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Hydra is the layer 2 scalability solution for Cardano, which aims to increase transaction speed through low latency and high throughput and minimize transaction cost.

Hydra Head is the first protocol of the Hydra family and embodies the foundation for more advanced deployment scenarios relying on isomorphic, multi-party state-channels. For an introduction to the protocol also check out these two blog posts

There are different flavors and extensions of the Hydra Head protocol, but let's start by looking at the full lifecycle of a basic Hydra Head, and how it allows for isomorphic state transfer between layer 1 and layer 2.

A Hydra Head is formed by a group of online and responsive participants. Participants initialize a Head by announcing several parameters on-chain, including the participants list. Then each of the participants commits unspent transaction outputs (UTXOs) from the Cardano main-chain to it, before all the UTXOs are collected and made available in a Hydra Head as initial state (U0). At any moment before collecting, participants can also abort the process and recover their funds.

While open, they can use the Hydra Head via a hydra-node to submit transactions over the Head network. Transactions have the same format and properties as on the main-chain: they are isomorphic. When UTXO entries are spent, and new UTXO entries are created in a Hydra Head, all participants are required to acknowledge and agree on the new state in so-called snapshots (U1..Un).

Any participant can close the Head using an agreed state, when for example they wish to cash out on the mainnet, or if another party misbehaves or stalls the Head's evolution. There is a mechanism to contest the final state on the main chain. Ultimately, a fanout transaction distributes the final agreed state and makes available on the layer 1 what only existed virtually in the Head.