## Background

As the second round of Polkadot Crowdloan expiries approaches, a significant amount of DOT liquidity will be released. For users who have DOT staking needs, vDOT may be the most appropriate solution for earning staking rewards whilst also participating in DeFi. Meanwhile, HydraDX's Omnipool and DCA Trading are able to fulfill the exchange and automated trading needs between vDOT and any Token with ultra-low slippage. Therefore, Bifrost aims to incentivize vDOT liquidity on HydraDX and encourage vDOT holders to gain a more diverse trading experience.

## Summary

This proposal aims to implement on HydraDX:

1. vDOT Liquidity Farming: Incentivize 36,165 BNC + 821,918 HDX for 30 days (16th Jan - 16th Feb) with $4m target TVL.
2. Increase vDOT liquidity cap to $4m.

## Benefits

The benefits of accumulating vDOT liquidity on HydraDX are:

- Adding $3,000,000 liquidity to the HydraDX protocol, facilitating vDOT users to exchange other Parachain Tokens through Omnipool + DCA.
- Preparing ahead for vDOT liquidity in the HydraDX lending market. As a yield-bearing token, even when used as collateral in the lending market, vDOT can still receive DOT staking rewards by default (unless the collateral is liquidated). This provides an additional layer of income protection for lending users.
- Continuous Incentives for HydraDX Treasury through vDOT Fees

In Bifrost Tokenomics, the protocol imposes a staking APY*10% protocol fee on vDOT. Moreover, Bifrost has the capability to establish a vDOT Referral Program for the HydraDX Treasury. Through the Referral Link, effectively minted vDOT can generate a continuous income of staking APY10%*20% for the HydraDX Treasury. 

**Note:** The current vDOT protocol fee is 0.1%, which will be adjusted to 10% once Bifrost Tokenomics 2.0 launched within several months.

- Referral Link: https://bifrost.app/vstaking/?r=hydradx
- Referral Fee: Starting from 20% of vDOT Protocol Fee
- Program Timeline: From 16th Jan, 2024 to 16th Jan, 2025

## ****Incentive Estimates****

The incentives for vDOT farming is suggested to run at 16th Jan, 2024, which is the beginning of 2nd batch of DOT expired and is merely a means to bootstrap the vDOT liquidity, attracting more vDOT holders to know HydraDX and experience DCA trade.

The suggested proportion of co-incentivizing value states as follow:

| Protocol | Rewards | Rewards (USD) |
| --- | --- | --- |
| Bifrost | 32,876 BNC | $16,438 |
| HydraDX | 913,242 HDX | $16,438 

| LP | Target TVL (USD) | Incentive APY | LP APY | Total APY | Total Rewards (USD) |
| --- | --- | --- | --- | --- | --- |
| vDOT | 4,000,000 | 10% | 0.25% | 10.25% | $32,876 |

**Note:** All calculations assume an BNC price of $0.5, HDX price of $0.018. The actual APR and TVL might change due to price changes of tokens used in these calculations. 

## Next Steps

Bifrost and HydraDX will leverage XCM to implement the first remote LST (Liquid Staking Token) minting and redemption client in the Polkadot ecosystem. This means that any common address in HydraDX will have the ability to remotely call Bifrost parachain to mint and redeem vDOT. We will work towards enabling one-click minting and redemption of vDOT on the HydraDX Dapp. Once this feature is live, we will be able to deploy the vDOT Referral Program on the HydraDX Dapp.

#108 Incentivizing vDOT Liquidity Farming with BNC and HDX During The 2nd Batch of Crowdloan DOT Expired