Midnight is still in the phase where developers can try it out on the dev-net. The community is asking what the relationship between Midnight and Cardano will be. We don't have enough information at the moment, but some things can be guessed.
Midnight will be a sidechain
Midnight will be reportedly a sidechain that will have its own consensus based on PoS+PoW. In this respect, it will be independent of Cardano, as it can provide its own security. Midnight likely won't need to use Cardano's PoS consensus, nor will ADA coins. At the end of the article, we will return to the sidechain question.
Midnight will have DUST coins. Whether there will be only one coin for both PoS and PoW we also don't know at the moment.
The question is whether the current Cardano SPOs will get involved. Our understanding is that it will be possible. SPOs will probably be able to run the Midnight client and receive a reward in the form of DUST coins. PoW will mainly provide immutability of the ledger.
As for the initial distribution of DUST coins, we don't know for sure either. In the past, it was speculated that some of the DUST coins could be given to ADA holders. Maybe it was heard at some conference. If the team were to take advantage of this option, roughly 1.3M current ADA stakers could receive DUST coins. Although this seems like a good idea, it is not at all certain that it will happen.
For example, in the context of PoW, it is more advantageous if all coins are mined gradually, similar to Bitcoin. For PoS networks, on the other hand, it is necessary to get coins to the largest possible number of stakers in a short period of time.
The Midnight project team will have to think carefully about the economic model and fair coin distribution.
Importantly, in terms of security, Midnight is very likely to be self-contained and completely independent of Cardano with its own economic model.
Focused on Privacy
Midnight focuses on privacy using Zero-Knowledge cryptography. This means that the ledger will not be public, more precisely, it will be possible to learn very little from the information in it.
Does it make sense to transfer tokens from Cardano to Midnight and vice versa?
Midnight can give Cardano users privacy. We assume that it will be possible to transfer ADA, tokens (NFTs, stablecoins, etc) from Cardano to Midnight and use private services such as payments, swaps, lending, etc.
Tokens that will be minted in Midnight do not make sense to transfer to the Cardano ecosystem, as their privacy would be partially violated. However, we still don't know if Midnight will be able to mint and burn tokens. It can be expected that he will be able to do this since all tokens minted on Cardano essentially lost part of their privacy.
There is a possibility that Midnight would not be able to mint tokens and would only use those transferred from Cardano and other chains. This would make sense, for example, for USD-backed stablecoins that will be minted and burned only on Cardano, but their use in a private way would be possible in Midnight. This would always make it easy to see how many minted tokens there are. In that case, there would be a very strong bond between Cardano and Midnight. It could be said that Midnight's existence would be heavily dependent on Cardano.
However, it is also possible that some information can be read from the Midnight ledger, and the number of minted or existing tokens could be one of them. According to Charles Hoskinson's latest comments, it appears that Midnight will have both a private and a public ledger.
A Decentralized Identity (DID) solution requires a public blockchain. In this case, we can imagine the integration between Cardano, Atala PRISM (identity management solution), and Midnight probably best. DIDs must exist in Cardano (although Midnight might be able to publish this information as well), and Midnight will enable stronger protection of private information. Zero-Knowledge proofs make it possible to convince the verifier of a fact without having to reveal the essence of the information itself.
For example, it is possible for Alice to convince Bob that she holds a government-issued ID and that she is over 18 years old. Bob can verify this information without knowing Alice's true age.
But again, Midnight can have a DID solution without using Cardano, all it needs is integration with Atala PRISM.
Is Midnight an Ally or a Competitor for Cardano?
At the moment it is impossible to say for sure. It will depend on how Cardano and Midnight will be connected economically, at the level of infrastructure and functionality.
Midnight will provide privacy for Cardano users. In this regard, Midnight will be an ally.
We expect that in some use cases, Midnight can do without Cardano entirely. It doesn't make sense to have part of the information public in the Cardano ledger and part private in Midnight. Some businesses, banks, or financial institutions will require 100% privacy. It will make no sense for tokens to be minted on Cardano and transferred to Midnight, or to use a decentralized application on Cardano from Midnight applications.
Many users require privacy for all financial transactions. From the point of view of current financial services, this is standard, as the public has no chance to learn about a loan between you and a bank, for example, from some publicly available document. Similarly, it is not possible for the cashier to look at the status of your wallet or bank account after you pay her for the goods.
We can imagine that for some use cases, Midnight could be a competitor to Cardano. Most people require privacy. It is an obligation for business. Privacy can be in high demand.
If a DEX is launched on the Midnight platform (and that can be expected), it can siphon liquidity and take over users from DEXs on Cardano. Midnight can also have better scalability and thus lower fees.
Midnight can be a sought-after solution even for BTC holders who want to pay through BTC. LN will never be a 100% private solution due to on-chain transactions for opening and closing Lightning Network channels. If holders transfer some BTC coins to Midnight, they can use them there for a relatively long time. They can completely spend the BTC through Midnight and there is no need to do any other settlement transaction after spending.
It would be nice if Cardano was used to tokenize BTC and then the tokens (wrapped BTC) were transferred to Midnight, but we can imagine that Midnight will have its own tokenization solution. According to the latest statements, it seems that Midnight will be able to do this autonomously.
It is important to mention that jumping to any conclusions is unnecessary at this point, as there is little publicly available information. We can imagine an integration that will be beneficial to Cardano users and ADA holders, but also one that largely does without Cardano and only uses Cardano SPOs. It would be possible for ADA stakers to receive DUST rewards if the given operator ran the Midnight client. Stakers would almost certainly have to hold not only ADA but probably DUST as well. Anyone interested will very likely be able to run the Midnight client without having to run the Cardano client, so Midnight can have its own infrastructure.
The question is why Midnight is actually marketed as a sidechain when it appears that it will be a separate network largely independent of Cardano. On the official website, Midnight describes itself as a blockchain, not a sidechain. Cardano is not mentioned. It looks the same on X.
It is difficult to predict the future of any project in the blockchain industry. However, it seems that Midnight will be a fourth-generation blockchain and will be able to do what most current blockchains cannot. Midnight will likely scale well, protect user privacy in a selective way, and have private smart contracts. Cardano users will be able to use Midnight, but they will also very likely be able to fully migrate to it.
It is possible that the Cardano community will decide to have some features of Midnight in Cardano and will ask (through on-chain governance mechanisms) the IOG team to implement them. Midnight should be fully open-source. This is a very premature conclusion at this point. Let's wait for more information.