Nadal fired six aces and needed only 80 minutes to breeze past Nikolay Davydenko 6-2, 6-2 on the unique blue clay of The Magic Box tennis facility in the Spanish capital.
The world No. 2 is seeking his third straight clay-court title of 2012, after notching victories last month at Monte Carlo and Barcelona. Nadal titled in Madrid in 2005 and 2010 and claimed second place last year and in 2009.
The third-seeded Federer had to rally against Canadian Milos Raonic to earn a 4-6, 7-5, 7-6 (7-4) decision while playing his first tennis in a month.
The Swiss star, who had to overcome 21 aces from Raonic to log the second-round victory, goes on to face Frenchman Richard Gasquet.
Fourth-seeded Frenchman Jo-Wilfried Tsonga got past American wild card Ryan Harrison 6-2, 7-6 (7-4) and No. 5 seed David Ferrer of Spain defeated Czech Radek Stepanek 7-6 (7-4), 6-2.
Juan Martin del Potro, fresh off his win last week at Estoril, stayed hot with a 6-4, 7-6 (7-1) triumph over Russian Mikhail Youzhny, while seventh-seeded Janko Tipsarevic of Serbia edged Argentine qualifier Federico Delbonis 7-6 (7-5), 6-7 (6-8), 6-3 Wednesday in Madrid.