Hydrolysis in a transformer is the chemical breakdown of the cellulose in the insulation paper due to its reaction to water.
Insulation paper and pressboard are hygroscopic, it readily absorbs moisture from the surrounding environment. Therefore, to reduce the effects of hydrolysis, insulation is dried before impregnation in oil. Insulation is more hygroscopic than oil and so the majority of the moisture in the oil is passed to the insulation. Therefore, oil is also dried.
However, water still finds its way into insulation in other ways. Moisture from water or air, which has entered the transformer from the atmosphere, dissolves into the oil which can then be passed to the insulation. This is typically mitigated by the sealing and vacuuming of transformers and by the use of dehydrating measures in transformers fitted with conservators.
However, water is a by-product of the breakdown of the cellulose polymer chains. Any amount of moisture in the oil or cellulose will cause a reaction creating water, feeding the process further. As the insulating oil degrades acids build up in the transformer and act as catalysts for the hydrolytic reaction.
The water content in the paper (WCP) will build up over the life of the transformer, decreasing the life of the insulation as it increases. For every doubling of the WCP the life of the insulation paper is halved. Over the life of the transformer, the WCP can increase to as much as 5%. This equates to an aging rate at 5% WCP of 20 times that of its initial 0.5% WCP.
This highlights the importance of monitoring the water content of the paper as transformer field drying procedures can be expensive and require lengthy outages.
 Saha, Tapan Kumar, and Purkait, Prithwiraj. Transformer Ageing: Monitoring and Estimation Techniques: Monitoring and Estimation Techniques. 1st ed., Wiley, 2017.
 Lelekakis, Nick, et al. “Ageing Rate of Paper Insulation Used in Power Transformers Part 1: Oil/Paper System with Low Oxygen Concentration.” Ieee Transactions On Dielectrics And Electrical Insulation, vol. 19, no. 6, 2012, pp. 1999–2008.