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Renowned Cardano (ADA) advocate Armor Tesar, also known as YODA on X, has issued an important caution on Hydra. The warning is important to help users and operators understand the security setup of the layer-2 scaling solution for Cardano.
Hydra operators hold authority over locked ADA funds
According to YODA, while Hydra allows for faster and cheaper transactions, there are critical details that users need to be aware of. Notably, only Hydra operators are fully in charge of their ADA. It implies, therefore, that any user not running their own node is at the mercy of the Hydra operator.
This is because any user who locks their ADA into a Hydra head automatically gives up control. For clarity, once locked, the user’s private key can no longer directly access the funds, as they are controlled by the Hydra head smart contract, not the user’s wallet.
It means that even without having a user’s private keys, the operators can still control what happens to the funds. The operators have this power because, inside the Hydra system, every update requires signatures from all operators, not users. Thus, operators can agree on any state, even a malicious one.
Based on the design of the Hydra system, once the on-chain Hydra smart contract accepts the operator's signatures, that becomes the "truth" when the Hydra head closes.
YODA is warning that this poses a major security risk, as operators could collude to sign a fake snapshot and direct the funds to themselves. He is emphasizing that the only way to have full control of one’s fund is to be a Hydra operator.
If, however, a user delegates their funds and uses Hydra through an operator, they have to "rely" on the operator not to cheat. This requires a high level of trust in the Hydra operators.
Cardano community urged to prioritize trust
YODA’s message to Cardano users is that Hydra is only truly trustless for people who run a node themselves.
Every other user is effectively using it the same way as a custodial service. In essence, before one decides to use a Hydra-based DeFi app, they must do their own research.
It is important to know who the operators are and whether they are trustworthy enough not to team up with malicious actors to redirect users’ funds.
Hydra has been so dogged with speculation that even Cardano founder Charles Hoskinson had to wade in in 2024 to address concerns about it.
Dan Burgin
Vladislav Sopov
U.Today Editorial Team