Hydra Chain Review: The Unique Economic Blockchain

Hydra Chain is a permission-less open-source blockchain project that came out of the project Lock Trip. Back is 2018 the team behind that project published a document called “LockTrip Blockchain Manifest” which became the defining design document for Hydra Chain.

The interesting and unique part is that the document came out of actual problems encountered during the development of the LockTrip dApp, which makes Hydra Chain one of the only blockchain projects to be designed around the actual hurdles encountered during the development of a dApp.

One of the strategies used in the development of Hydra Chain was to use the best open source technology available. The founders choose that approach because it is the same successful strategy that was used by some of today’s largest blockchain projects such as Litecoin, Qtum, and Bitcoin Cash.

Hydra Chain follows a philosophy of implementing the critical economic features needed while using technology that’s proven successful for data transmission on a blockchain.

Hydra is a proof-of-stake blockchain that’s both permissionless and open-source, and it has been built on top of larger blockchain projects such as Qtum, Bitcoin, Ethereum and BlackCoin’s PoV v3, designed by Pavel Vasin. Hydra features a number of unique economic characteristics and a truly decentralized architecture.

What is Hydra Blockchain?

Hydra is a proof-of-stake blockchain that was designed with a unique set of economic features. It is unique because it utilizes both inflationary and deflationary mechanics to make its economy work, while also allowing actual adoption by users to define the total supply of tokens.

Besides the unique economics introduced for Hydra Chain, the project also features a fixed inflation model that is designed to stimulate market participants and token stakers to contribute fully to the decentralized nature of the project.

Hydra Chain was designed based on the production version of the open-source blockchain Qtum. That blockchain was forked from Bitcoin Core, and has an Account Abstraction Layer added that supports the Ethereum Virtual Machine (EVM).

Hydra Chain uses the same well-known UTXO transaction model used by Bitcoin, but also employs a proof-of-stake consensus model. This design was implemented from the BlackCoin project and is a evolutionary step up that combines the best of Bitcoin and Ethereum.

It’s all built on top of a proprietary blockchain capable of preserving decentralization and supporting Ethereum dApps while also reaching impressive transactions per second performance.

What Problem Does Hydra Chain Solve?

One of the most difficult challenges in blockchain technology is deciding when and how to switch the economics from inflationary to deflationary. Hydra Chain addresses this through a unique mechanism whereby it can burn as much as 100% of the generated transaction fees at the protocol level, while also maintaining inflationary driven block rewards.

This design has been found to stimulate community growth while also protecting users against price degradation thanks to the ability of the blockchain to convert transaction fees into a permanent reduction in token supply.

Unlike other blockchains, in the Hydra Chain tokenomics the total supply of tokens isn’t simply a randomly selected number. Rather it is a direct representation of the actual economy and utility of the system.

On the inflationary side the block rewards mint new HYDRA tokens and increase the total supply of the token, while the deflationary side takes 50% of the transaction fees and burns them at the protocol level, thus reducing the total supply of tokens.

This creates a unique constant battle between the inflationary and deflationary forces of the blockchain, which yields a predictable economy that’s attractive for stakers since there is no price degradation of tokens due to inflation.

This is a market-driven approach that uses supply and demand to determine where the tipping point between inflation and deflation lies, thus maintaining an adaptive economy based on the actual usage of the token.

The ecosystem began with the creation of 18.5 million HYDRA tokens in the circulation, and during the initial growth phase of the blockchain inflation is the dominant economic force being used, which means total supply will increase. As adoption grows the inflationary aspect of the blockchain will gradually be offset by the deflationary force of 50% of transaction fees being burned regularly.

The balance between inflation and deflation is maintained through a HYDRA fiat price oracle that determines the gas fees of the blockchain at a fixed fiat cost. This is a critical feature of the blockchain that enables both scalability and predictability – both of which are needed for the success of dApps.

This fiat price oracle also acts as a natural protection against price degradation since it has a synergy with the deflationary gas burning component of the economy. In the event that price would drop significantly the fiat oracle would step in to update the fiat fees cost in real-time. The end result would be a significant increase in the number of HYDRA tokens being burned.

The other 50% of gas fees that aren’t burned are distrusted to the wallet addresses of the smart contract creators where the fees are being spent. In other words these fees go to the dApp creators, which makes Hydra Chain a unique sharing economy that rewards developers for adding to the ecosystem and encouraging increased adoption of the chain

This is a unique feature that makes Hydra particularly attractive for DEX applications not only as a potential level 2 chain, but also as a theoretical primary blockchain to migrate to (as Hydra is fully EVM compatible).

Solving the “Total Supply” problem

Nearly every new blockchain project launched puts an emphasis on its total supply, making the assumption that somehow the total token supply is an isolated metric that by itself represents the value of the blockchain.

Many comparisons have been made to the total supply of one project versus another in which the underlying assumption is that the chain with the lower total supply is also the chain with the more valuable token.

Based on this assumption, and on the trend for projects to place such emphasis on their total supply, it seems like the concept of total supply is now used more like a marketing tool than anything else.

It is understandable that things have evolved in this manner. After all, Bitcoin was the very first blockchain created, and its use of a total supply of 21 million BTC in order to maintain a deflationary status and generate demand is well known.

In addition, there’s a psychological predisposition by people to perceive an item as more valuable when it is scarce. Scarcity in the economy refers to the gap between limited resources and theoretically limitless wants.

It’s important to note that one of the key principles of scarcity is that as a concept it applies to units that are in a non-divisible form that leaves them functional for their primary purpose.

Bitcoin as it was created in 2008 by Satoshi Nakamoto was a brilliant invention that has spawned the entire multi-billion dollar blockchain industry. However there is a common misconception surrounding the interpretation of Bitcoin’s economy based on the disregard of several critical Bitcoin factors.

Hydra Chain looks beyond this by basing its ideology on a concept of supply being only 1 of 4 key components in the economic design of a blockchain and of the token scarcity that arises from that design. These four key components are:

• Starting supply – Supply is considered as a starting point which can go up or down depending on the design, usage of the chain and the integrated deflationary/inflationary mechanisms on protocol level.
• Node economy degradation over time (relative to market cap) – This is a critical factor since the node infrastructure has a fundamental implication on the whole system. A degrading node economy inevitably leads to a disparity between network value and the node security which on its end could lead to systemic failure. Node economy degradation should be 0 or negative. If positive, this would mean the whole system is increasing out of proportion to the security that supports it.
• Rate of Supply Change – The immutable mechanics embedded on protocol level that define the rate of change as a vector of the starting supply over time. A negative rate of change means the blockchain is burning coin supply and hence having a deflationary vector towards potential scarcity. A positive rate of change means the supply is in an inflationary state
• Transactional economy efficiency – Signaling the impact transactions make on the economic design

The 4 components must be examined collectively to make an informed decision of the economic geometry with all implied risks and the theoretical scarcity of a given blockchain.

Hydra Improves on Crypto Economy

The Hydra Chain attempts to learn from the past economic flaws introduced into blockchain economies, and through that learning to create a healthy and dynamic economic geometry rather than one in which supply halving are predetermined events. Hydra Chain looks at the issue of total supply is a completely new and unique manner.

With Hydra Chain there is no longer any need or relevance to questions such as “When is the next halving”, and “What will happen to price after the next halving.” Instead the total supply of the system is a direct representation of the actual usage of the blockchain.

This gives everyone a fair and transparent means for interpreting total supply and the relation it has to price and transaction volume on the chain. And it gets rid of the speculation that arises from communicating the total supply metric.

In the way Hydra Chain was designed the monetary base of the ecosystem is completely determined by the market, rather than being set arbitrarily by the blockchain creators. This design makes the system resilient to severe price drops or rampant inflation because it is able to effectively capture transaction fees and use them to counterbalance supply growth.

Hydra Chain provides protection against inflation driven price degradation, enabling sustainable transactional economy deflation as a background process.

• HYDRA has a fixed, predictable and attractive mining economy. If the transactional economy is weak, inflation will dominate during the growth phase and subsidize the nodes until the moment transactions activity increases.
• HYDRA burns all transaction costs. If the transactional economy is strong, deflation will dominate, and the supply will at some point decline potentially reverting the staking rewards that came through inflation in the seed growth phase of the chain. In the meantime nodes will always have a predictable income that will guarantee maximum security of users’ funds.

Hydra Chain uses a combination of the fiat fixed fees from its price oracle, and the ability to burn transactional gas, combined with a high inflation rate to create a unique economic system.

This system also safeguards security by providing high and predictable staking income to node infrastructure while offering significant protection against inflation price degradation due to the capacity to use the transactional economy as a way to stimulate deflation.

Powerful Staking Economy

As mentioned earlier the Hydra Chain is a proof-of-stake blockchain. Anyone is able to become a full node in its ecosystem. All it takes is some HYDRA for staking and a few clicks of the mouse. Stakers are rewarded through block rewards and they receive a high APY. This mechanic helps to protect the chain from potential 51% attacks.

Here are few of the advantages of staking:

• Same APY for all stakers, regardless of HYDRA amount staked.
• Minimal computing power needed.
• Environmentally friendly.
• Accessible to everyone.
• Strong decentralization through hundreds of nodes.
• 100x more secure against “51% attacks” compared to POW.

The unique staking economy created for Hydra Chain guarantees a fixed income for the stakers. Each block yields a predefined block reward which can be adjusted through the distributed governance of the chain via proposals and on-chain voting.

In the Hydra Chain ecosystem the more HYDRA staked, the more frequently blocks will be mined. Whenever the number of stakers decreases the yield immediately increases, which works to incentivize the deployment of new nodes within the ecosystem.

When the transactional economy shrinks these fixed reward blocks will incentivize nodes to keep the network running. And once the transactional economy increases in strength deflation will kick in to maintain a smaller supply.

The block rewards in the system come from two sources:

1. Transaction fees;
2. New HYDRA issued by the blockchain.

Both metrics can be adjusted through the decentralized governance protocol used by Hydra. This transactional economy provides stakers with a USD-based income stream (thanks to the fiat price oracle), which becomes increasingly dominant as transactional activity increases or as price decreases.

In addition, the inflation based rewards yield an income stream based on HYDRA tokens, and this income stream becomes more dominant when transactional activity falls, or when token price increases.

Block Rewards – Transactional Economy

Each transaction on the Hydra Chain is accompanied by a transaction fee. The transaction fee can be modified through a community vote, which allows the transactional economy to be steered by the network community and HYDRA holders.

Current Setting (June 2021): 100% Burn of Transaction Fees

Block Rewards – Minted HYDRA

Minted HYDRA provides the second layer of revenue by rewarding full nodes with newly minted HYDRA tokens. That means that even when there are no transactions conducted on-chain (highly unlikely), stakers can still count on receiving an attractive APY.

Current Setting (June 2021): 20% Inflation Rate Minted to Stakers

Hydra Governance

Even over the short history of blockchain there have been a number of times where hard forks didn’t work as intended, or when communities became separated due to varied views on proposed changes. These types of events present significant risks to the blockchain and can cause damage or even put an end to a project if they are serious enough.

Hydra Chain is fighting this risk by using a decentralized governance protocol that is designed to adapt to a variety of scenarios in a harmless and constructive manner.

There are a number of blockchain settings that have been identified as open to voting by HYDRA token holders. This allows a variety of blockchain settings to be modified “on the fly” so to speak, whenever required. This mechanism gives Hydra Chain increased flexibility and allows for steering by the community in a process of agreement rather than division.

The settings that can be voted on are:

• Adding new admins (these can initiate a new voting)
• Removing admins
• Changing the Gas limit per KB (UTXO layer)
• Changing the Gas/Fiat rate (EVM Layer Gas)
• Changing the block size
• Modifying the transactional economy (reimbursement to token creators with range 0% – 50%)
• Modifying the protocol burn rate (range 0% – 50%)
• Modifying the protocol inflation rate (range 0% – 25%)

Proposals are able to be pushed through by admins within a set of predefined limits. Voting works by sending HYDRA tokens to a smart contract that has the desired outcome. The smart contract that receives the most tokens by the end of voting period determines the outcome of the vote. Once the voting is completed all the coins used in voting are burned, thus making disputes that attract a large number of votes into beneficial events for the ecosystem.

The Hydra Team

Nikola Alexandrov is the CEO and co-founder of Hydra Chain. He is also the CEO of LockTrip.com, a leading blockchain travel project with 2.1 Million integrated hotels in 190+ countries through contracts with 15 of the biggest travel suppliers in the world.

Prior to that, he amassed seven years of experience with high-frequency algorithmic trading on high liquidity global markets. He was also a co-founder of the Bitcoin7 exchange that in 2011 had been one of the first exchanges in the world reaching third place in global volumes.

Hristo Tenchev is the other co-founder of Hydra Chain and was also a co-founder of LockTrip.com and the Bitcoin7 exchange. In addition he was also the founder of xs-software.com, one of the most successful gaming companies in Europe with more than 50 million registered players worldwide.

A serial entrepreneur, he also co-founded Softuni.bg – an innovative IT education center with more than 100,000 software engineering students for its three years history, also pioneering blockchain education in Bulgaria.

The HYDRA Token

The HYDRA token was released just after 2021 began, at a price of $1.69 and in its first few weeks remained in a range of roughly $1.50 to $2.00. By February 2021 the price began to climb and at the end of February HYDRA tokens were trading above $8.

Price made dramatic gains in March 2021 as the entire cryptocurrency market was in a major bull rally, and by April 4, 2021 the token reached an all-time high of $48.66. Of course volatility is never far where cryptocurrencies are concerned and two weeks after hitting its all-time high the HYDRA token was down by over 60% at $18.69.

Since then price has remained volatile, and as of June 8, 2021 the HYDRA token is trading at $29.52.

In addition to the potential price increase HYDRA holders also benefit from an APY of over 285%.

Airdrop to Community (April 2021 – Feb 2022)

When it was initially conceived of in 2018, Hydra Chain was going to be the blockchain component of LockTrip. It was only later that the developers decided to unpeg it and create it as a standalone project from LockTrip.

The upside to this is that Hydra Chain was conceived of and developed as a blockchain with a practical use perspective by a dApp developer. That perspective is why the focus of the project is the critical economic limitations of existing blockchains.

The decision to move Hydra Chain to a standalone project came from a community vote as the LockTrip community saw Hydra Chain as having unique economic and technical capabilities, with far too much potential to keep it pegged to LockTrip.

In this respect the Hydra Chain project has been financed and developed by the LockTrip development team. Because of this the distribution of HYDRA tokens is initially being made to LOC token holders proportionally to the amount they hold. This is a gradual 12-month process that includes multiple mechanisms to prevent speculation.

Currently the distribution is in phase 3, which is the primary phase in terms of HYDRA distribution. Over the course of 50 weeks HYDRA tokens will be airdropped to LOC holders on a weekly basis, with 1.3% of the total amount airdropped each week and a new snapshot being taken each month to determine the proper airdrop amounts.

For example, a user owning 10,000 LOC tokens at the time of the weekly snapshot, will receive 10,000 HYDRA x 0.013 = 130 HYDRA for that particular week. And the process will be repeated over a total of 50 weeks. The first snapshot was taken on April 1, 2021.

Inflation during this period is being set much higher as a means to incentivize HYDRA holders to stake their tokens. It is presumed that as the airdrop progresses the staking power of the community will grow, allowing them to gradually take over the network from the company nodes.

This is how the transition to complete decentralization will unfold. The airdrop will ensure the HYDRA genesis originates with the community that created it

You can participate in the airdrop through this link.

Conclusion

Hydra Chain is a fully permissionless, open source, and decentralized proof-of-stake blockchain that was created out of a combination of the best features of Bitcoin, Ethereum, and Qtum. It unifies these features, and adds a unique economic layer on top that is focused on providing HYDRA holders with a steady and guaranteed income in both USD and HYDRA.

It is obviously very early for the blockchain, with tokens only recently being emitted and strong inflationary forces in the early days of the blockchain. This has given the token an amazing APY of nearly 300% at the time of writing. That said, the token price has also been quite volatile in 2021, ranging from a low of $1.69 to a high of $48.66.

Overall Hydra Chain presents an intriguing tokenomics, combining both inflationary and deflationary forces as determined by the market. It is expected that this will enable a very strong shared economy of which all parties can benefit fairly. Whether that’s true or not remains to be seen.

Featured Image via Shutterstock

Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.

Source: https://www.coinbureau.com/review/hydra-chain/