Layer 2 expansion: beyond Hydra

As part of its evolving approach to community collaboration, Input Output Research (IOR) hosted the June 2025 research session in association with the Intersect Research Working Group as a thematic, livestreamed panel discussion on Layer 2 Expansion: Beyond Hydra. The event spotlighted a series of leading layer 2 innovations being developed across the Cardano ecosystem, exploring scaling solutions that extend far beyond the Hydra Head protocol.

IOR has rejigged the monthly Intersect Research Working Group meetings as dynamic, thematic open events in response to community feedback during the 2025 Cardano Budget campaign. The June event brought together developers and researchers from Anastasia Labs, zkFold SA, Eryx, Sundae Labs, and IOR to share insights on their respective layer 2 initiatives, followed by a roundtable discussion moderated by Fergie Miller, IOR’s Director of Research Partnerships.

Hydra and the layer 2 landscape

The session opened with an in-depth presentation from Sandro Coretti-Drayton, research fellow at IOR, who provided a comprehensive update on Hydra’s evolving role within Cardano’s scaling strategy. As a key pillar of the Cardano Vision research agenda, Hydra aims to deliver scalable off-chain transaction execution while preserving the security guarantees and settlement finality of layer 1.

Sandro outlined two primary designs within the Hydra family:

• Hydra heads – state channel protocols for small, fixed participant groups that enable rapid off-chain transaction throughput with shared control.
• Hydra tails – rollup-inspired models operated by a central party, targeting broader scalability for applications with higher throughput needs.

He detailed several active research streams, including the formal verification of Hydra Heads using the Universal Composability (UC) framework, which allows provable security and modular protocol composition. Another focus is Hydra Inter-Head, a mechanism to connect multiple Hydra Heads and enable virtual channels between them, creating a foundational step toward complex, multi-party networks.

Importantly, Sandro introduced state channel network Optimization Tools as a distinct and growing research stream. This work aims to design efficient topologies and routing mechanisms for Hydra deployments involving multiple heads—maximizing performance, minimizing latency, and ensuring robust coordination across distributed participants.

Sandro also addressed the challenge of transparency in off-chain protocols. To mitigate this, the team is developing Auditing Tools that allow external auditors to verify high-level metrics—such as transaction volume or frequency—without exposing individual transaction data. This lightweight mechanism is designed to balance privacy with accountability. Future work in this area includes extending auditing functionality to cover non-aggregatable statistics and enabling dynamically configurable audit policies.

Panel highlights: scaling beyond Hydra

Following Sandro's presentation, the panel discussion brought together some of the most active contributors to Cardano’s emerging layer 2 ecosystem, each offering a distinctive approach to solving the scalability, usability, and security challenges facing Cardano.

While united by a common commitment to advancing Cardano’s performance and accessibility, the panelists reflected a broad spectrum of technical strategies showcasing the richness of innovation within the ecosystem and how Cardano’s foundational architecture—particularly its extended UTXO (EUTXO) model—can support a wide variety of layer 2 constructions.

Anastasia Labs: Midgard (optimistic rollups)

Philip DiSarro presented Midgard, an optimistic rollup inspired by Optimism and Fuel, tailored to the EUTXO model. He emphasized the design advantages of deterministic fraud proofs and a minimized reliance on governance multisigs. With technical specs already open-sourced, Midgard is targeting a mainnet-ready MVP by year’s end.

zkFold SA: ZK rollups for Cardano

Vladimir Sinyakov introduced zkFold, a zk-rollup that compresses hundreds of transactions into a single layer 1 submission. zkFold emphasizes privacy and efficiency, offering near-final transaction finality and significantly reduced network overhead. Vladimir noted that zkFold might reach testnet by year-end, with full smart contract support following later.

Eryx Cooperativa: ZK bridge protocol

Carolina Lang shared Eryx’s vision for a built-in ZK bridge on Cardano, aimed at isomorphic chain communication. With deep experience in cryptographic engineering across chains like Zcash and StarkNet, the Eryx team is building an open-source, modular protocol for secure, auditable cross-chain interoperability.

Sundae Labs: Gummiworm (Hydra-inspired rollup)

Pi Lanningham described Gummiworm as a horizontally scalable rollup system that decouples transaction execution from custody. Reimagining Hydra for broader DeFi use, Gummiworm allows for atomic transactions across multiple heads and leverages practical cryptography over bleeding-edge primitives.

Roundtable: interoperability, economics, collaboration, and security

A recurring theme throughout the discussion was interoperability. Philip DiSarro and Vladimir Sinyakov both underscored the need for a standardized interface layer across Cardano layer 2s, drawing important lessons from Ethereum’s fragmented scaling ecosystem. Rather than competing for dominance, the panelists agreed that the goal is to offer a portfolio of solutions optimized for different use cases—ranging from DeFi and privacy to high-throughput applications—underpinned by shared standards that ensure seamless cross-protocol interaction.

The conversation also explored the economic design of layer 2s, with Pi Lanningham noting that capital fragmentation—caused by users needing to lock funds within isolated protocols—remains a key barrier to adoption. He and others proposed solutions such as liquidity bonding mechanisms, improved user experience, and deep integration between protocols to help retain capital efficiency and ensure composability between opportunities. These incentives, the panel agreed, must be thoughtfully aligned not just for users, but also for developers and operators to sustain a vibrant layer 2 ecosystem.

Security emerged as another critical focus area. Sandro highlighted the importance of rigorously defined properties and mathematically provable guarantees, especially as these protocols begin to handle more value and infrastructure-critical transactions. Carolina emphasized the need to build a stronger zero-knowledge (ZK) community within Cardano to support both implementation and auditing, noting that collaborative security reviews and education will be vital for reducing risk and increasing trust in complex cryptographic systems.

Finally, the panelists reflected on the importance of collaboration over competition in shaping Cardano’s multi-layered architecture. As the network embraces a pluralistic approach to scaling, there was a shared recognition that Cardano’s EUTXO model offers a unique advantage for secure, modular layer 2 construction—but that its full potential will only be realized through community-led innovation and collaboration, shared infrastructure, and open standards. The conversation reinforced the idea that Cardano’s scaling roadmap isn’t about choosing one winner, but about enabling a secure, interoperable foundation where a diversity of layer 2 solutions can thrive.

Looking ahead: the future of layer 2s on Cardano

In closing, panelists reflected on the evolution of Cardano over the next 3–5 years:

• Sandro focused on advancing rigorous protocol security analysis.
• Philip warned of the sustainability gap in layer 1 fee models, suggesting that scalable layer 2 throughput could help close it.
• Vladimir noted the role of blobs and batching in expanding bandwidth while maintaining decentralization.
• Carolina highlighted Cardano’s unique compatibility with ZK-based applications, thanks to its formal verification ethos and EUTXO model.
• Pi reaffirmed the collaborative mindset across Cardano as a differentiator, with developers eager to share and build together.

Layer 2 Expansion: Beyond Hydra demonstrated that Cardano’s scaling future will not be defined by a single protocol but by a constellation of interoperable, specialized layer 2 solutions—each contributing distinct performance, privacy, and usability enhancements.

IOR and the Intersect Research Working Group remain committed to supporting this ecosystem-wide collaboration. With new protocols on the horizon and deeper partnerships forming, Cardano is well positioned to lead the next phase of decentralized, high-performance blockchain infrastructure.