How Do Fees Work On Hedera Hashgraph? (Paul Madsen, Swirlds Inc.)

– Hi everyone, it's the Gossip Guy here. So, as many of us grow more familiar with
the Hedera hashgraph public ledger, there still remains many topics where we have questions
on. One, in particular, is cryptoeconomics and
how fees will work on the network. So in order to gather further insights on
this, I had the opportunity to speak with Paul Madsen from Swirlds, the hashgraph company,
in order to find out more. All right Paul. So our topic today is, how do fees work on
Hedera hashgraph? Or, basically, cryptoeconomics and how fees
will work on the network. So Paul, maybe to start things off, do you
mind introducing yourself? – Sure. I'm Paul Madsen, and I work at Swirlds. We're the company, at least, initiating, taking
hashgraph to the market, both on the public side and the permission side.

Sometimes I'm a technical lead, sometimes
a technical architect, I have no idea what the distinction is, what my business card
says. – A jack of all trades there. – Yeah, little bit of marketing, little bit
of sales support, little bit of analyst relations, or also a– – A very important person in the Telegram
channels. – Yeah, put that on your business card and – Okay, so Paul, maybe before we dive into
our main topic today, do you mind just going over some fundamentals as it relates to the
network? One thing maybe to start off with is nodes.

Who are they within the public ledger? What's their role? Why do they exist? And then maybe, how does one become a node
within Hedera hashgraph? – So we use node just to refer to the computers
that will run the hashgraph algorithm. The nature of a decentralized network is you
need to decentralize, you can't have a single computer determining truth, you need multiple. And so, for us, nodes are those computers
that create consensus. We do it differently than blockchains, but
the premise is the same. You distribute the responsibility, and so,
mitigate the risk of any one of them going bad, or some number. Now, on a public ledger, you need to worry
about some of those nodes being bad, you need to plan for it.

So we have a model where we get to a future
healthy public network of, in the ideal, millions of nodes. But we necessarily need to get there in a
gradual manner. So in the early days of the network, the plan
is that we would have a small number of known nodes. Probably the initial members of the Hedera
Council that will govern the platform will also run a node. And we'll start in that permissioned model,
and over time, evolve to a model where anybody can be a node.

And, again, in the ideal, anybody can run
a node in their basement. Their computer will be, likely, more than
capable, their bandwidth will likely be more than capable of participating in consensus,
which is different than how other public proof of work ledgers have turned out. There's been this arms race to powerful ASICs
or GPUs. Hashgraph algorithm is simpler, less burdensome
on the nodes, so ultimately, we expect a more democratic distribution of computing power. – Yeah, just one quick question, Paul. And if we don't know it right now, that's
fine, but as far as GPU requirements to become a node, is that something that's available? Or that you guys have settled on, or– – I think we're getting close, we haven't
yet announced that, I've seen numbers. Yeah, at some point, we'll make clear what
we expect, that minimum– – Got it.

– Capability set is, and it's not just processing
power, the bandwidth is arguably more fundamental. – Yup. All right, so Paul, I also know, too, another
thing that's come up is around proof of stake, and how that's also gonna be implemented within
Hedera hashgraph. Do you mind, obviously that's a topic that
can go on for hours, but do you mind just giving us a brief overview of how proof of
stake will work in Hedera hashgraph? – Sure. Like any other public ledger, you need to
mitigate the risk of attacks where it's too cheap to be able to do so. So you want to make attacks expensive. You do that by requiring that attackers have
some scarce resource, some stake, some coins. Everybody seems to be moving to that model,
effectively running away from proof of work as your scarce resource. But how you apply the stake, how you use the
stake to mitigate civil attacks or other attacks, can vary. Ours is a relatively simple stake model, where
the votes, the virtual votes that the hashgraph algorithm is built upon in order to determine
consensus, when we move to a public ledger, we'll just weight the votes that a particular
node has towards consensus, we'll weight that by their relative proportion of stake or coins.

So it's simpler because other stake models
either add some sort of punitive risk or slashing condition to stake so that bad behavior is
not prevented, in a sense, it's discouraged by making it, adding to it the chance of losing
coins. We don't have that complexity. Other stake models, like delegated proof of
stake, uses stake not to directly influence consensus, but rather to influence who determines
consensus. You vote, you elect your delegates, and empower
them with consensus. So again, a different way to use stake. Potentially manipulable by all the ways that
humans can be manipulated, elections bribery, et cetera. So everybody, I think, is moving towards stake,
but they'll use it in different ways. – Yeah, and just to follow up on the point
that you just made too, around delegated proof of stake, so Hedera hashgraph is not a DPOS
model, correct? – Correct, so what we have, as I said, is,
nodes will have a certain amount of stake, and that'll influence their votes towards
consensus, but we also recognize that, even though we hope to have millions of nodes,
there are billions of humans, and ultimately, trillions of clients, devices, thermostats,
et cetera.

And those other actors will have stake as
well, they'll have coins. And our security will be significantly improved
if those coins also contribute towards stake, just because the implication is, stake would
be more evenly distributed. So we have a model that, if I have coins,
or you have coins or stake, but you're not running a node, well, first, we want you to
run a node, but for your own reasons, you might not, we also want to make it easy for
you to, even not running a node, contribute towards consensus. So we have a model where you can proxy your
stake to a node. That stake is used towards consensus, so we
get the security benefits of that stake, and we'll reward you accordingly.

So you will benefit, like the node will, for
effectively lending your coins to the network. So yeah, you'll get a monthly check. – Got it. Well, this is a good transition into our main
topic for today, around how fees will work on the network. So from my understanding, from the white paper,
there's essentially three types of fees that will work in the public ledger. We have the fees to, well, we have the fees
to the nodes, the transaction fees, and then ultimately, the service fees that are paid
to the network. So do you mind just giving us a little bit
of a walk-through of how those three work, and any other information? – So the context is, we expect users of the
platform, their software, their clients, who are going to ask the platform, comprised of
millions of nodes, ultimately, we expect it reasonable for them to pay fees for that service.

I've got a transaction, I want it recorded,
I want it recorded with a consensus time, I will pay some tiny, minuscule fraction,
but I will still pay somebody else for that service. And then those fees that users of the platform
use will fund payments to the nodes that are actually running the consensus, and those
who are governing the platform as well. So we need to pool all the fees, and then
appropriately apportion those out to the nodes that did the work in recording those into
the ledger. So we have, as you say, three different fees
that are designed to accomplish that. But also recognize that different nodes did
different amounts of work in coming to that consensus. So I'm a client, let's say I'm an iOS wallet
app, I've got our wallet app on this phone.

I'm not a node, but nevertheless, I want a
transaction that I just created, necessarily with somebody else, I want that recorded into
the ledger. I do so by asking a node to gossip this out. Hey node, this thing happened, I need you,
and all the other nodes, who I'm not talking to at the moment, to establish a consensus
timestamp for this interaction, or for this transaction. So I'm only talking to one node, that's the
only person I can currently pay at the moment. And I do so, I pay them a node fee. And that node fee is designed to acknowledge
the node has costs in supporting an API that allows me to call it, but it also has costs,
but it has to compensate, indirectly, all the other nodes that ultimately will support
this transaction by doing a little bit of work and gossip and storage.

So that node fee that I pay the first node
that I'm talking to, potentially the only node that I'm directly talking to, is designed
to compensate the other nodes that will do work in support of my transaction. The other two fees are designed to acknowledge
that work that the other nodes do. So a transaction fee, necessarily smaller
than that node fee that I've given to the first node, just recognizes that, any node,
anytime it gossips out a particular transaction, on my behalf, in this case, it's got some
costs. There's bandwidth, CPU, et cetera. So that's a small transaction fee. The other fee, we call it a service fee. And that recognizes that certain transactions
imply a longer-term cost in resources for all nodes. If I'm storing a file, well, then every node
that stores that file on my behalf has storage costs. And we need to acknowledge that. So those are the logical fees. To accomplish that distribution of payments
and to reward the nodes accordingly, the Hedera wallet plays a role in effectively aggregating
those fees and then distributing them every 24 hours, but the premise is fundamentally
that users of the platform pay fees, and nodes are compensated accordingly based on their
costs.

And the fact that we have three fees is just
designed to acknowledge that different nodes contribute differently, and certain applications
have different costs associated with them. – Right, well, and there are incentives at
the end of the day to make sure that everyone acts as good players within the network. – Well, right, we definitely want to recognize
that it should be profitable to be a node. This is not a charity, we want people to be
a node, so we want to both acknowledge their costs, but critically, give them a profit
margin on top. No one's gonna do this just because they believe
in the vision of a trust-free internet. I'm not. – Fair enough. So also, too, with all these fees that we've
established, who's determining the price, or determining how much value each of these
fees are gonna be? So who is determining the fees on the network? – So we talked about three fees, the node
fee, we expect that to be negotiated between the client and the node, so between my wallet
app and the node.

We expect that anybody who develops a wallet
app, as an example, would probably also run a node. And so there's an existing relationship there,
maybe where the node offers reduced fees to its own wallet relative to other wallets. So we expect a market dynamic of competitive
fees for that fee. The others, the transaction fee and the service
fee, Hedera will set those and will, in all likelihood, tweak those as the network evolves
to maintain the health of the network. – Right, and when you say Hedera, you're ultimately
referring to the overall Hedera Hashgraph Council, the governing body that will be overseeing
the network, is that correct? – Yeah, and managing the financial health
and viability of the network will be a key part of what that council does, in addition
to all the other things that will be necessary to keep Hedera healthy.

– Before we wrap up here, I know one thing
that we had talked about before is just the overall service fee to the network. I understand it's around 10% that's essentially
paid to Hedera hashgraph, do you mind just giving some insights on that? 'Cause I know that there's probably some people
out there thathave some different reactions to the governing model there, so– – [Paul] Sure, yeah. – It would help to clarify that. – Yeah, so to clarify, I talked about how
the fees that the client pays the node ultimately fund this pool that rewards the other nodes
for participating in consensus.

Well, it also fund payments towards those
enterprises that have signed up to govern Hedera. Hedera is a for-profit venture. Again, it's not a charity, and so the enterprises
that have committed their time and energy and expenses, flying people around the world
to exciting locations, hopefully, those are real costs, and sending people to tech meetings,
to make the architectural decisions on how to evolve Hedera, real costs. So we reward them out of that mining, sorry,
not mining, out of that pool of fees as well. – Got it. Well, and then also, too, Paul, I might have
heard a little bit of gossip there on some of the chat channels and also on social media,
but as far as fees, the tokens, or the coin that would be offered to the nodes, are you
guys calling it H bar? Or– – [Paul] Yes. – Might have heard those names thrown out
there. – As far as I know, that is the current strongest
contender. I tweeted it, so it must be official. There's an ASCII character or a Unicode character,
so that helps. Yeah, I've heard other contenders as well,
so I wouldn't rush for anybody to try to reserve H bar dot– dot org, or something comparable.

– All right, well we'll wait and see, but
for now, it's just gossip,so– – [Paul] Which can be accurate, but– – [Gossip Guy] Yeah. All right, so Paul, thank you very much for
your time. Just before I let you go here, if someone
wanted to get further information on this or wanted to seek, take a deeper dive on this,
what are some available resources out there that they could look to? – Hederahashgraph.com has a white paper, both
the Hedera white paper and the original hashgraph. YouTube has some great videos of Leemon, both
walking through the hashgraph algorithm, if you want to understand the fundamentals, but
also answering questions, the sorts of questions we inevitably get about license and governance
and motivation, et cetera. If you're interested in learning when the
ICO is, I highly recommend the Telegram channel. Always seem to talk about. – And make sure to not harass Paul on the
Telegram channels there. – I pick and choose when I participate or
not. It's all good. – I know you've been quite active there, so– – I answer what I can answer. – Fair enough. All right, well, Paul, like I said before,
greatly appreciative of your time, and appreciate you taking the time to walk us through how
networks will work there.

I'm sure people will hopefully find this video
interesting and overall, helpful. – My pleasure. Is it G.G.? Do we call you G.G.? Is there a– – Oh, yeah. You can call me Gossip Guy. – All right, no I think I'll go with G.G.,
it kinda– – All right. Or double G. – [Paul] Double G, there you go. – All right, well, thanks Paul for your time,
and best of luck with everything. – Thank you very much. Thanks for joining on the ride. – [Gossip Guy] All right..

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