Hedera Hashgraph Vision
Hashgraph is a relatively new consensus protocol that aims to process transactions faster than existing networks. Hedera layers Proof-of-Stake for consensus weighting, a fee & rewards model, a cryptocurrency, and the two key HCS and HTS services on top of hashgraph, Hedera’s consensus algorithm. Since hashgraph has the potential to process transactions at a comparatively efficient rate, Hedera intends to be a platform that can support high-volume use cases, such as micropayments, data integrity, and tokenization. The network also supports a virtual machine that can compile smart contracts written in Solidity, similar to the EVM. Hedera intends to be compliant across jurisdictions by offering native support for optional KYC and AML checks via its “Verified Identity” mechanism.

Hedera will launch in a permissioned model with only the governing members running nodes. Over time, as the distribution of the network’s native token, HBAR, improves, the node membership will transition from permissioned to fully permissionless, where any network participant can operator a Hedera consensus node.

Entities Behind the Network
Hedera Hashgraph LLC is a US-based entity that is governed by 39 term-limited global enterprises across multiple industries. These entities manage Hedera’s consensus nodes while collaborating to determine the protocol’s future direction (i.e., Hedera’s near-term governance model). Governing members are responsible for council membership, regulating network rules and tokens, and approving changes to the protocol. They also elect subcommittees that will operate traditional corporate functions such as Legal, Finance, and Marketing departments. Governing members receive fees from operating nodes to compensate for their security and governance contributions, but they do not take profits from the entity in their role as members.

Swirlds is a separate company that owns the intellectual property of the hashgraph consensus algorithm and is an equal-weight governing member. Swirlds has licensed the technology to Hedera Hashgraph. The two entities will use the associated patent rights to legally prohibit anyone from forking the code and creating a competing platform and currency. While the consensus algorithm is not open source, it is “open review,” meaning anyone can verify there are no backdoors in the code. Additionally, Hedera’s platform and services code, as well as developer tools, are all open source under the Apache 2.0 license. Using GitHub developers can make a “Hedera Improvement Proposal” (HIP) which members of the community can vote on.

The native token of the Hedera mainnet is the HBAR. This token serves the following purposes:
Transaction Fees: Clients pay fees in HBAR to consensus nodes for processing and timestamping transactions and for any subsequent maintenance, such as storing a file or token balances. Fees serve to inhibit DoS (Denial of Service) attacks by making such attacks financially prohibitive. Fees are denominated in USD but charged in HBAR. The exchange rate between the two is updated hourly to give clients stability in prices irrespective of fluctuation in HBAR price.
Network Security via Staking: A node’s influence towards the determination of consensus timestamp and order is weighted by the number of HBARs the node itself has in its account and (to be implemented at a future date) the number of HBARs that other non-node accounts proxy to that node.
Incentivizing Security (Staking Rewards): Nodes (and those that proxy their HBARs to nodes) will receive daily reward payments as per the participation in validating transactions during that period.

The Hashgraph consensus algorithm is used for consensus on the Hedera Mainnet. The Hashgraph consensus algorithm is Asynchronous Byzantine Fault Tolerant (ABFT). Every node participates in every round of consensus, meaning it doesn’t rely on a single node or “leader” to order transactions each round. The consensus is ”fair in that it doesn’t allow a leader to censor or unduly delay a given transaction.

In addition to ordering transactions, Hashgraph also issues a consensus timestamp for each transaction, calculated as the time at which the transaction reached a majority of the network. Once the consensus timestamp is determined then the transaction is final, which contrasts most Proof-of-Work (PoW) networks that rely on probabilistic finality. A formal proof of the consensus algorithm is available here. Hedera’s fee model is not auction-based, a common model among most networks for submitting transactions. Without the concept of a fee auction, users can’t pay more in fees to increase the likelihood of their transactions being ordered before transactions that may have been submitted earlier.

Hashgraph aims to process a high number of transactions per second (TPS) with low latency. The team has said Hedera’s hashgraph consensus allows it to support over 10,000 transactions per second. The nature of these transactions has been disputed, as the 10,000 number may only represent cryptocurrency transactions and not any smart contract interactions. These disputes can be found here and here, while the Hedera team has issued a few rebuttals here and here.

As for how Hedera achieves this reportedly high TPS, it leverages two core components within Hashgraph: gossip about gossip and virtual voting. These components, along with weighting votes by stake, enable nodes to determine the consensus order of transactions. More information can be found here.

Hashgraph Consensus
Hedera uses hashgraph consensus, an alternative to blockchain consensus mechanisms. It achieves a lower latency on transaction finality because once consensus on the timestamp and order of transactions is reached, those transactions are applied to the state in that order. Hashgraphs attempts to remove the reliance on fee-based auctions for transaction inclusion, which can lead to greater fees when the native token fluctuates in price and the potential for higher levels of MEV (miner extractable value).

Consensus Nodes
Hedera’s public ledger being stored and run by the Hedera Governing Council. While running mainnet node is currently limited to Council members, Hedera eventually plans to make its network permissionless, allowing any participant to run a consensus node. Hedera nodes come to consensus on the validity and order of transactions. When the network transitions to a permissionless state, the influence of each node towards consensus will be weighted by the number of HBAR in their account. Hedera will run PoS (Proof-of-Stake) but without any stake bonding or slashing penalties. Hashgraph will function as the consensus and security layer, while the PoS layer will deter DoS (Denial of Service) attacks.

Consensus nodes (currently run by Council members) will receive daily payments to compensate for their bandwidth, storage, and computing costs. These daily payments will be proportional to the stake the nodes have designated. Other accounts that proxy their stake to a node will receive smaller payments to incentivize them to select valid nodes.

Mirror nodes offer a cost-effective way to query historical data without trust loss. The key network services are cryptocurrency, consensus, and token services.

Network Fees
Clients pay fees in HBARs for the network to process a transaction. The network attempts to keep fees low. For instance, transferring HBARs between accounts costs approximately $0.0001 USD according to the team. Fees are denominated in USD but charged in HBAR. Clients are given stability in fees since the network updates the exchange rate between HBAR and USD every hour to reflect the market price.

Hedera is owned and governed by the Hedera Governing Council, which consists of up to 39 term-limited organizations and enterprises. Council members are committed to running consensus nodes and governing software changes.

Each member of the Hedera Governing Council has an equal vote when deciding whether to accept an improvement proposal or change to the Hedera platform’s codebase. All members have a three-year maximum term, with up to two consecutive terms. Swirlds, the creator of the hashgraph algorithm, has a permanent seat and equal vote. After initial members are selected by Swirlds, the council’s Membership Committee will source replacements.

The Hedera network separates governance from consensus. The governance model is more traditional, using a model pioneered by National BankAmericard Inc. (now VISA) in 1968. It is designed in a way to incentivize the governing council to do what’s in the best interest of the Hedera network and discourage a single company from assuming total control. It also aims to prevent the Hedera Governing Council from being unduly influenced by individual members or node operators.

The hashgraph consensus algorithm is proprietary but “open review;” therefore, the network and its cryptocurrency cannot be forked by third-party developers, but the underlying code is available to the public for review.

The 27 current Governing Council members include:
abrdn
Avery Dennison
Boeing
Chainlink Labs
DBS
Dentons
Deutsche Telekom
DLA Piper
EDF
eftpos
FIS
Google
IBM
IIT Madras
LG
LSE
Magalu
Nomura
ServiceNow
Shinhan Bank
Standard Bank
Swirlds
Tata Communications
Ubisoft
University College London (UCL)
Wipro
Zain Group