This is a big one.
Since Hydrex’s inception, the 1 year mark denoted a pivotal point where key facets of the protocol transition to a decentralized environment. We are nearing that point.
While centralization was necessary for birthing and bootstrapping, the goal has always been to allow Hydrex Account operators to determine the outcome of the protocol. This started with emissions direction on gauges and is soon expanding in scope.
What is Changing and When?
Here’s a summarized breakdown of what you can expect from Hydrex.
Hydrex Governor Proposals & Snapshot Temp Checks
Hydrex will be introducing a new "Governor" smart contract that reads Earning Power balances from Hydrex Protocol and Flex Accounts to determine voting weight, similar to how weekly fee/emission voting behaves.
This Governor contract will become the controller of several key contracts in the protocol, namely the Strategic Protocol Reserve, Emissions Schedule, and Protocol Acceleration Fund. It leverages open-source and well-audited OpenZeppelin contracts, which require governance votes to execute onchain calls and permission changes. The net effect of this creates a decentralized management system, where Hydrex Account holders can collectively govern key aspects of the protocol.
The Governor adheres to existing onchain governance standards and allows for exclusively binary outcomes, meaning a suggested change can go through or not. At the Governor level, there are no in-between or multiple choice options. The Governor will require a minimum of 1M Earning Power to create a proposal and 100 Earning Power to visit & engage on the web app. Hydrex will support a dedicated user interface for easier accessibility.
For any governance decisions that require multiple choice selection or advanced coordination, an initial Temp Check will be placed on an offchain Snapshot service. A shorter preliminary vote will go live to determine which option will be placed for onchain voting. Please note that the Snapshot approach is optional, and serves as an offchain coordination layer for voters to express onchain power. Anyone with sufficient voting power can propose directly to the Governor. Snapshot votes do not afford any onchain power or control.
The Strategic Protocol Reserve
The Strategic Protocol Reserve will migrate to a dedicated contract, which utilizes an architecture powered by permissioned operators. These operators can be voted in to perform any arbitrary set of function calls with constraints on the values those calls may use.
This design creates a space where voters can allow precise operator permissions to execute functions on behalf of the SPR that are limited in scope, and must be approved by Hydrex Account holders. Hydrex Account holders can also vote to revoke permissions from operators via a new proposal. Additionally, a pause guardian will be retained for an emergency kill switch in case of a rogue operator.
This architecture was designed to find a happy middleground between security, flexibility, and decentralization. In practice, we expect there to be a select few operators with focused use cases.
Emissions Schedule
Hydrex emission allocations have always been directed by Account holders, and now we’re expanding the scope to control the entire schedule.
There are two key methods in which the emissions schedule can be modified:
Weekly Adjustments - On a weekly basis, Hydrex Account holders will be able to adjust emissions up or down by a predetermined rate of 100K oHYDX tokens. They may also choose to make no adjustments.
Global Override - If at any point in time Hydrex Account holders would like to propose an emissions change outside of the weekly adjustments, the current emissions rate can be overridden via a Hydrex Governor proposal. The upper bound is 10M oHYDX per week and the lower bound is zero.
These combined levers give holders the control to fine tune existing emissions or make more sweeping changes if they deem it necessary.
Protocol Acceleration Fund
Due to the simplicity of the Protocol Acceleration Fund, there are minimal changes occurring to the PAF. Instead, the primary adjustment will be migrating voting power and operations to a purpose-built smart contract.
The operational execution of PAF behavior will become fully decentralized. This means the weekly operations of the PAF can be executed by anyone publicly, although a keeper will be maintained to ensure timely execution.
Additional Key Notes
With the goal of these changes being a step toward decentralization, we are taking additional measures in this direction. Specifically, the Community & Partner Growth Gauge will no longer be utilized. Previously this gauge was voted upon with excess voting power from the Treasury to support campaigns such as the Anchor Club and other partnership activities.
Finally, Hydrex always prioritizes security when bringing new onchain functionality to life. As such, all aforementioned smart contracts have been tested exhaustively internally and audited by a third party (Paladin).
The first obvious decision to be made under this new paradigm is around the Strategic Protocol Reserve. On September 8th, a Temp Check likely with the following options will be introduced, contingent on community feedback. The preferred option will go to a formal onchain governance vote, as per the process outlined above. To get the conversation started, we have included a performance review & potential approaches below.
A High-Level Performance Snapshot
Currently sitting at $1.4M in value, the vast majority is held in bluechips & stablecoins, with nearly all liquidity provisioned into Hydrex gauges. At a current snapshot, the SPR is averaging approximately 8% APR, which contributes ~$2,200 in weekly fees generated split across Hydrex Account voters.
To date, the SPR has experienced around 11.8% in net losses vs USDC inputs as a result of holdings price changes & impermanent loss. Specifics about the SPR and its current capital structure are readily available on the Hydrex Analytics page.
If the overarching objective is to maximize the value the SPR gives back to Hydrex Account holders, it’s clear that alternatives should be considered.
Option 1: Conservative
A conservative approach would be quite similar to the current capital allocation of the SPR, focusing entirely on bluechip assets & stablecoins. This would propose converting any non-bluechip held in the SPR into BTC, ETH, or USDC and deploying it as liquidity.
This approach prioritizes retaining value in the SPR, but given the previous empirical performance, could be seen as an ineffective method for generating fees.
Option 2: Fee-Gen Optimization
On the other end of the spectrum is choosing to focus more aggressively on allocating capital to tokens and pairs that increase the probability of fee generation. This would result in the current SPR capital, as well as new USDC, to be converted routinely into the highest volume assets on Base.
Empirically, the SPR has some experience with this, holding allocations in VVV/USDC, VIRTUAL/WETH, and BNKR/WETH. To date, these positions have generated higher fee APRs, but have lost approximately 20% of their value due to IL & outright loss in the last 3 months.
This approach prioritizes maximizing value generated from the SPR, but also comes at the risk that outright value loss or IL could outpace it.
Option 3: SPR Bribes
A final option worth considering is utilizing the SPR to bribe the value directly to voters over a controlled time frame, e.g., the entire SPR would be bribed evenly over 3 months. The guarantees for this option are (i) the value collected by the SPR finds its way to voters without the risk of IL or capital loss, (ii) the SPR is fully exhausted, (iii) a large amount of capital makes its way into Hydrex’s flywheel.
This approach prioritizes guarantees for voter capital allocation at the expense of full SPR utilization.
Thank you for making your way through the article. We are very excited for Hydrex to embark on its decentralized journey, powered by the collective opinions and execution of Hydrex Account operators.
We expect many opinions and great conversations to arise out of this process, and we’d like to hear yours. Please join the Discord server to have your opinion heard on the discussion.
