A new ampholytic cellulose derivative (CAD) was prepared by grafting acrylamide and dimethyldiallylammonium chloride on carboxymethyl cellulose (CMC). The performance of CAD applied as a clay-hydration inhibitor in oil field drilling fluid was examined; the results showed that CAD had a hydration inhibitive property with better mud-making performance for low-solid mud. The mechanisms of the CAD inhibition of clay hydration were studied. The inhibiting-hydration performance of CAD was found to depend not only on cation, anion content, and molecular weight, but also on the cation-anion association in CAD chains.