500 HOLLAR** and **19,500 USDC** as Treasury-owned Kraken liquidity inventory
2. **3,600 HOLLAR** as operation fee for the initial 3-month test period

#335 HDX Liquidity Provision on Kraken