Introduction

H2O is a stable asset protocol which issues the over-collateralized, non-pegged stable $H2O currency used for trading on Ocean’s data marketplace. A New Order DAO incubator project, H2O is striving to be a staple component in the growing “DataFi” economy.

The protocol recently made an announcement outlining their upcoming V2 update as well. This update, along with the gradual market realization of the importance of data ownership, positions H2O to be the decentralized money of the data economy.

The Problem

Publishers on the Ocean Market earning $OCEAN from selling their data would often look to realize their profit and, as a result, $OCEAN was perpetually dumped by publishers.

This contributed a lot to $OCEAN’s volatility as well as the volatility of data prices, and in time it became clear an additional currency was needed. Not only this, but it is simply ideal that a currency of any marketplace is a relatively stable one.

The Goal

H2O would alleviate $OCEAN’s volatility from those perpetually dumping their $OCEAN payments. $H2O would serve as a stable asset for the data economy, and it would be backed by $OCEAN to completely reverse this perpetual dump effect.

While this is H2O’s initial ambitions, it plans to keep growing its list of collateral to include actual data itself, made possible through Ocean’s tokenized data. With this, $H2O aims to be the stable medium of exchange for the entire data economy, rather than confined to just Ocean.

How Does it Work?

To get $H2O, users can buy it on the open market or mint it with $OCEAN collateral. To mint, users deposit collateral into a vault (a SAFE) and receive $H2O in return. $H2O is a friendly fork of $RAI, so it is free-floating rather than pegged to a single price. H2O has already surpassed over 2 million deposited $OCEAN.

This is why $H2O is referred to as a stable asset rather than a stablecoin. Stablecoins are pegged, whereas stable assets try and maintain stability without being pegged. Although it is only backed by $OCEAN now, it plans to expand collateral types to a larger index of tokenized data!

Users can take their $H2O to the Ocean Market to buy different datasets. These $H2O payments go to data publishers who now have an incentive to keep their payments, since they are now in the form of a stable asset. $H2O liquidity providers also have juicy yield opportunities available to them.

The peg is maintained primarily via a “redemption price”. The redemption price is almost always fluctuating, and dictates how much $OCEAN can be minted against $H2O or vice versa (how much collateral each $H2O can redeem). “Redemption rate” changes the redemption price, where a positive redemption rate increases RP and a negative redemption rate decreases RP.

Redemption rate shifts depending on how long the market price is above or below the redemption price, and by how much. Basically, redemption rate “revalues” and “devalues” $H2O, and is adjusted based on supply and demand. This encourages the price to remain stable, but not pegged.

Borrowers do pay a borrow rate, but the redemption rate is not the borrow rate. It is not a rebase mechanism either. Redemption rate and redemption price simply influence market price by incentivizing either the minting or redemption of $H2O.

Liquidations are facilitated by Keepers on-chain, some seizing collateral when necessary and others scanning for this auctioned collateral to purchase at a discount. Liquidated positions incur a liquidation fee. Fees accrued supply a protocol-owned surplus which is used to incentivize Keepers to perform necessary tasks. H2O plans to release tools to help users avoid liquidation with tools like insurance.

H2O further protects itself from insolvency by incentivizing $PSDN holders and $OCEAN liquidity providers on Uniswap to stake their tokens with H2O for rewards. In return, should $H2O become insolvent, the staked assets are auctioned off for $H2O to compensate for any un-backed debt.

How Does it Work? H2O V2

With the announcement of the V2 roadmap, H2O plans to introduce new features like $OCEAN liquid staking (psdnOCEAN) and multi-collateral $H2O minting!

Ocean Protocol recently announced their move to veNomics with the release of the veOCEAN token. Similar to Convex’s cvxCRV product, users can come to H2O and stake $OCEAN for psdnOCEAN. psdnOCEAN stakers receive the same rewards they would receive for locking $OCEAN as veOCEAN + $PSDN emissions, except they aren’t actually in a locked position. psdnOCEAN stakers can unstake anytime.

H2O is taking these $OCEAN deposits and locking for veOCEAN for four years, and takes a portion of the rewards it earns before passing it down to psdnOCEAN stakers. psdnOCEAN is soft-pegged 1:1 to $OCEAN. It will look to support liquid staking for any other similar assets in the emerging data economy.

$H2O will also diversify beyond just accepting $OCEAN collateral, starting this initiative by accepting psdnOCEAN as collateral as well. It maintains its goal to accept Ocean’s datatokens as collateral when it is sustainable to do so.

Partnerships

$H2O is one of the two forms of currency that Ocean Market publishers can choose to accept for their data. It was an initiative led by New Order DAO and the creator of the $RAI token Reflexer Labs.

New Order DAO incubates new DeFi projects and is well known for its byproducts like [REDACTED] Cartel and Y2K Finance, and it supplies H2O with some of the brightest minds in DeFi.

With H2O aiming to provide the default medium of exchange for the DataFi economy, it has immense potential to partner with other data marketplaces who are looking to integrate $H2O. The floating peg mechanism also invites the creation of projects for speculating on this peg, whether it be options or futures.

Tokenomics

• $PSDN Price: $1.10

Market Capitalization: ~$33,000

Circulating Supply: ~30,000

Total Supply: 1,000,000

• $H2O Market Price: $1.69

$H2O Redemption Price: $1.60

Market Capitalization: $176,395

Circulating Supply: 104,376

Learn more about the token distribution here.

$PSDN is the governance token of H2O, is used to defend $H2O from issues like insolvency, used to reward stakers, and all stakers also earn protocol fees. The minimization of protocol governance by completely automating certain parameters and other components is an eventual step for H2O. In this, $PSDN holders gradually lose control over the protocol, but are still entitled to protocol fees.

As a backstop to insolvency, $PSDN stakers have their stake auctioned off for $H2O. If these stake reserves run out, fresh $PSDN is minted and the auctioning continues until the protocol is solvent.

The token is also used to pay rewards to liquidity providers and $PSDN stakers. $PSDN stakers also earn fees paid by $H2O minters (the borrow rate), as a fraction of this is sent to stakers with another fraction sent to buy and burn $PSDN.

Conclusion

H2O is a great addition to Ocean’s data market, and its goal to expand into the entire DataFi ecosystem sets up $H2O demand to increase exponentially. The protocol is an intertwining of DeFi and data, building on the “DataFi” concept and bringing a new niche to the DeFi space. It sets itself up well to capture adequate revenue with an increase in demand, all while providing an ideal stable asset for the data economy.

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DISCLOSURE: I do not have any exposure to H2O, $OCEAN, or $PSDN. I was not asked to write this article and have not been compensated in any way. The information provided in this article is solely for educational purposes and should not be considered as financial advice. The views expressed in this article are my own and do not necessarily reflect the official policy or position of any company or organization. Readers should always conduct their own research before making any financial decisions.