EUTxO-L2 interoperability: Connect Hydra and other L2s

[GENERAL] Name and surname of main applicant

EUTxO-L2 interoperability: Connect Hydra and other L2s

[GENERAL] Are you delivering this project as an individual or as an entity (whether formally incorporated or not)

Entity (Incorporated)

[GENERAL] Co-proposers and additional applicants

Maxim Jourenko

Perry Wasserbauer

[GENERAL] Please specify how many months you expect your project to last (from 2-12 months)

6

[GENERAL] Please indicate if your proposal has been auto-translated into English from another language

No

[GENERAL] Summarize your solution to the problem (200-character limit including spaces)

Explore feasibility of research on eUTxO-based L2 interoperability for payments and smart contract execution, fostering a connected L2 ecosystem in Cardano without liquidity fragmentation.

[GENERAL] Does your project have any dependencies on other organizations, technical or otherwise?

No

[GENERAL] If YES, please describe what the dependency is and why you believe it is essential for your project’s delivery. If NO, please write “No dependencies.”

No dependencies

[GENERAL] Will your project’s output/s be fully open source?

Yes

[GENERAL] Please provide here more information on the open source status of your project outputs

We will follow our past practice of developing Hydra in the open also with this project. All source code will be published on Github in the cardano-scaling organization with a permissive license (Apache-2.0). All documentation, notes and meeting recordings will be publicly available.

[METADATA] Horizons

L2

[SOLUTION] Please describe your proposed solution

Based on this research paper, we aim to explore the feasibility of interconnecting fully scriptable L2 ledgers. While our focus will lie on isomorphic eUTxO ledgers of the Hydra Head protocol and Midgard, the findings could be applicable to any similarly capable Cardano L2.

By building a prototype cross-ledger communication protocol, we aim to validate the concept and assess its performance. Our prototype will be designed to support the following interactions between Cardano L2s:

• Payment transfers: Sending native Cardano assets (e.g., USDM) across multiple L2s.
• Smart contract interaction: For example, placing a bid in an auction running on a Hydra Head from Midgard.

We will compare the potential of these atomic L2 transactions to traditional cross-chain methods such as Hash Timelocked Contracts (HTLCs), identifying key advantages and potential challenges.

The main artifacts of this project will be

• Open-sourced prototype (likely written in Haskell and Aiken)
• Technical report (published in mdbook format) summarizing key findings, challenges, and future directions.

[IMPACT] Please define the positive impact your project will have on the wider Cardano community

Positive Impact on the Cardano Community

1. Proactive interoperability research: Align L2 developments with Cardano’s growth, avoiding fragmentation issues.
2. Identify common interfaces: Facilitate smoother interactions between different L2s and lay the groundwork for standardization.
3. Open-source prototype: Provide developers a baseline for implementing cross-L2 applications.
4. Upstream contributions: Contribute to Hydra, Midgard, and other L2 projects to enhance interoperability across the Cardano ecosystem.

[CAPABILITY & FEASIBILITY] What is your capability to deliver your project with high levels of trust and accountability? How do you intend to validate if your approach is feasible?

Our team comprises core developers of Hydra and Midgard and published authors of relevant research papers. We have extensive experience building in the open and engaging the Cardano community.

We intend to validate the feasibility of our approach through iterative prototype development, releasing early versions for community feedback and technical evaluation.

[PROJECT MILESTONES] What are the key milestones you need to achieve in order to complete your project successfully?

Milestone 1: Implement Atomic Transactions Across Two Hydra Heads

• Objective: Create a prototype demonstrating the transfer of native Cardano assets between two isolated Hydra Heads using atomic transactions.
• Details: Atomic transactions ensure that either all operations across the two Hydra Heads succeed or none do, preventing partial failures and avoiding liquidity traps. This milestone will validate whether native assets like USDM or ADA can move seamlessly across separate L2 instances.
• Deliverable:
• Working code showcasing atomic asset transfers.
• A technical report documenting how the solution leverages the eUTxO model for efficient atomic operations and any challenges encountered.

Milestone 2: Design Smart Contract Interactions Using Cross-Ledger Framework

• Objective: Enable smart contract execution between L2 ledgers, such as placing a bid on Midgard from a Hydra Head.
• Details: This milestone explores cross-ledger calls where dApps on one L2 can interact with smart contracts on another. Example: a user on Hydra participates in an auction or lottery contract deployed on Midgard.
• Deliverable:
• A demo of smart contract interactions across L2s.
• A framework for structuring cross-ledger calls, including design patterns for request-response flows and transaction finality guarantees.

Milestone 3: Address Dispute Resolution and Ensure Eventual Liveness in Cross-Ledger Interactions

• Objective: Develop a mechanism for dispute resolution to ensure the integrity and liveness of cross-ledger operations, especially under adversarial conditions.
• Details: Midgard’s fraud proofs and Hydra’s state commitments provide the foundation for this milestone. The system will need to handle cases where one L2 attempts to withhold or delay a transaction. This step ensures that transactions remain live and disputes can be resolved in favor of honest participants.
• Deliverable:
• Implementation of dispute mechanisms ensuring that cross-ledger operations cannot get stuck indefinitely.
• Test scenarios involving adversarial actors to validate the solution.

Milestone 4: Validate Payments Across Two-Party Ledgers Using a Central Multi-Party Ledger

• Objective: Establish a central multi-party ledger to facilitate multi-hop transactions and payments across multiple L2 instances, acting as a liquidity hub.
• Details: The multi-party ledger will function as a payment aggregator where two or more L2s can settle transactions without requiring direct connections between each L2. This reduces the burden on users by minimizing the number of transfers they need to make between ledgers.
• Deliverable:
• A working prototype where multiple L2s exchange assets through a central ledger.
• Report comparing the efficiency of this model against point-to-point atomic transactions and HTLC-based systems.

Milestone 5: Demonstrate Payments Across Multiple L2s Using Atomic Transactions

• Objective: Showcase payments that flow through multiple two-party ledgers without breaking atomicity.
• Details: This milestone demonstrates multi-step, atomic payments, ensuring that even if the payment involves several L2s, it either completes fully or reverts safely. This system will leverage hydra heads and Midgard rollups, creating a blueprint for more complex multi-hop payment networks.
• Deliverable:
• Test case demonstrating atomic transfers across three or more L2s.
• A report highlighting performance metrics, including latency and gas costs, along with recommended optimizations.

Expanded Key Milestones

Milestone 1: Implement Atomic Transactions Across Two Hydra Heads

• Objective: Create a prototype demonstrating the transfer of native Cardano assets between two isolated Hydra Heads using atomic transactions.
• Details: Atomic transactions ensure that either all operations across the two Hydra Heads succeed or none do, preventing partial failures and avoiding liquidity traps. This milestone will validate whether native assets like USDM or ADA can move seamlessly across separate L2 instances.
• Deliverable:
• Working code showcasing atomic asset transfers.
• A technical report documenting how the solution leverages the eUTxO model for efficient atomic operations and any challenges encountered.

Milestone 2: Design and Demonstrate Smart Contract Interactions Using Cross-Ledger Framework

• Objective: Enable smart contract execution between distinct L2 ledgers, such as placing a bid on Midgard from a Hydra Head.
• Details: This milestone explores cross-ledger calls where dApps on one L2 can interact with smart contracts on another. Example: a user on Hydra participates in an auction or lottery contract deployed on Midgard.
• Deliverable:
• A demo of smart contract interactions across L2s.
• A framework for structuring cross-ledger calls, including design patterns for request-response flows and transaction finality guarantees.

Milestone 3: Address Dispute Resolution and Ensure Eventual Liveness in Cross-Ledger Interactions

• Objective: Develop a mechanism for dispute resolution to ensure the integrity and liveness of cross-ledger operations, especially under adversarial conditions.
• Details: Midgard’s fraud proofs and Hydra’s state commitments provide the foundation for this milestone. The system will need to handle cases where one L2 attempts to withhold or delay a transaction. This step ensures that transactions remain live and disputes can be resolved in favor of honest participants.
• Deliverable:
• Implementation of dispute mechanisms ensuring that cross-ledger operations cannot get stuck indefinitely.
• Test scenarios involving adversarial actors to validate the solution.

Milestone 4: Validate Payments Across Two-Party Ledgers Using a Central Multi-Party Ledger

• Objective: Establish a central multi-party ledger to facilitate multi-hop transactions and payments across multiple L2 instances, acting as a liquidity hub.
• Details: The multi-party ledger will function as a payment aggregator where two or more L2s can settle transactions without requiring direct connections between each L2. This reduces the burden on users by minimizing the number of transfers they need to make between ledgers.
• Deliverable:
• A working prototype where multiple L2s exchange assets through a central ledger.
• Report comparing the efficiency of this model against point-to-point atomic transactions and HTLC-based systems.

Milestone 5: Demonstrate Payments Across Multiple L2s Using Atomic Transactions

• Objective: Showcase payments that flow through multiple two-party ledgers without breaking atomicity.
• Details: This milestone demonstrates multi-step, atomic payments, ensuring that even if the payment involves several L2s, it either completes fully or reverts safely. This system will leverage hydra heads and Midgard rollups, creating a blueprint for more complex multi-hop payment networks.
• Deliverable:
• Test case demonstrating atomic transfers across three or more L2s.
• A report highlighting performance metrics, including latency and gas costs, along with recommended optimizations.

Final Milestone: Smart Contract Interaction Across Ledgers – Lottery Contract Use Case

• Objective: Demonstrate a non-trivial, real-world use case where smart contracts deployed across multiple L2s interact seamlessly, focusing on a lottery contract.
• Details: This milestone will feature a scenario where users on Hydra participate in a lottery contract running on Midgard. Participants will lock assets on Hydra, submit entries, and receive lottery results—all through cross-ledger interaction. This will prove the feasibility of building multi-L2 dApps with smooth UX.
• Deliverable:
• Full demonstration of a lottery contract with cross-ledger participation.
• Publicly released open-source code and a technical report outlining challenges, optimizations, and future improvements.

[RESOURCES] Who is in the project team and what are their roles?

• Sebastian Nagel - Lead developer / Software Architect
• Philip DiSarro - Software Architect
• Maxim Jourenko - Senior Researcher (consulted)
• Trym Bruset - Project management
• Perry Wasserbauer - Communication and writing

[BUDGET & COSTS] Please provide a cost breakdown of the proposed work and resources

Team member / roles are not full-time over project duration

• Lead developer / architect - 70k ADA
• Software architect - 70k ADA
• Senior Researcher (consultation) - 20k ADA
• Project management - 20k ADA
• Communication and writing - 15k ADA

[VALUE FOR MONEY] How does the cost of the project represent value for money for the Cardano ecosystem?

The problem of liquidity and UX fragmentation is one of the most significant challenges faced by other L2-centric ecosystems like Ethereum, where users often face the burden of transferring assets between isolated L2s to interact with different dApps. This fragmentation creates friction, delays, and additional fees, resulting in poor user experience and limiting adoption. In response, the Ethereum ecosystem has invested millions of dollars and extensive R&D into developing solutions like aggregation frameworks (e.g., Agg Layer and Superchain). However, these solutions have also led to competition among L2 aggregation layers, with each L2 vying for dominance, further complicating the interoperability landscape.

This proposal aims to learn from the challenges faced by Ethereum’s L2 ecosystem and apply those lessons proactively to Cardano before fragmentation becomes a critical issue. By developing a standardized interoperability framework from the outset, we can ensure seamless communication between Cardano’s L2 protocols—such as Hydra and Midgard—eliminating the need for redundant asset transfers between L2s.

The value lies in addressing these challenges early by building a connected ecosystem that benefits users, developers, and the broader Cardano network. With an open-source prototype and technical findings, the project will pave the way for standardized CIP proposals, ensuring that any new L2 protocol on Cardano is designed with interoperability in mind. This approach saves significant future costs by avoiding fragmented ecosystems and reducing the need for retroactive fixes. Ultimately, this project will position Cardano ahead of the curve, enabling a unified, user-friendly L2 ecosystem.