$ADA: What IOG is doing to help ‘unlock micropayments on Cardano’

by James · November 13, 2022

Recently, IO Global (aka “IOG”, formerly known as “IOHK”), the company responsible for Cardano’s R&D, together with Obsidian Systems, explained what is being done to “drive the development of use cases based on the Hydra Head protocol. “

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What is Hydra?

In a blog post published on September 17, 2021, Sebastien Nagel, Software Engineering Lead at IOG, said that one of the exciting developments enabled by the Alonzo upgrade was “Hydra, a key layer 2 solution to further improve Cardano’s scalability with a new protocol on top of the existing layer 1 blockchain.”

According to Nagel, here are the concerns that Hydra aims to address:

“In a blockchain network, a consensus algorithm creates a secure and trustless environment by ensuring agreement on a transaction history. Cardano uses Ouroboros, an efficient proof-of-stake consensus algorithm, for this very purpose. But Cardano, just like any permissionless blockchain, faces challenges when he tries to scale to achieve the throughput required to support real-world applications, including payment, identification, gaming or mobile services…

“Cardano transactions incur fees. The people running the network (in the case of Cardano, the stake pool operator community) must be appropriately rewarded for the role they play, so fees must be set at a sustainable level. Users want to pay fees they consider acceptable. In addition, the blockchain must be protected against, for example, Denial-of-Service (DoS) attacks.

“Fees cannot therefore be set so low that it opens up unnecessary risk – DoS events must be made prohibitively expensive for a potential attacker. Storage is also a concern, as an ever-growing transaction history can lead to storage issues. Effectively, the most successful blockchains risk becoming “victims” of that very success.“

On September 21, IOG co-founder and CEO Charles Hoskinson commented on Hydra during an interview with “Cheeky Nick,” a co-host of the YouTube series “Cheeky Crypto.”

The IOG chief said:

“So when you look at things like Mithril, Hydra, you know that these are extensions of known concepts. Mithril is a threshold signature idea and they construct these proof certificates and when you do transactions they get paired with proof certificates and it gives you that inclusive accountability… it’s not a new idea. It’s like 10 years of talking about this thing we just implemented. There is a lot of difficult cryptography to implement, but when it’s done, it’s done. And it’s more about how you distribute the certificates and build them.

“Hydra is everything Lightning wanted to be growing up… The hard part is the fact that Bitcoin is not programmable. So 95% of your effort is trying to figure out how to make a model that wasn’t designed for this work with this…

“With the extended UTXO and Plutus, there is enough there for you to build rich, isomorphic, state channels. So basically you can take state and assets and you can batch and bundle them together and put them into a layer two solution and then you can use it for microtransactions, you can use it for smart contracts…

“But then you can build modules on top of that to do specific applications, like DEXs, voting, these sets of things, and in particular one area that I’m very interested in using Hydra in 2023 is repurposing that technology so that you can do all the stuff we’re doing right now with Catalyst and voting…

“What if you could do everything off-chain in a layer two network like batches and bundles, and then it creates an aggregate that you put on-chain which is a small data payload, but then you can verify at any time that those votes were counted correctly . Well, that’s what Hydra does in a nutshell, and it can make for a smart contract. It can do so for a fee. It can do that for an asset.

“What we thought was very important is to treat Hydra as an applied research program. So what we did was we got a small team, we got DApp developers like SundaeSwap and others and we said, ‘build it with us, so as we build you integrate and we talk back and forth and we de-risk for parts of the protocol, and then we have a 3-4 week release cycle.

“So if you go to Hydra’s GitHub repository, the full release schedule is there on the project page. And you see the releases we’ve done and the capabilities these releases have, and we’ll work our way up over a reasonable period of time to a 1.0. It’s a good foundation for a DApp developer to take and integrate into their infrastructure for much of the off-chain stuff they do.

“Now, who will run that infrastructure? Well, the way we designed it, stake pool operators and the developers themselves and other people can, and it’s just going to be another extension to Cardano. And what’s cool is [that] it’s a foundation for other protocols, like a tail protocol for microtransactions or a voting protocol or these kinds of things… And you kind of know that you’re getting a lot of guarantees with this system.

“So it’s slow to start because you have to do a lot of applied research, but once that research is over and done and you have a strong foundation, it’s easy for people to take that and build apps on top of that for other tools like Mithril which you have when you think about how I build an ecosystem around this.“

IOG’s collaboration with Obsidian systems on micropayments

In an IOG blog post published on November 10, 2022, Obsidian Systems said:

“The Hydra family of protocols is one of the key components of Cardano’s Layer 2 scaling journey. The Hydra head is the first in this suite of protocols. It provides the basis for building out further scalability. Hydra Head is an off-chain mini-ledger between a relatively small group of participants, which works in the same way but faster than the on-chain ledger. Here we introduce Hydra for Payments – open source developer tool for implementing payment solutions in the Cardano ecosystem.

“Hydra for Payments will simplify the use of the Hydra Head protocol for a variety of payment cases. Just as the first generation of lightweight wallet functionality served as an enabler for basic network access, Hydra for Payments will unlock the power of micropayments in the Cardano ecosystem. Hydra for Payments will provide a toolkit for lightweight wallet developers to continuously leverage the Hydra family of protocols to build products that better meet user needs, reduce operational costs and enable higher throughput across the growing Cardano network...

“Initially, the API will directly map the primitives and domain of the Hydra Head protocol and provide convenient manipulation of Heads. Over time and in response to developers integrating Hydra for Payments, we will add specialized or additional features that cater to specific micropayments…

“Hydra for Payments tools will gradually roll out to help developers manage credentials, manage the entire Hydra Head lifecycle, and interact with Heads through a common convenient interface. The Hydra Head protocol is undergoing some important improvements in Q4, which will not immediately affect the initial Hydra for Payments interface. A functional demodel of Hydra for Payments will focus on a limited fast payment system that allows a group of people to select a Head and transfer assets at unmatched speed and price.“