Hydro Protocol HOT ICO: Network Transport Layer For Exchanges?
Hydro is a next-generation network transport layer protocol for hybrid decentralized exchanges. Find out what that means today in our review.
What Is Hydro?
Hydro, found online at TheHydroFoundation.com, is a protocol built for hybrid decentralized exchanges.
Today, decentralized exchanges offer trustless, non-custodial trading, improved transparency, and inter-exchange sharing of liquidity. Users can trade without relinquishing their funds to a centralized exchange account.
However, decentralized exchanges account for a small percentage of overall transaction volume. There’s a lack of adoption among users and crypto exchange makers.
Hydro believes this lack of adoption is due to several factors, including barriers to entry, performance and usability issues, susceptibility to arbitrage, and a lack of economic incentives for liquidity sharing.
Hydro aims to solve those problems by offering a network layer protocol for high performance decentralized exchanges and marketplaces with built-in incentives for coordination.
How Does Hydro Protocol HOT Work?
Hydro is a network layer protocol designed to solve major problems with decentralized exchanges and marketplaces. The protocol contains built-in incentives for coordination, including tools like the Hydro Protocol Token or HOT.
The HOT token will facilitate and coordinate the formation of shared liquidity pools. The token can be used for three main purposes, including:
New decentralized exchanges struggle to build liquidity in the early days. It’s a catch 22 situation – users won’t come until there’s liquidity, and liquidity can’t be built until there are more users. Hydro solves this problem by allowing new decentralized exchanges to stake HOT tokens to gain membership into existing liquidity pools. The specific number of tokens required for admission into each liquidity pool will vary between pools.
Tokens will be used as an incentive mechanism. The only way to get back your staked tokens from the liquidity pool is by contributing liquidity over time. This provides an additional incentive for all parties to contribute liquidity to the pool. Governance mechanisms will be used to punish exploitative behaviors like front running.
Bounty System for Market Makers:
New exchanges typically bootstrap liquidity by inviting professional market makers onto the system. An individual exchange or a pool of exchanges can pre-allocate HOT tokens into a smart contract. That smart contract then pays market makers autonomously.
What Problems Does Hydro Protocol HOT Seek To Solve?
Hydro seeks to solve a number of problems that decentralized exchanges face today. Some of the problems outlined in the Hydro whitepaper include:
Usability and Performance Issues:
On-chain decentralized exchanges are slower and more expensive than centralized exchanges. The majority of users aren’t willing to sacrifice speed for security.
Susceptibility to Arbitrage:
The off-chain maker, on-chain taker model performs better than on-chain exchanges. However, these exchanges are still susceptible to arbitrage, front-running, and order collisions.
Technical Barriers to Entry:
Crypto exchanges are often built and run by operation-focused teams. For these teams, the technical difficulties of creating a high-performance hybrid exchange are a barrier to entry.
Hydro Protocol HOT Features
Hydro emphasizes all of the following features:
Canonical Order Schema:
Decentralized exchanges can either use a proprietary order schema or an openly shared schema. Hydro is designed with the assumption of a canonical order schema. The main advantage of this system is that orders can match against each other, leading to cross-exchange liquidity sharing.
Incentive to Share:
An open order makes it possible to share liquidity. However, decentralized exchanges have no incentive to share liquidity. Open, permissionless orders are easier to arbitrage, and more likely to result in order collisions. Hydro introduces an incentive system (including the HOT token) that encourages decentralized exchanges to cooperate and share liquidity. Hydro calls its liquidity pools “Federated Liquidity Pools”, or FLPs.
Hydro provides a set of middleware components that lower the barriers to entry of creating decentralized exchanges and marketplaces. Today, there are thousands of exchanges with different operating characteristics, but they have similar features and technical implementations.
Who’s Behind the Hydro Protocol?
Hydro’s development is led by Tian Li (formerly of Microsoft and Palantir), Kevin West (YC Alumni, Google, and Facebook), David Qin (blockchain full stack engineer and teenage hacker), and Bowen Wang (ZhenFund blockchain analyst).
Hydro Protocol HOT ICO Conclusion
Hydro Protocol is creating a network transport layer protocol that incentives collaboration between decentralized exchanges. Today, decentralized exchanges have the potential to be the exchanges of the future. However, barriers to entry and adoption are preventing them from taking off.
With that in mind, Hydro wants to create a set of middleware solutions that lower the barriers to entry. To learn more about Hydro and how its protocol will work, visit online today at TheHydroFoundation.com.