CosmosHub: Signaling Proposal: Re-route Cosmos Hub PoL Deployments to Hydro

OVERVIEW

This proposal is a revised version of the Cosmos Hub forum post Re-routing PoL deployments through Hydro, which was preceded by the following Cosmos Hub forum posts:

Prior community discussions surfaced a preference to reroute existing PoL deployments into Hydro before exporting additional funds from the Cosmos Hub community pool. Consequently, this on-chain proposal is not a community spend proposal but a signaling proposal that requests members of the different multi-sigs involved in the existing PoL deployments to transfer fund custody to the Hydro committee.

Additional changes resulting from community discussion are as follows:

Hydro will launch with a single ATOM bucket
A market-based approach will be used to establish further LST buckets
LSM shares will be used from day one

RE-ROUTE ALL LIQUIDITY EXPORTS TO HYDRO

This signaling proposal indicates the Cosmos Hub community’s intent to re-route all existing liquidity exports to Hydro. This includes the PoL deployments previously approved by governance and any new PoL deployment approved by governance prior to the official launch of Hydro, unless explicitly stated otherwise by a team requesting a new PoL deployment or for maintaining an existing deployment.

This liquidity is essential for many projects, and brutal claw-backs may trigger several issues in Cosmos DeFi (significant slippage, liquidations, problems with borrowing & minting caps, etc.). We suggest the following framework:

The position is transferred from the ad-hoc multisig to the Hydro committee
The project participates in the auction process and wins a certain amount of votes
When the previous round completes, the multisig unwinds/rebalances as normal
Based on the amount of support received, the position is adjusted accordingly

The least disruptive process may vary slightly based on how PoL exports are managed. For example, the Osmosis PoL from Prop 858 is managed by a DAO on Osmosis. If this proposal passes, the existing custodians can simply transfer control of the DAO to the Hydro committee. The Informal Systems Cosmos Hub team and the Hydro committee will work with each custodian to transfer the liquidity to Hydro while minimizing position disruptions.

SINGLE ATOM BUCKET

Hydro will launch with a single ATOM bucket and accept LSTs (instead of ATOM) upon the return of the existing liquidity deployments. This market-based approach organically establishes LST buckets based on demand, eliminating the need for the Hub to convert ATOMs into liquid-staking tokens with insufficient demand.

This solution comes with risks. For instance, an LS protocol may put up a very attractive bid to convert a large part of the ATOM into their LST and initiate a large LST bucket without actual market demand. For that reason:

The Hydro committee will actively monitor the auction performance for all LST buckets and, if needed, swap back some of the derivatives into native ATOM
If needed, the Hydro committee may also decide to create a new tranche into the ATOM bucket for LSTs, which would effectively cap the amount that could be converted

While the above initially requires more active management from the Hydro committee, it is the best way to let the market decide the appropriate size of any LST buckets during the Hydro launch phase.

Note that we do expect Hydro to start new buckets for other tokens in the near future.

LSM SHARES

LSM shares introduce technical complexity because each tokenization event creates a distinct share denomination, making them non-fungible. Over time, slashing events may make each share denomination worth less than the underlying ATOMs. This necessitates querying the Hub via Interchain Query (ICQ) to determine the weights between LSM shares and handle potentially fluctuating ratios. The Informal team has now prioritized LSM integration and anticipates that this change will cause a few weeks’ delay.

COMMITTEE MEMBERS

The following committee members have agreed to work unpaid for the first few months as Hydro establishes itself. Afterward, we will develop a compensation model based on the committee’s performance (measured by auction profitability and liquidity export effectiveness) and seek community approval through a separate proposal.

Robo McGobo for liquidity export performance: Robo is a long-time community contributor to several Cosmos Ecosystem protocols. He works on growth & BD at Stride Labs and leads grants at Osmosis and dYdX grants programs.
Phil RX for allowlist management: Phil has extensive experience in risk management, advises multiple crypto projects, and co-founded PRO Delegators, a Swiss validation company. He also leads the Govmos initiative, a prime contributor to Cosmos governance.
Trix for auction performance: Trix is a systems design fanatic who planted his roots in Cosmos in 2020 within Terra & Apollo. He is the founder of Membrane, a stablecoin laboratory on Osmosis.
Jonny Wiles for export deployment: Johnny has contributed to Osmosis since its launch. He works in governance facilitation at the Osmosis Foundation, where he strives to establish robust governance processes.
Andres Monty for security monitoring: Andres Monty is a blockchain security expert and Co-founder & CEO of Range, a security and risk platform for the interchain. Before that, he was a lead security auditor at Oak Security.
Carter Woetzel for partnerships: Carter is a long-time Cosmos ecosystem builder & contributor. He is the lead researcher at Shade Protocol and is also on the AADAO Strategic Committee.

Note that we expect the Hydro committee to have to add/remove members as members' availability changes over time.

GOVERNANCE VOTES

Yes: You signal your support for the transfer of custody of Cosmos Hub community pool PoL deployments to the Hydro committee as outlined in this prop to run a competitive bidding process as per the mechanics described in the Hydro litepaper and subsequent community disucssions and revisions on the Cosmos Hub forum

No: You do not signal your support for the transfer of custody of the Cosmos Hub community pool PoL deployments to the Hydro committee

No with Veto: You indicate that this proposal either (1) is deemed to be spam, i.e., irrelevant to Cosmos Hub, (2) disproportionately infringes on minority interests, or (3) violates or encourages violation of the rules of engagement as currently set out by Cosmos Hub