By Crystal Stranger, Co-Founder, PeaCounts
Image by Hedara Hashgraph
Faster transaction times are the dream of any crypto trader. If you have traded much, you have certainly spent what felt like an eternity staring at your screen for a transaction to clear on an exchange or between exchanges. This lack of reliable transactions is certainly a barrier of growth in the crypto investment world, and a problem that the new distributed ledger company Hedera Hashgraph aims to solve. They actually take this claim so far to say that this technology will build a new internet. But whether it will make that mark is if developers choose to use Hedera over the many other new platforms launching in the crypto world.
Speed is one of the main appeals of Hedera, whose speeds are expected to surpass 250,000 transactions per second! When compared to Ethereum processing 15 transactions per second the increase in speed is exponential. One of the reasons Hedera can achieve this speed is because it’s not structured like a true blockchain. The technology underlying Hedera is actually a Decentralized Acyclic Graph (DAG). In the simplest of ways of thinking about it, a DAG is like a field of blocks rather than a chain. Sorting is done in what, from an outside perspective appears random, but is following a computer-controlled optimization, much like driving apps that send you on the route with the least traffic.
A differentiator of DAGs, compared to blockchain, is that the transactions are not permanently archived. With Hedera this means that only the past ten transactions will remain on the DAG, and data is deleted regularly as transactions override this. While this is a benefit to companies building data-heavy applications on blockchain, such as messaging services, it is a disadvantage to a companies that rely on immutable records. For example, PeaCounts (the company I co-founded), is an automated accounting solution that leverages the encrypted archival of source documents, and accessing massive amounts of permanently archived data is the primary reason we are implementing blockchain into certain parts of our system. Thus if a company is like ours and needs the data storage aspects of blockchain, switching to a DAG based system is not an option.
Proofing, meaning the method that verifies transactions in the network, is via the environmentally-friendly Proof-of-Stake (POS). This uses significantly less computer resources and is therefore much more efficient than Proof-of-Work systems such as Bitcoin. But unlike other POS networks, only a two-thirds consensus is required before a transaction is approved. This further increases efficiency and creates a very strong platform for powering tokens.
Image by CryptoKitties
Everyone in the crypto development world has been searching for a more robust platform ever since CryptoKitties overwhelmed the Ethereum network, slowing it to a snail’s pace. Surely Ethereum is solving this via sharding, or breaking up each transaction into smaller pieces that are easier to verify. However, it likely will be years before this is fully implemented and transaction speeds improve.
One of the criticisms of cryptocurrencies at large now, is that the cost of completing small transactions is higher than the actual cost of the purchase. It doesn’t make any sense to spend $1 in fees when making a $0.50 purchase. Hedera solves for this issue, allowing for micro transactions to be made with minimal cost, getting us one step closer to a functional cryptocurrency.
The Hedera platform is an interesting concept as far as payment for staking is concerned. Nodes are the connecting points between transactions, i.e. they take in an input, perform a function, then provide an output. Users who stake a node by providing computer resources will be able to share the earnings they receive for transaction processing with proxy stakeholders, meaning other holders and users of the tokens. Those who proxy by owning and using tokens can select in their wallet which node they want to process their transactions, giving incentive to nodes to attract proxies. The way this is expected to play out is that those who create nodes will advertise using websites and social media to incentivize proxies to join their network, by sharing some portion of the revenues with them or providing other benefits, like reduced fee transactions. Similar to how you earn interest in a bank, or receive other benefits like free wires and safety deposit box.
There is a lot of controversy surrounding Hedera because it is not open source. Much how Ripple is disliked in the crypto community there’s likely to be similar sentiments of distrust in Hedera, despite its excellent technology. Ken Anderson, chief developer at Hedera, defends his company’s position saying, “we needed to patent our technology to protect it.” He added that at a later date they may make the decision to go open source.
Image by Visa
“One of the problems with decentralized systems is that the decisions made in the system are controlled by just a few nodes” says Anderson. Instead Hedera will be governed by a council of 39 members, made up of executives from Fortune 500 companies similar to the Visa Foundation model.
The reason for this, he says, is to create trust in the system by determining the decision making structure. On true decentralized systems the power tends to shift naturally to a few miners who hold a large stake. By creating this council, it should make the system more secure than mined cryptocurrencies and prevent the need to ever have forks in the future, he believes.
From my experience investing in cryptocurrencies, this model of governance may make investors and blockchain developers nervous, similar to how there is a lot of dislike of Ripple on social media. This may not be an issue going forward as mainstream adaptation of blockchain and other distributed ledger technology catches on. However, attracting developers in early stages may prove a problem.
Hedera is planning to work with developers to distribute tokens so as to have them in the hands of those who will use the system, although the specifics of this are not available yet. “The goal is in ten years to have 100% of tokens in circulation,” says Anderson.
This may make investors a bit uncomfortable though, as this guarantees dilution of the outstanding tokens before the network is fully operational. However, this step is essential to create a DAG model that is functional as there must be substantial traffic before the system runs efficiently. Without a large user base of developers a platform like this will not be successful. There also is much competition in the distributed public ledger area, so it is very difficult to anticipate which of the many new platforms will be utilized heavily in the future.
However you feel about centralization, one thing all in the crypto world can agree on is that Hedera is an ambitious project with some great technology behind it. There are certainly some applications that only make sense on a DAG, and some that are better suited for blockchain. But the added technological choices should help developers implement new projects that we have not even dreamed of yet. Hedera, or some other hashgraph system, may indeed open the doors to a new internet.
Crystal Stranger, EA, author of The Small Business Tax Guide (Clear Advantage, 2014), wanted to help her tax clients who struggled when it came to bookkeeping. Looking to help entrepreneurs focus on business instead of finances, she co-founded PeaCounts, an automated accounting software using AI and blockchain. PeaCounts is tokenizing their payroll system using the token PEA with an ICO starting in July.