L2 Scalability
Delivering production-ready L2 infrastructure through Hydra production hardening, Midgard mainnet launch, and shared L2-agnostic primitives, in partnership with Input Output and Midgard Labs.
The team behind the initiative
The opportunity
Cardano’s L1 delivers over two hours of finality, approximately $0.17 per transaction, and roughly 7–10 TPS. Competing platforms offer 400ms to 2s finality, sub-cent fees, and 1,000 to 7,000+ TPS. High-performance verticals — DeFi, AI agent micropayments, gaming, and consumer payments — often exclude Cardano at the selection stage before a fuller technical evaluation begins, preventing consideration of Cardano’s genuine strengths: its security model, formal verification approach, and EUTXO design.
Four structural gaps compound the problem: L1 finality of over two hours makes UX uncompetitive for use cases that require fast on-chain settlement; current L1 fees represent up to 1,000x overhead versus competitors, making high-volume applications economically unviable; the UTXO concurrency model introduces complex batcher infrastructure that stretches development timelines; and current throughput of approximately 7–10 TPS constrains applications that require far greater capacity.
Upcoming L1 upgrades — Leios (targeting approximately 400 TPS) and Peras (targeting approximately 2-minute finality) — will strengthen the base layer. At the same time, high-performance use cases such as zero-fee or sub-second interactions benefit from complementary scaling approaches. L2 solutions provide an additional path to address these requirements while maintaining integration with the base layer.
L2 solutions extend the capabilities of L1 rather than compete with it. Use cases such as agent-based systems on Hydra or decentralized exchanges on Midgard illustrate scenarios that benefit from dedicated execution environments. By enabling these applications within the Cardano ecosystem, L2s contribute to increased developer activity, ecosystem growth, TVL, and L1 settlement usage. Activity on L2s ultimately anchors back to L1 through block publication and settlement, reinforcing the overall system.
The Initiative
L2 Scalability
This proposal delivers three coordinated pillars:
- Pillar 1: L2-agnostic infrastructure. The shared infrastructure every Cardano L2 needs: a data availability strategy that benefits all current and future Cardano L2s. Investing in shared primitives prevents ecosystem fragmentation and solves technical bottlenecks once for the whole ecosystem rather than once per project. This work benefits Hydra, Midgard, and any future Cardano L2.
- Pillar 2: Hydra production hardening and turnkey solutions. Hydra has crossed from research to market validation. The Midnight Glacier Drop successfully processed token distribution for over 30 million users across eight blockchains. Delta DeFi is building a DEX that bets its entire product roadmap on Hydra. Masumi requires machine-to-machine micropayment infrastructure that L1 can no longer sustain. These are live production commitments, not pilots. This pillar funds the critical engineering needed to move from a well-tested research protocol to production infrastructure: memory optimization, maximum TPS improvement, benchmarking, operational tooling, resilience improvements, and pre-built reference stacks for DeFi use cases — including pre-built smart contracts, off-chain state machines, head lifecycle tooling, and operator runbooks — so the next wave of Hydra builders can deploy in weeks rather than months.
- Pillar 3: Midgard optimistic rollup to mainnet. Midgard is Cardano’s first truly permissionless optimistic rollup, made uniquely possible by the EUTXO architecture. Its UTXO-based design enables single-party fraud proofs in a single L1 transaction, eliminating the complex multi-round challenge-response games that make Ethereum L2 fraud proofs difficult to implement. Anyone can lock a bond in the on-chain Operator Directory to produce L2 blocks. Hundreds of user transactions are batched per block, driving costs below $0.01 per transaction, with costs decreasing as volume grows. This pillar funds penetration testing and the path to mainnet by end of 2026.
Hydra and Midgard are not competing solutions. They are complementary layers that together address a broader range of high-performance use cases. Hydra is purpose-built for known-party, high-frequency environments: it requires a fixed, pre-agreed participant set where all parties remain online and co-sign state updates, enabling sub-second finality, privacy, and zero-fee transactions. Midgard is purpose-built for open, permissionless environments where participants are anonymous, unpredictable, and do not run infrastructure: public DEXs, lending protocols, NFT marketplaces, and consumer applications. The distinction reflects different trust models rather than overlapping functionality. Supporting only one leaves a meaningful coverage gap across use cases.
Treasury ask: ₳10,425,871
Who is building
This initiative is jointly led by Sharan Konerira at Input Output Group and Midgard Labs. Production partners include Delta DeFi (DeFi on Hydra), and Masumi (AI agent micropayments).
The decision on a dedicated L2 Scaling entity is under active exploration by IO and Midgard Labs and will affect long-term coordination structures beyond this proposal period. IO is funding this year’s delivery and leading across all three pillars throughout 2026.
Expected outcomes
- Data availability strategy specification and prototype delivered, benefiting all current and future Cardano L2 builders.
- Hydra hardened for production workloads, with reference implementations for DeFi use cases including pre-built smart contracts, off-chain state machines, and operator runbooks.
- Hydra performance and operational improvements delivered, with memory optimization, TPS improvements, and enhanced observability.
- Midgard mainnet launch by end of 2026, with penetration testing completed in preparation.
- Active production integrations with Delta DeFi and Masumi demonstrating real-world L2 utility.
Ecosystem Impact
L2 infrastructure directly drives Scalability and Throughput Capacity. Every Midgard block published to L1 generates L1 transaction fee revenue. Midgard’s architecture includes mechanisms that allow L2 operators to allocate a portion of sequencer revenue back to the Cardano Treasury, establishing a structured, ongoing economic relationship between L2 activity and treasury sustainability. Hydra lifecycle management similarly generates L1 fees. L2 fee accrual adds to the overall Cardano ecosystem revenue rather than allowing it to flow to competing ecosystems.
This initiative also drives TVL (DApps on Hydra and Midgard lock funds on L1), Monthly Transactions (previously non-viable use cases become feasible), and MAU (competitive finality and fees address the primary filters that currently limit Cardano’s consideration during platform evaluation).
Governance links
Formal treasury proposal
The on-chain submission, read the full proposal text and rationale.
View the formal proposalJoin the Conversation
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