Hashgraph: How to create a cryptocurrency world
Paul Madsen of Swirlds talks about the plans to go big and public with Hashgraph.
Hashgraph emerged relatively recently as one of a small handful of directed acrylic graph (DAG) cryptocurrencies. DAG is widely regarded as the next-generation successor of blockchain architecture, potentially able to deliver the same functions much more efficiently.
The most widely known DAG cryptocurrencies at this point are probably Nano and IOTA, both of which are still in the process of ironing out kinks in their complex systems. As such, Hashgraph caught a lot of attention when it sprung up abruptly, with an entirely new kind of high-performance DAG system that has already been extensively developed.
At this stage, Hashgraph is still a mostly centralised system. Hashgraph is owned by the Swirlds company and licensed out to companies that want to use their own version. However, it's also going public with a decentralised and open system as well as its own cryptocurrency.
The lay of the land
Hashgraph is the name of the software. It's a high-performance DLT system that could be used for a wide range of applications where existing blockchain systems might fall down.
Swirlds is the company that created the software. It licenses the program to third parties who pay a subscription fee to use it and to develop their own applications on it, much like any other corporate software system.
Like other DLTs, Hashgraph offers an element of transparency and the fairness of decentralization, Madsen explained, and a degree of immunity to manipulation from the inside and outside. At the same time, it's also extremely fast and has been demonstrated to perform 50,000 or 100,000 transactions per second depending on the node arrangement, with seconds of latency.
"We think we have a unique combination of characteristics that enable a set of use cases that haven't been viable so far," Madsen explained. He gives the example of exchanges of any kind.
"They recognise the value of a fair matching algorithm," he says. "Any place where you have multiple people theoretically bidding on some resource, you need to guarantee fairness."
Stock exchanges and other marketplaces have already been moving towards blockchain architecture to get the benefits of increased transparency and efficiency, and some might consider licensing the Hashgraph software to improve efficiency, better satisfy clients and boost their profit margins.
The new world
Swirlds also intends to create a public version of the platform with its own cryptocurrency and governing structure, where anyone who wants to use it can do so. This type of public network system is that "world changing decentralisation" paradigm that's in vogue at the moment. It's also the same kind of system that's used by bitcoin, Ethereum and most other big names in crypto.
This is much more economically, socially and legally challenging than simply creating and licensing a piece of business software the way Swirlds currently does. It essentially means creating an entirely new, geographically diverse decentralised nation; being one's own central bank and issuing one's own cryptocurrency; and finding a system that can maintain the financial and social stability of the newly created world. It's also much more technically complex because laws of the land need to be programmed into the system and because it involves running a network "in the wild" rather than in the sterile confines of a business. In the real world, it will be subject to a constant stream of thieves, hackers, takeover attempts, attacks from rival networks and everything else.
One of the main criticisms of Hashgraph so far is that it's running on "easy mode" by focusing on closed business environments rather than a public network, with some arguing that Hashgraph won't be able to maintain its high performance as a public network.
Madsen is more optimistic.
He laid out how Swirlds plans to bring Hashgraph into the public as a decentralised network – or how to build an entirely new world, if you're feeling dramatic.
Step 1 - Governance
Who's going to rule the world?
Different creators have their own visions of the world they're trying to create, and it all starts (and ends, if things go poorly) with power structures.
- Bitcoin can be viewed as a semi-anarchic libertarian system where no one has any real power. The upside of this is that it's arguably as free as it gets. The downside is that bitcoin's history is full of ideological schisms. Its community has shredded and fragmented over time, which has slowed its development, brought in unnecessary competition and lost many of its users.
- Ethereum's core developers focus on stable decentralisation at all costs. The system is deliberately designed to incentivise its participants to stay together and collectively decide on the way forward, while avoiding the possibility of power consolidating. The upside is that it's relatively sustainable and immune to any kind of hostile takeover. The downside is powerlessness in the face of unfortunate circumstances and some limitations on Ethereum's usefulness as a business tool.
Hashgraph aims for a balanced approach through a kind of elected council whose members are deliberately selected for their diverse objectives, geographical locations and roles. This is the Hedera Council, and the council members will serve three-year terms. Swirlds granted the Hedera Council irrevocable rights to operate Hashgraph as a public network and to rule over the Hashgraph world as a kind of democratic oligarchic technocracy.
Madsen suggests that the 39 council members will be composed of a diverse range of banks, non-profits, government organisations and others, chosen specifically to ensure a strong diversity of views and, in his words, to prevent the formation of a "cabal".
Swirlds will be one of the initial 39 members, and it will be just another council member without any more authority than any of the others.
The system is designed to operate as a blend of centralised and decentralised elements. The decentralised part is designed to keep the system in the hands of everyone, rather than being turned into a tool to benefit the few. Meanwhile, the centralised part, in the form of the 39 council members, is designed to imbue the ecosystem with direction, guidance and a certain level of top-down authority for solving problems and promoting innovation within the network.
A super majority of 26 votes from the council is required to take actions. The numbers aren't set in stone though. If circumstances necessitate it, the number of councillors could be increased later. At the same time, if a lot of the councillors are meeting behind closed doors ahead of official meetings and creating some kind of cabal, then the council might take action.
"We’re very conscious that the long term health of the network requires we do not have undue influence," Madsen explained. "We should not have inappropriate influence over the public ledger when it’s running and healthy and viable."
But until then, the Swirlds and Hedera will be taking a more central and active role in the technical health of the network. These 39 council members are also expected to be the initial node operators on the network, but when the time comes, anyone who wants to get involved may be able to run a node and contribute to the network.
Step 2 - Technicals
Without suitable architecture, the world is doomed.
The two main elements that a system needs to address are speed and security. All public cryptocurrency networks have strong security. Those that don't, die quickly.
But this often comes at a cost to speed. Bitcoin is about as secure and stable as they come, but it tends to chug along at a completely inadequate 7-15 transactions per second. With up to 100,000 transactions per second, Hashgraph is one of the faster systems around.
"We're fast because we're efficient," Madsen says. In this case, efficiency refers to the kinds of data that are passed around the network, and how they get passed around.
Hashgraph uses a "gossip to gossip" system. Essentially, each transaction will describe itself as it emerges, and then the nodes will pass this description along to each other until the entire network gets on the same page and knows about that transaction.
In Hashgraph, nodes are just programs that listen out for transactions and then talk about them with other nodes. In contrast to traditional blockchains, which pack transactions into blocks for later processing, Hashgraph simply lets transactions wash through the network freely as they're made.
The trick is that the actual amount of data needed to effectively describe a transaction is extremely small. By keeping them small, thousands of transactions can be passed around the network very quickly.
"If the pipe is fast and nodes have plenty of bandwidth, nodes can run close to that limit," Madsen says.
Essentially, the Hashgraph system packages transactions very efficiently, and simply lets nodes dedicate more power to gossiping about transactions and thereby reaching consensus, rather than wasting resources to compete with other miners, package blocks or anything else.
The problem comes when bad actors enter the network or things go wrong, both of which are guaranteed to happen on a public system.
Consider two relatively common types of attack:
- DDoS: Someone spams the network with transactions. On an improperly secured network, this might slow down the system so much that someone can quickly spend the same coin multiple times because they managed to initiate multiple transactions before the network realised they had already spent it.
- Sybil: Someone creates multiple nodes with the intention of gaining control over the network. If the same person, or group of people, end up controlling a considerable portion of nodes, they can effectively control the entire network and just give themselves money or do anything else.
Different systems might defend themselves in different ways:
- DDoS: A transaction fee of just a fraction of a cent can make this prohibitively expensive for attackers.
- Sybil: A system for manually approving nodes (although trusting someone to approve nodes puts all the power in their hands), or requiring nodes to hold some funds as collateral can similarly make this untenable for attackers.
Hashgraph protects against the former by having extremely high throughput plus implementing marginal transaction fees, and the latter by starting off with trusted nodes only (the 39 council members).
However, the Hedera Council will eventually release Hashgraph cryptocurrency tokens. These will be put up as a kind of collateral by node operators. Requiring a stake can make Sybil attacks untenable in a suitably distributed system with enough nodes and also ensures that node operators have some skin in the game.
If the network is successfully attacked, the value of the token will tank. So, even if it was feasible, there would be little incentive for stakers to get together and take over the network's nodes. Node operators will also be paid with the transaction fees, compensating them for the energy and bandwidth they put into maintaining the network and perhaps giving them some net gains on top.
A healthier network means more transactions and a more valuable token, which further motivates all participants to do the right thing, and promotes a secure and healthy network.
Madsen also points out that stakers will have their votes weighted according to their Hashgraph token holdings, which naturally gives a slightly louder voice to those with more skin in the game.
Step 3 - The Economy
What's a world without a functioning economy?
Crypto-patriotism might be enough for some, but you need money to get most people on the same page and to reward them for contributing to the glory of your crypto world. The technical elements of the world are integrally tied to the economic parts and work to support each other.
The security and functionality of the network helps give the token value, while the value of the token help contribute to the security and functionality of the network.
The hard part is getting started, especially if you're trying to migrate from a centralised council of 39 nodes to a new crypto-world order under legal and technical constraints.
How it begins
According to Madsen, Swirlds and the Hedera Council are taking things slowly and cautiously.
Right now, the Hashgraph network is still centralised under the control of the 39 council nodes, with the council essentially controlling the entire network. At the moment, Hedera is waiting for more regulatory clarity from the SEC before it creates its new world.
Madsen reckons the Hashgraph crypto is a utility token, but the current regulatory situation means the native currency of Planet Hashgraph might technically be classified as a security, which Hedera isn't licensed to distribute.
Kick-off happens when the tokens are issued, at which point Madsen says they will be carefully distributed "in a model that, at the right time, kickstarts these functions [staking and running nodes]."
The importance of tokens to Hashgraph's network security mean they can't simply go live and throw open the doors to new nodes without it, and everything needs to happen in a deliberate and organised fashion.
Initial token distribution is a balancing act. Tokens need to be distributed widely enough among those who plan on operating nodes that the network can securely take off but probably shouldn't be spread so thinly that the relatively few starting transaction fees aren't enough to be adequately distributed among all node operators. To incentives them to keep running and securing the network, node operators should be appropriately compensated by network transaction fees.
If that goes well, and the network proves to be secure, then it can start growing organically. People will start building applications on top of the high-speed Hashgraph network, which might be anything from games to business bookkeeping systems. These applications can be paid for with the Hashgraph token. As the network grows and becomes more useful and as the token itself becomes more useful and valuable, it attracts more node operators and becomes larger, faster, more diverse and more secure.
Madsen is also aware of the potential for abuse, even within the existing systems. In this way, there might be some reassurance in knowing that there's an organised council behind it all, and that it's not entirely anarchic.
"Nothing's written in stone," Madsen says. "We're launching carefully and slowly, and we will monitor the network. If we see concentration [a party accumulating too many tokens], then we'll act appropriately. No one should pretend to launch a platform like this and have it all worked out. We acknowledge that, and will start slowly and will correct the ship."
So where's Madsen's employer, Swirlds, in all of this? Hashgraph might sustain a new world, but it's all just software and lines of code – and at the end of the day, Swirlds is basically just pirating its own software and releasing it for free.
This thought seems to have crossed their mind as well. When asked how Swirlds felt about cannibalising their own business, Madsen reckoned there would always be enough interest on both the public and private side of the fence and suggested that many businesses would be able to effectively use both the public and private Hashgraph alongside each other.
"There will always be enterprises who see the value in it, but would be terrified at the idea of putting their data on a public ledger even if it was encrypted," he said. "I think Swirlds will do okay."
Give me a firm spot on which to stand, and I shall move the earth."
-Archimedes, commenting on the importance of technical fundamentals in decentralised digital currency networks – or something like that.
Disclosure: At the time of writing, the author holds ETH, IOTA, ICX, VEN, XLM, BTC and NANO.