Exploring Cardano Layer-2 Scaling Solutions: Sidechains, Hydra, Mithril, and Off-chain Computing

Cardano is a modern blockchain created to delicately balance security, decentralization, and scalability. Scalability is a public blockchain’s ability to process many transactions without affecting performance. With enhanced scalability, the network can also transmit more data and handle more intensive operations like high definition blockchain video gaming, enhancing user experience.

From the onset, the development wing of Cardano, IOHK, looked at releasing a high throughput platform that provided more balance, allowing for the building of a sustainable ecosystem while concurrently meeting the ever-evolving needs of users and integrating systems.

Seven years later after IOHK development began, Cardano is now fully functional. It has enabled smart contracts, merging exciting properties of legacy networks like security and decentralization using Ouroboros as a superior consensus algorithm as it evolves to meet the rising needs of users.

After the Alonzo Upgrade — marking the end of the Goguen Phase — the demand for block space in Cardano is now higher, on some occasions causing network congestion, impacting user experience. In light of this, and as part of IOHK’s scaling and performance optimization efforts under Basho, the primary goal in 2022 is to optimize Cardano further and scale it without compromising security, code stability, or decentralization.

Cardano Layer-2 Scaling Solutions

Cardano is taking a two-pronged approach to gradually increase throughput and capacity in 2022, combining on-chain solutions such as block size increment and off-chain solutions — which is the primary focus of this article.

Some on-chain scaling proposals like diffusion pipelining might be introduced in the Vasil Hard Fork combinator (HFC) event scheduled for June 2022. Thus far, Cardano plans to implement the following off-chain scaling options:

Sidechains

A sidechain is a separate blockchain that runs in parallel, tied to the primary blockchain (in this case, Cardano) via a two-way peg or a bridge. The bridge is central to sidechains since it uses a complex cryptographic mechanism to enable fluid movements of assets between chains. Notably, a sidechain is an off-chain process that allows the quick propagation of data (called events) between both chains. Events can only be initiated after the initiator locks funds in the mainnet using a smart contract.

Because of the bridge, digital assets between the primary chain and the sidechain can be moved quickly — saving time and resources. Depending on the primary blockchain’s set rules, the sidechain can exist independently, using its consensus algorithm, block time, and tokenomics. Sidechains are used to scale the mainnet because, technically, an infinite number of sidechains can connect to the mainnet, allowing them to execute different functions designed by their creators.

Sidechains would increase the possibilities of Cardano, allowing the network to integrate with many blockchains and cryptocurrencies. The flexibility of the sidechain in enabling a user/project to transfer resources and execute their business logic in the customized sidechain offers advantages that save valuable resources for the launching team.

Milkomeda by dcSpark and Mamba by IOG are two projects that will bring EVM compatibility to Cardano.

Hydra

Hydra by IOHK is a layer-2 system that will use isomorphic state channels, forming heads, (thus the name hydra, like the mythical creature) to maximize throughput, drastically reduce cost, minimize processing speeds to less than one second — that is, finality, and reduce storage requirements. Powering Hydra will be the Ouroboros Hydra — a consensus architecture enabling Cardano to scale horizontally by increasing the number of nodes rather than integrating powerful hardware.

Each Hydra head will act as a natural extension of the Cardano mainnet, enabling each channel to process on-demand, concurrently and asynchronously. Therefore, each head can carry a blend of assets, including native assets, NFTs, scripts, and more. Hydra won’t require global consensus but will keep security guarantees and remain coupled to the mainnet without requiring initial funding on the receiver’s side, enhancing user experience.

The IOHK development team is building a proof-of-concept Hydra Node and the head protocol. However, the release date depends on their stability, enabling the community to build various dApps on the layer-2 platform.

Mithril

Mithril is a layer-2 scaling protocol being developed by IOHK, symbolizing the blockchain’s emphasis on efficiency, security, and lightweight approach.

This implementation is expressly developed to resolve chain synchronization, state bootstrapping, allowing different stakeholders to validate a certain checkpoint in the chain, massively benefitting lightweight applications — and certifying consensus in a trustless setting, the Cardano blockchain.

Mithril solves the chain synchronization problem by making multi-signature aggregation among individual stake operators fast and efficient without, most importantly, compromising security. Accordingly, Mithril signatures can find immense use in running sidechains as it enables lightweight blockchain state verification. This way, there is efficient and real-time validation and confirmation of transfers between the mainnet and the sidechain. Furthermore, the Mithril aggregator logarithmically combines all signatures into one, boosting node data synchronization translating to efficient resource expenditure and higher processing speeds.

The layer-2 protocol is designed to take advantage of the stake to boost efficiency, guarantee transparency, eliminate trust issues, and leverage trade-offs between block size and efficiency using a modular design. For its design, Mithril can find applications in mobile dApps and light clients.

Besides, Cardano is also exploring off-chain computing to drive higher core efficiency. IOHK notes that offloading transactions off-chain can result in faster and cheaper transactions. The problem is that unloading and computing on-chain transactions to layer-2 options would force the use of trusted models. Still,off-chain computing is one of Cardano’s layer-2 considerations that’s being actively researched. Eventually, offloading computation through Asynchronous Contract Execution (ACE), for instance, would lead to greater core network efficiency.

Conclusion

With over 2,000 smart contracts currently running on Cardano, it is projected that the demand for block space will continue, necessitating further optimization to increase capacity and throughput as laid out in Basho. Cardano is adopting two approaches for the network to quickly soak demand and sustainable development on the modern, high-performance layer. The use of secure and thoroughly tested layer-2 scaling options will further enhance Cardano, making it a go-to platform for intensive DeFi protocols and NFT projects.

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Genius Yield

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Genius Yield is the all-in-one DeFi platform, that combines concentrated liquidity DEX with an automated yield optimizer.

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