What is Hedera? (HBAR)

Hedera is a Proof of Stake (PoS) smart contract platform created for cryptocurrency transactions and decentralized applications.

The network differentiates itself from other blockchains by offering a unique take on the blockchain using a technology called a directed acyclic graph (DAG). In contrast to a traditional blockchain which has a single chain of linear, sequential blocks, in a DAG, network groups of computers (nodes) run in parallel to allow connections between one another to be verified simultaneously using a randomized structure.

Blockchain networks have historically struggled to maintain the correct balance between decentralization, security, and scalability, known as the “blockchain trilemma.” This trilemma requires design tradeoffs and poses difficulties for enterprises, institutions, and governments requiring high throughput yet decentralized platforms.

Hedera’s directed acyclic graph (DAG), called the Hashgraph Gossip Protocol, is designed to address these issues. The team behind Hedera’s goal was to create a network built for a wide range of real world uses, including healthcare, financial services, supply chain, decentralized finance (DeFi), and for payment via central bank digital currencies (CBDCs) and stablecoins.

Hedera makes use of the HBAR utility token as a payment mechanism for dapp development, transaction and smart contract fees, and governance processes that help shape the future of the network.

Who created Hedera?

Hedera was founded in 2017 by American technologists Leemon Baird and Mance Harmon. Baird and Harmon also launched Swirlds Labs, the company that developed Hedera’s underlying technology. Both founders have experience in the software development and tech industry and possess vast expertise in AI, security, defence, identity, and more.

The development of Hedera is commissioned by the HBAR Foundation and governed by the Hedera Governing Council, consisting of up to 39 enterprises, which include Google, Dell, and IBM. About 11% of the total HBAR supply was initially distributed to accredited investors through a Simple Agreement for Future Tokens (SAFT) crowd sale.

How does Hedera work?

Hedera Network Services

The Hedera platform can be divided into three separate frameworks, called Hedera Network Services, that contribute to the network’s functioning:  

• Hedera Token Service (HTS) – allows for the configuration, management, and transfer of native fungible and non-fungible tokens (NFTs).
• Hedera Consensus Service (HCS) – allows the Hedera network to record transactions and other event data logs (such as governance decisions and tracking supply chain assets).
• Hedera Smart Contract Service – allows developers to deploy smart contracts in various programming languages (including Ethereum’s native Solidity language) to create dapps on Hedera.

The Hashgraph Gossip Protocol is the consensus algorithm that allows the three main components that make up Hedera Network Services to function.

Hashgraph Gossip Protocol Consensus

Hedera’s Hashgraph Gossip Protocol is a DAG-based distributed ledger technology built to ensure that no single node, or group of nodes, can control the network or interfere with its consensus.

To ensure all nodes agree on the network’s transaction history and the validity of current transactions, data is sent between network nodes (called gossiping) and verified for correctness (called gossip syncing).

Nodes then generate timestamped events on-chain to record that gossip syncs have been verified. After this is carried out for each consensus round (a time-based portion of network procedures) the process starts anew and repeats, ensuring its balanced operation.

Hedera Use Cases

Hedera is focused on the development of numerous enterprise solutions including those required for healthcare, supply chain, financial services, and energy and sustainability.

Hedera is also designed as a network service provider for the operation of private closed blockchain systems (permissioned blockchains) often used by institutions, enterprises, and governments that are completely independent from Hedera’s permissionless public blockchain which uses the HBAR token (similarly to open public blockchains like Bitcoin and Ethereum).

Additionally, Hedera is built to service uses related to decentralized identity, remittances, and fraud mitigation, as well as for decentralized finance (DeFi) apps, play-to-earn (P2E) gaming, and metaverses.

How does HBAR work?

Hedera uses a Proof of Stake (PoS) consensus mechanism that allows users to stake their HBAR coins to run a validator node in exchange for rewards and improved network security.

Directed acyclic graph protocols, like those employed by Hedera, use a graph-like structure where transactions are developed simultaneously. In a DAG, the term “acyclic” means the protocol does not use cycles. Therefore, during consensus, DAGs do not repeat or operate in loops. Instead, they are “directed” and append blocks by moving in one direction (though not linearly like a traditional blockchain).

Although Hedera’s consensus is based on a DAG, it also employs a staking mechanism based on Proof of Stake. On Hedera, stakers are not required to choose a specific amount of HBAR to stake on their account like a traditional PoS system. Instead, the entire balance of the account is staked automatically to the selected node or account and does not employ the “bonding” (locking in) or “slashing” (penalizing) of tokens.

As of March 2023, the minimum stake required to run a validator node on Hedera is approximately 460 million HBAR, with a maximum stake of about 1.85 billion. Each of the 27 enterprises that provision Hedera’s governance run a validator node on the network, though this number can eventually increase to 39 as more organizations join the Hedera Governing Council.

Individuals who wish to contribute to the network security and cannot reach the minimum stake can delegate their HBAR to other nodes in a process called “proxy staking”. In return, a portion of the rewards is allocated to them based on the percentage of HBAR delegated.

HBAR is also used to fulfill additional services on the network including as a payment medium for dapp development, transaction and smart contract fees, and network governance voting.

Token distribution

The maximum supply of HBAR is capped at 50 billion tokens. At launch, all the tokens were distributed and were subject to a vesting schedule of 15 years. Of these tokens, 23.9% were allocated to ecosystem and open-source development, 22.26% to purchase agreements (early investors), 14.77% to network governance and operations, 7.74% to initial development costs and licensing. This leaves an additional 31.33% unallocated that will be used based on a voting by the Hedera Council.

HEDERA ESSENTIALS

• Hedera is a smart contract platform built using a directed acyclic graph (DAG) design, as opposed to a traditional linear blockchain, intended to provide a decentralized solution to private enterprises.
• The Hedera network is built for the creation of decentralized applications that fulfill a wide range of use cases including supply chain management, healthcare, DeFi, payments, finance, banking, stablecoins, and CBDCs.
• The HBAR coin is Hedera’s native token, and is used as payment medium for network governance, application development, smart contract use, and transaction fees.

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