Three Minutes to Understand HydraDX: Cross-Chain Liquidity Protocol in the Polkadot Ecosystem

Author: Spike Chen

Despite the significant growth of the DeFi market since 2020, the current state of DeFi still struggles to meet the needs of all users in various aspects. For example, users' trading options can be confined to specific trading pairs due to the numerous isolated liquidity pools, which can occasionally cause frustration for users.

When we talk about DeFi, it's almost impossible to overlook liquidity, a crucial topic for decentralized exchanges. However, the lack of interoperability between liquidity pools belonging to different designated trading pairs leads to another issue: insufficient trading depth for various cryptocurrencies.

Moreover, when it comes to cross-chain trading, the depth of corresponding liquidity pools in different DeFi ecosystems can seem as shallow as a fishbowl, making the user experience even more frustrating.

Currently, the overall architecture of the cryptocurrency ecosystem is very inefficient and rigid, still resembling traditional finance to some extent. Assets in the market are separated like isolated islands in the ocean.

Let’s recall the original intention of creating decentralized finance: we wanted to rebuild a financial system through the continuously evolving blockchain technology, rather than simply replicating the operations of traditional finance by creating several competing cryptocurrency exchanges.

We aim to create a decentralized financial ecosystem that transcends limits, possessing sufficient depth and liquidity, interconnected like a vast "ocean" of liquidity, rather than just "pools" of liquidity. This is the goal that HydraDX seeks to achieve.

HydraDX is a cross-chain liquidity protocol based on Substrate and deployed on Polkadot, tasked with providing users a decentralized platform that supports seamless interaction between all cryptocurrencies. The HydraDX team is working on establishing the world's first multi-asset liquidity pool, the HydraDX Omnipool.

With Omnipool, HydraDX breaks the traditional concept that assets must be traded through specific trading pairs in various segmented liquidity pools. The native token of HydraDX, HDX, is used as a proxy service in the Omnipool, determining the relative value between different cryptocurrencies, thus establishing a cross-chain integrated liquidity pool with a unique unified standard.

Speaking of HDX, it serves as the foundational asset in the entire design of HydraDX. Its basic model is inspired by the Bonding Curve.

HDX tokens are mined through the HydraDX protocol and held by the protocol itself, making the protocol a liquidity provider. This gives HydraDX's Omnipool a dual nature: it acts as both a liquidity provider and a part of the protocol itself.

In the Omnipool, numerous digital assets can determine their relative prices through relative pricing with HDX, allowing HDX to act as a price oracle. Additionally, users no longer need to provide paired currencies.

For example, if Alice wants to buy HDX with DOT, she only needs to add a single asset, DOT, to the Omnipool. The DOT she uses to purchase HDX from the HydraDX Omnipool's protocol layer will become an asset of the HydraDX protocol, thus making the protocol itself a liquidity provider.

HDX provides 50% of the initial value in the liquidity pool, while the other 50% of the initial value comes from external assets provided by other liquidity providers. These assets are algorithmically maintained at a 1:1 ratio, and HDX will be held in the liquidity pool until they are purchased.

For instance, if Alice purchases HDX worth 1 BTC and Bob purchases HDX worth 10 ETH, once these two transactions are completed, HydraDX will start providing liquidity for BTC and ETH while also earning fees as a liquidity provider.

This indicates that HDX will be supported by various cryptocurrencies injected into the liquidity pool for purchasing HDX. When different tokens are deposited or withdrawn, HDX will correspondingly be minted or burned.

In addition, HydraDX has devised a streamlined solution to address the troublesome slippage issue during user transactions. To achieve this, the HydraDX team combines the efficiency of CLOB (Central Limit Order Book) matching with the advantages of AMM by not introducing the AMM mechanism within a single block, directly eliminating counterparty trading.

Compared to other outstanding projects like Uniswap or Balancer, HydraDX innovatively breaks the boundaries of their inherent outdated and artificially set trading forms. Through the design of the native token HDX, HydraDX handles these adaptive issues like an invisible organic entity imitating the sea, expanding and contracting as needed, continuously adapting to the current environment rather than maintaining a rigid structure. HDX enables HydraDX to manage the inflow and outflow of any cryptocurrency funds, allowing it to constantly adjust itself.

HydraDX demonstrates a vast ocean of liquidity to all DeFi users by revitalizing long-tail assets within the entire DeFi ecosystem; at the same time, HydraDX will play a crucial role in plugin-based middleware, providing each user with a smoother trading experience.