Importance of Hydra Layer 2 in Cardano Network

The launch of smart contracts had brought Cardano network to the peak of possibilities, with developers outside of its main project developing their own solutions and protocols that run on the network. IOHK, the developer of the network, is constantly focused on various other projects to make Cardano more scalable and safer for its users. Here comes the question of Importance of Hydra Layer 2 in Cardano Network.

A consensus algorithm is what creates a secure and trustless environment in a blockchain network. The challenge of any permissionless blockchain is to maintain the ability to scale while achieving any kind of throughput required to support real world applications including payment identification, gaming and mobile services. Many of the Level 2 networks that emerged as a solution for the scalability issues are only for damage control.

There is a big pool of transactions on Cardano which are of low value or occurring frequently, but only 5 to 10 percent of the total ledger value. Batching these transactions and putting them into a different layer of the system enables acceleration, thus bringing down the fees and ensuring instant finality.

Importance of Hydra Layer 2 in Cardano Network

Hydra Layer 2 in Cardano Network scalability solution that IOHK developed alongside Cardano, is a complementary addition to the existing Layer 1 blockchain ecosystem. Designed as Cardano’s native scalability solution, it addresses the scalability issues due to growing usage and adoption of the network. Hydra processes transaction networks efficiently to avoid storage issues as the transaction history grows on the Cardano network.

Although Cardano is able to change fees to balanced user costs, stateful operator rewards and network security they will never be low enough for many real-world use cases like micropayments. The Hydra Layer 2 solution will be able to balance the transaction fees low enough to satisfy users and high enough to prevent potential Denial-of-Service (DoS) attacks. The network uses an off-chain ledger to provide the most effective means of processing the transactions for a set of users while using the main-chain ledger as the secure settlement layer.

Why is Hydra Layer 2 important to the functioning of Cardano Network

Hydra Layer 2 in Cardano keeps the security guarantee while remaining loosely connected to the main chain and introduces the concept of isomorphic state channels which yields uniform, off-chain ledger siblings by reusing the same ledger representation over and over again. Specifically, for Cardano, the off-chain ledger siblings, commonly known as Heads are connected to each other and to the main chain to provide NFTs, native assets and Plutus scripting directly into each Hydra Head, which acts as an extension of the current existing system.

Hydra aims to improve Cardano’s scalability with faster Transaction per Second (TPS) and reduce latency and storage requirements, with low to no costs. Hydra will be beneficial to many of the transactions currently handled by the main chain or main chain-run application, as it understands the same transaction formats and signatures. This feature gives existing and potential new customers an easier onboarding to Hydra while building wallets and applications by interacting Cardano’s tried and tested infrastructure with the layer 2 system. The basic Hydra Head protocol was implemented as proof-of-concept and the developer preview has been launched in the Cardano Summit 2021. Developers will be able to run one or more Hydra nodes online to build a Hydra Head with a limited number of participants and feed transactions to it.

As the Cardano network starts growing, the Hydra Heads can be put on the top of stake pools so that there will be two settlement channels – main network and layer 2 network that works together for a seamless user experience. Transactions can be settled on the main network or on the layer 2 network depending on whether value is very high or low or settlement speed should be fast or slow.

The base protocol of Hydra allows users to avoid bloat that the systems tend to accumulate off-chain and to different systems. More than just micro-transactions, fast finality and high frequency, Hydra also allows interoperability with lightning as well as cross-chain compatibility which makes it easier to move Cardano back and forth to other cryptocurrencies. The channel also makes it easier for Cardano to communicate with other systems like Bitcoin and Ethereum.

Hydra will not have any user facing components like wallets or interfaces yet, but replicates the main chain’s functionality while reducing friction for users but still with Layer 2 flexibility of different fee structures and timing constraints. As like any successful ecosystem, Hydra also balances the needs of individuals, enterprises, professionals and the growing list of DApps and their developers while ensuring scalability and the ability to evolve. IOHK developed Hydra as a foundation where anyone can build upon, create and enable their own use cases which haven’t been done before on the main chain. The team will work on the next 6 to 12 months to introduce ways to interconnect multiple Hydra Heads thus expanding the reach of the scaling solution.