What Is Hedera (HBAR) and How Does It Work?

What Is Hedera (HBAR)?

Hedera is a publicly accessible distributed ledger network. That means it’s a network where multiple computers work together to keep a shared digital record. It’s similar to a blockchain, but Hedera does not use a regular chain of blocks for consensus.

Instead, the network uses hashgraph. That’s how nodes, or computers in the network, agree on the order of transactions and when they were processed.

On Hedera, tokens can be issued, smart contracts can run, and messages can get a fixed order and timestamp. Smart contracts are programs that can be executed on the network. Hedera uses the Ethereum Virtual Machine for this, among other things, which means Solidity-based smart contracts are supported.

HBAR is Hedera’s native cryptocurrency. You use HBAR, among other things, to pay transaction fees. HBAR also plays a role in the network’s proof-of-stake model.

So Hedera is open for public use: anyone can create an account and use or deploy applications. That does not mean, though, that anyone can just run a consensus node on the mainnet right now. Those nodes are permissioned, meaning they’re approved in advance.

Key Takeaways

• Hedera is a publicly accessible distributed ledger network with hashgraph consensus.
• HBAR is the native token for transaction fees and staking within the network.
• Hashgraph uses gossip-about-gossip and virtual voting to reach consensus.
• Consensus nodes on the mainnet are currently permissioned.
• The Hedera Council governs formal decisions about the network.

How Does Hedera Work?

When you send a transaction, you first sign it and send it to a Hedera node. That node checks, for example, whether you have enough HBAR to pay the transaction fees.

After that, the node spreads the transaction further through a gossip protocol. Simply put: nodes keep sharing information with other nodes, so the information spreads quickly across the network.

Next, the nodes validate and order the transactions using hashgraph consensus. Once there is consensus, a transaction gets a fixed place in the order and a consensus timestamp. That timestamp shows when the network says the transaction was processed.

Hedera uses proof-of-stake. A node’s influence in consensus depends on how much HBAR is staked to that node. To reach consensus, nodes together must represent more than two-thirds of the total voting weight.

There is no proof-of-work mining on Hedera. So the network does not use miners competing with computing power to create blocks.

Hedera (HBAR) Overview

What Is Hashgraph on Hedera?

Hashgraph is the consensus mechanism Hedera uses. Where a regular blockchain usually puts transactions into sequential blocks, hashgraph works differently. Nodes continuously share information with each other and keep track of what information they have already received and which node it came from.

One important part is called gossip-about-gossip. When a node passes along information, it shares not only new information, but also two hashes. Those hashes point to earlier information the node already knew. A hash is a unique digital fingerprint of data.

This creates a shared history that shows how information moved through the network. Nodes can use that to figure out who already had which information and when that information was received.

That’s where virtual voting comes in. Nodes do not need to send separate messages to each other for every voting round. Instead, they can calculate how other nodes would vote based on the shared communication history. That is the core of virtual voting.

Hashgraph is designed for asynchronous Byzantine fault tolerance, often shortened to aBFT. This means the consensus mechanism can keep working even if some nodes make mistakes, stop responding, or send information with delays.

A transaction’s consensus timestamp is based on the median of the times when nodes first received that transaction. The median is simply the middle value when you line up all the times in order.

What Role Does HBAR Play Within Hedera?

HBAR has two important functions within Hedera. First, you use HBAR to pay transaction fees. Think of things like sending tokens, running smart contracts, and storing data.

Second, HBAR plays a role in Hedera’s proof-of-stake mechanism. The amount of HBAR assigned to a node partly determines how much weight that node has in the consensus process. The more HBAR assigned to a node, the greater that weight.

You can assign your full HBAR balance to a node for native staking. You do not need to lock up your HBAR separately for that. There is also no lock-up period, so your HBAR stays available.

Hedera does not use in-protocol slashing for native staking. Slashing is a mechanism where part of your assigned crypto can be taken away as a penalty. That does not happen through the protocol on Hedera. That does not mean staking is completely risk-free, though: the value of HBAR can change, and the terms for staking rewards can also change.

The transaction fees paid within Hedera are distributed among nodes, the Hedera Treasury, and staking accounts.

How Is Hedera Governed?

Hedera is governed by the Hedera Council. This is a group of organizations that together handle the network’s formal governance. The Council can have up to 39 members.

Each Council member gets one vote on decisions that are put to the members. The members decide, among other things, on changes to the network software, network pricing, and Treasury management.

New members are chosen by the existing Council members. Members serve terms of at least three years and can serve a maximum of two consecutive terms. There is one exception for the original Council member: it has a permanent seat.

Council members are required to run a node. That is why the consensus nodes on the mainnet are run by Council members or designated affiliates.

Important to know: HBAR holders do not vote directly on-chain on these formal Council decisions. So the governance works differently from a system where all token holders can vote directly.

How Did Hedera Start?

The technology behind hashgraph came before Hedera itself. Leemon Baird developed the innovation that later became known as hashgraph between 2012 and 2015.

Leemon Baird and Mance Harmon then founded Swirlds to keep developing the technology. The first hashgraph white paper was published on May 31, 2016.

Hedera was formed in 2017 with funding from a seed round from Swirlds. Leemon Baird and Mance Harmon are considered the founders of Hedera. The name Hedera was chosen in 2018.

The Hedera mainnet went live for early access and testing on August 24, 2018. On September 16, 2019, the mainnet became publicly accessible. From that point on, anyone could create an account and developers could deploy applications.

What Are the Benefits of Hedera?

One notable feature of hashgraph is that there is no leader, miner, or block producer with a privileged role in deciding transaction order. Consensus comes from the shared communication history between nodes.

Virtual voting is another important part. Nodes do not need to send extra voting messages for every round, because they can infer voting results from the information that has already been shared.

Once consensus is reached, transactions get a final consensus order and a consensus timestamp. That gives applications clear information about the order of events.

Hedera also supports Solidity-compatible smart contracts through the Besu Ethereum Virtual Machine. In addition, the Hedera Consensus Service can give messages a verifiable order and timestamp.

The source code for the consensus node and related software is available under the Apache-2.0 license.

What Are the Downsides of Hedera?

The consensus nodes on the Hedera mainnet are currently permissioned. You can use the network, but not everyone can run a consensus node without approval. That means the operational consensus layer depends on a limited group of approved node operators.

Governance is also concentrated in the Hedera Council. The Council has up to 39 members, and HBAR holders do not have a direct on-chain vote on formal Council decisions. The permanent seat for the original Council member is also an exception to the normal term limits.

With smart contracts, costs can vary. EVM gas depends on how much computing and storage resources a smart contract uses. Because of that, those costs are not always the same.

The maximum supply is 50 billion HBAR, and all HBAR were minted at launch. Some of that supply is released from Treasury accounts according to governance decisions.

Conclusion

Hedera is a publicly accessible distributed ledger network with HBAR as its native cryptocurrency. You use HBAR for transaction fees, and it plays a role in proof-of-stake because stake affects the consensus weight of nodes.

The technical foundation of Hedera is hashgraph, not a linear blockchain with blocks. Through gossip-about-gossip and virtual voting, nodes reach consensus on the order and timing of transactions.

The main trade-off is that the network is open for public use, while consensus node operation on the mainnet currently remains permissioned. Formal governance is also in the hands of the Hedera Council, not directly all HBAR holders.