After the successful launch of the Alonzo Hard Fork update on September 12th, 2021, the next big milestone of the Roadmap of the Cardano Blockchain project is the Hydra update.
Hydra will be a great update and is planned for late 2022 or even beginning 2023 but there are already pre-releases of the update that look very promising.
The second pre-release of the Hydra was just launched in week 50 of 2021. In this post, I will explain a bit more about the Hydra update and how it will contribute heavily to the scalability of the Cardano blockchain.
Scalability and the Alonzo launch
One of the strong cases of Cardano is the fact that its Roadmap is heavily focused on scalability. This is very important because currently, other (older) blockchains are not in the position to handle huge amounts of NFT transactions. In case the NFT “hype” continues and the number of processed smart contracts on blockchain networks (Alonso made that possible for Cardano) is going to increase, scalability will be one of the key components that can make or break a blockchain network.
The launch of Alonzo in September 2021 was a huge milestone in the Cardano Roadmap. It started the process of transforming the transactions and tokens based blockchain into a far more dynamic platform in which financial inclusion, creativity, and development of additional decentralized tools can now co-exist and complement each other in a very organic/symbiotic way by the integration of the functionalities to create smart contracts and decentralized applications (DApps). Alonzo was also a mandatory update to start with the next milestone of the project: Hydra.
Proof of Work vs Proof of Stake
In order to get a full understanding of Hydra, a small detour needs to be made into the world of consensus algorithms and into the mechanics of Proof of Work and Proof of Stake particularly.
The key in a blockchain network is that it has a completely secure algorithm that guarantees a trustworthy trade between parties: a consensus. This is done by ensuring agreements based on transaction history. The technique behind this is called a “consensus mechanism” and the algorithm that makes it possible is called a “consensus algorithm”. Cardano uses Ouroboros as a consensus algorithm. Ouroboros is a proof-of-stake algorithm that distinguishes itself from the more classical blockchains like Bitcoin and Ethereum that work with a proof-of-work algorithm.
Proof of Work (PoW) rewards the miner for solving complex equations while with Proof of Stake (PoS) the creation of the next block in the blockchain is based on how much an individual has “staked”. This stake is based on the number of coins that an individual has for the particular blockchain that this individual is attempting to mine. This means that individuals are not actually mining. They are “forging” because there is no block reward. This concept is completely different compared to PoW because a PoW model rewards a block reward every time that a new block has been verified. PoS only awards a transaction fee. Because PoW is far more electricity intensive than PoS, many new blockchains are chosen for the PoS concept while the classic blockchains that use PoW are seriously considering switching to PoS (which is not easy to implement) by introducing this with a Hard Fork.
The fact that Cardano uses Proof of Stake instead of Proof of Work is an advantage in my opinion (I think it’s the way to go for the future). However, Cardano also has challenges when trying to scale in order to achieve the throughput that is required to support real-world applications like identification, payment, mobile services, and games (including its NFTs claiming digital ownership of in-game property like clothing, houses, etc.). In the end, a fully global consensus needs to be made for every transaction.
Because Cardano works with PoS, the blockchain incurs fees. This means that the people that run the Cardano network need to be rewarded properly for the part they play in all transactions. This means that fees need to be set at a sustainable level. Sustainable in this means no excessive “middleman fees” like some services that are now offered in the world that are not blockchain-related, for instance, banking services, insurance services, etc. A user of a blockchain wants to pay an acceptable fee. In addition to this, a user also wants to be protected against security breaches and cyber-related issues like Denial-of-Service (DoS) attacks for example. Because of this, a fee can therefore not be set up as low as possible because these kinds of risks need to be mitigated. DoS events need to be made costly for a potential attacker to reduce the chance that these attacks might occur. In addition to this, storage is also a challenge because the ever-growing transaction history needs to be stored as well. The most successful blockchains can become “victims” of their own success because of this.
Entering Hydra
Hydra is a layer 2 scalability solution that addresses all concerns, mentioned in the previous paragraph, related to the Proof of Stake concept and the scalability of a blockchain in general.
Hydra solves these concerns by providing more efficient means of processing transactions off-chain for a set of users, while the main-chain ledger is used as the secure settlement layer. Hydra guarantees security while it remains loosely coupled to the main chain. This means that global consensus is not required and that it can be adapted in a wide range of applications.
More importantly, Hydra introduces the concept of “isomorphic state channels”. This sounds complicated but it is nothing more than reusing the same ledger representation, yielding uniform off-chain ledger “siblings”. These siblings are called “Heads” and there will be a lot of these “Heads” in order to be able to keep up with the growth of the Cardano blockchain. This also explains the name “Hydra” which refers to a mythological multi-headed creature.
With Hydra, native assets, NFTs, and Plutus scripting are available inside each Hydra Head. This means that the natural system is extended instead of creating a bolted one. In my opinion, this creates much more flexibility and reduces the risks of old legacies. Instead, you can “cut off one head and grow a new one”.
How will Hydra improve the current Cardano blockchain?
The Cardano transactions that are currently handled by the main-chain application that runs on the main chain will benefit from Hydra. This is because Hydra understands the same transaction formats and signatures. This lowers the entry barrier to Hydra for existing and potential new customers and developers because they can reuse Cardano’s tried-and-tested infrastructure for building wallets and applications while interacting with the new layer 2 system. In addition to that, you can create a Hydra Head without initial funds on a receiving party’s side. This allows a smooth user experience.
Final Thoughts
The introduction of Hydra will replicate the functionality of the main chain while minimizing the friction for users while still allowing the flexibility of having a different fee/cost structure and timing constraints on the 2nd layer. In nature, a successful ecosystem can only be created if there is complete balance and unity between all organisms in this ecosystem. Otherwise, an ecosystem ceases to exist, being replaced by a new ecosystem over time.
The same is true for a blockchain. A successful ecosystem has to balance the needs of all its users. Otherwise, the blockchain dies because users will refuse to use it. Hydra improves the Cardano ecosystem by upgrading (improving) its ecosystem in a very smooth and organic way, keeping current users happy and attracting new users because of the new functionalities it will offer.
I absolutely like Hydra myself and it proves that the Cardano Roadmap is working. Its developers stick to their Roadmap and keep the promises they made. I understand the complaints of people in the crypto community that the complete Cardano project is very slow and way too academic but all the steps and functionalities in this project were totally spot-on.
The Alonzo hard fork set a new journey for Cardano as a smart contract platform and enabled new technologies like Hydra, that will in their turn dramatically improve the scalability of Cardano, increasing its adoption and separating itself from other blockchains.
Feel free to contact me if you have any questions or if you have any additional advice/tips about this subject. If you want to keep in the loop if I upload a new post, don’t forget to subscribe to receive a notification by email.
