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Hedera Cryptoeconomics

Written by: Hedera Hashgraph

Abstract

Dr. Leemon Baird, Chief Scientist & Co-Founder at Hedera Hashgraph, discusses the cryptoeconomics of Hedera Hashgraph, including details around proxy staking, fees, and node payments on the Hedera public network. He also touches on some of the obstacles of cryptoeconomics seen across all distributed public ledgers, and how Hedera Hashgraph overcomes them.

Speaker

Dr. Leemon Baird | Co-Founder and Chief Scientist | Hedera Hashgraph

Hedera18 Keynote: Hedera Cryptoeconomics with Dr. Leemon Baird

Slides https://www.slideshare.net/HederaHashgraph/hedera-cryptoeconomics-with-dr-leemon-baird-hedera18 Speaker Dr. Leemon Baird | Co-Founder and Chief Scientist | Hedera Hashgraph Abstract Dr. Leemon Baird, Chief Scientist & Co-Founder at Hedera Hashgraph, will discuss the cryptoeconomics of Hedera hashgraph, including details around proxy staking, fees, and node payments on the Hedera public network.

In this half-hour talk, Dr. Leemon Baird describes the cryptoeconomics of Hedera Hashgraph. Giving us an “under-the-hood” look into the Hedera’s design, Dr. Baird articulates how Hedera uses transaction fees, node payments, and data micropayments to compensate hard-working nodes and incentivize active and positive participation in the network.

Dr. Baird begins by outlining Hedera’s cryptoeconomic philosophy: that aligning pricing with resource usage creates a fair, efficient, and sustainable economy. When a user stores a file, for instance, they should not pay a one-time fee for lifetime storage. Instead, the user should fairly compensate the network for the resource usage, paying in proportion to the size of the file and the time stored.

Following this philosophy of fair compensation, Dr. Baird breaks down Hedera’s cryptoeconomics into three primary components:

  • Fees: A client compensates the entire network for executing a transaction.
  • Data Micropayments: A client pays a node for information.
  • Payments: Hedera pays staking nodes and users for contributing to consensus.

Cryptoeconomics1

Hedera Fees: [4:21]

In this section, Dr. Baird addresses transaction fees. When users issue transactions, they communicate with a single node. That node accepts their transaction, gossips to the network, and requires the entire network to come to consensus. Then, the network executes the transaction or provides the desired service. To compensate the node and the network for their work, clients must pay a transaction fee comprised of a node fee, service fee, and network fee.

Cryptoeconomics2

The node fee and service fee are straight-forward. The client compensates the node for initiating the transaction, and pays the network for the service provided.

To prevent malicious attacks, the network fee is slightly more complicated. The network fee exists to compensate the entire network for gossiping the transaction and coming to consensus. At first, it might make sense to have the client directly pay the network for their expense. However, if a node were to gossip a fake transaction, there would be no client to pay for the network’s discussion of that transaction. Therefore, to ensure the network is always paid for its resource usage, Hedera splits the network fee into two steps:

  1. The client pays the node the network fee.
  2. The node passes on the network fee to the network (or pays the network fee if the client doesn’t exist).

Cryptoeconomic3

Because of this two-step process, Hedera Hashgraph ensures that the malicious node must pay the network when they issue a fake transaction. The network always gets paid for its resource usage, and the node is monetarily punished if it makes up a fake client.

Hedera Payments: [15:24]

Next, Dr. Baird tackles node payments. To compensate nodes for contributing, and to incentivize positive behavior, Hedera pays nodes for their work.

Cryptoeconomic4

Hedera Hashgraph uses a proof-of-stake system. In other words, the value of a node’s vote towards consensus is proportional to the amount of cryptocurrency that node stakes on the system. The greater the stake, the more economically invested the node is in the success and health of Hedera Hashgraph. Unlike other distributed ledger technologies, Hedera Hashgraph does not slash, tax, bond, or lock-down a node’s stake. The stake can be changed or spent at any time, and only serves as a measure of that node’s investment in the system.

As Dr. Baird describes, because nodes with a greater stake contribute more to achieving consensus, they should be compensated more. Therefore, Hedera pays contributing nodes with an amount of cryptocurrency (hbar) proportional to their stake.

Clients can also stake their hbar without founding their own node. This process, called proxy-staking, allows clients to contribute their cryptocurrency to the stake of someone else’s node. Proxy-staking, just like normal staking, contributes to the networks consensus, and therefore should be rewarded. In this case, the proxy-staking client and the node who receives the proxy-stake split the payment.

Cryptoeconomic5

Because of this proxy-stake payment, clients are incentivized to stake their hbar on productive nodes, and productive nodes are rewards by receiving more proxy-stakes. Aligning the resource usage with pricing and cost builds a healthy network which incentivizes participation and productive nodes.

Data Micropayments: [22:09]

Finally, Dr. Baird delves into the specifics of querying and data micropayments. When a client queries a node, that node uses a small amount of resources to retrieve the requested information. The client compensates the node directly for this resource usage through a micropayment.

Because queries happen independently of the network, the node which a client queries need not be a part of the main network (mainnet). To allow queries which do not slow down the mainnet, Hedera Hashgraph supports mirror nodes, or nodes that record their own copy of the public ledger but do not participate in consensus. Mirror nodes form a network separate from the main network, and do not interfere with the mainnet at all; they do not send information or requests to mainnet, and only receive information that is pushed to them.

Clients can query these mirror nodes to receive official information without interfering with mainnet. Further, any participant can set up their own mirror node. While users will not be paid by Hedera for their mirror node, Dr. Baird enumerates several reasons someone may want to set up a mirror node:

  • To provide free access to the ledger for their company or organization
  • To keep an official archive of the ledger over time
  • To build a business around the data (for instance sending paying subscribers an update when certain information is added to the ledger or changed)
  • To be a nice person and give the world the information for free

Cryptoeconomics6

Summary: [27:30]

To conclude his talk, Dr. Baird again returns to Hedera’s economic philosophy. Hedera Hashgraph aligns incentives, payments, and fees with resource usage in order to provide a fair and sustainable service. Hedera incentivizes nodes with stake-proportioned payments, levies transaction fees which reward hard-working nodes and disincentivize malicious activity, and charges data micropayments to compensate nodes for responding to queries.

To the end user, all of these payments and fees are simple; they are paid or charged a single value. However, these decisions are not arbitrary. Behind the scenes, the crypto-economics of Hedera Hashgraph are complex solutions purposefully designed to incentivize good behavior and construct an effective network.

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