Cryptocurrencies came to the world to become an alternative to the current financial system. As such, users must be able to pay in a shop as fast as with credit cards. It means that a transaction must be settled within a few seconds. The Visa network processes an average of 150 million transactions every day. It is approximately 2 000 transactions per second (TPS). Such throughput is unreachable for current blockchain networks. The normal throughput of PoW networks is usually only a few dozen TPS. PoS networks can reach several hundred TPS.
Distributed networks generally suffer from serious scalability limitations, low throughput, and excessive storage required to maintain the state of the system and its transaction history. After some 5 years of inter-disciplinary research effort in IOHK, the Hydra paper was released. Scientists and researchers from networking, multi-party computation, programming language, and consensus branches had to work together to come up with a scaling solution that fits well with blockchain and smart contracts. It is a major scientific achievement and a significant milestone in the development of Cardano. Ouroboros Hydra breaks new ground in PoS scalability. With Hydra, Cardano can really become the alternative to current fiat money.
Hydra is the second layer solution on top of the Cardano first layer where PoS consensus is used. Hydra is designed in a way that fits well with a stake pool model. The IOHK team introduced an extended UTxO model that allows sharding of stake space without the need to shard the ledger itself. It is still possible to shard on the ledger level and Hydra is a complementary part of the whole scaling solution. Every pool can create a new Hydra’s head so adding more pools mean that more head can be added. So by adding new heads to the protocol nearly linear scaling can be achieved. Simulations have been done and the results are great. Each Hydra head can process around 1000 TPS and there is room for further optimization. So with 1000 pools, Cardano could be theoretically able to scale up to 1 million TPS and the finality of transactions will be very fast. Hydra enables horizontal scaling. It means increasing performance by incorporating additional nodes. It is always easier than to add additional powerful hardware since there are HW limits.