Hedera Hashgraph derives its name from an algorithm. It is based on the “hashgraph consensus” technology that gets around the big trade-off related to blockchain, the fundamental technology behind cryptocurrency. Blockchain can be fast but unsecure, or secure and slow. Hedera Hashgraph aims to build a fast and secure blockchain alternative.
This is not a riveting topic for many people, but it may surprise you to learn the company has just raised $100 million. It raised the money via a future token sale from institutional investors, and Hedera will use the money to create a new commerce network based on its “hashgraph consensus” technology.
Mance Harmon, CEO of the Dallas, Texas-based company, will use the money to build out the Hashgraph network and set up a micropayment system that uses the core tech. Put simply, the company hopes to disrupt the world’s financial systems, Harmon said in an interview with VentureBeat this week.
“As a technology, it’s a fundamental advance in the world of distributed systems,” Harmon said in an interview with VentureBeat. “It has fantastic performance, and it achieves the best in security one can have in the field.”
He added, “Small systems have achieved this in the past, but never at scale. Bitcoin had terrible performance, but it is reasonably secure. It was always a trade-off. What hashgraph does for the first time is break that trade-off, maximizing both security and performance.”
I was fascinated by the story Harmon told me about how the hashgraph technology could one day be used to handle millions of transactions per second in a secure way.
Here’s an edited transcript of our interview.
VentureBeat: The amount of money in the fundraising here ($100 million) is definitely an eye-opener. Could you take a crack at explaining Hashgraph to me?
Mance Harmon: As a technology, it’s a fundamental advance in the world of distributed consensus. By comparison, it has fantastic performance, and it achieves the best in terms of security that one can achieve in the field.
In distributed systems, academically, there’s a gold standard for security called asynchronous byzantine fault tolerance. This notion of asynchronous BFT has been around for decades. There have been small systems that have achieved it, but it’s never been achievable at scale before. That’s what Hashgraph does.
If you look at everything else in the market, there’s a tradeoff between performance and security. Bitcoin has terrible performance, but in some ways it’s pretty secure. At least it’s more secure than what we have in the closed or permission networks, where they get rid of proof of work and get much better performance, but the security is significantly worse. There are new categories of attacks.
What Hashgraph does for the first time is break that tradeoff and maximize both at the same time. It achieves the best security that one can achieve — theoretically there’s nothing better – and it maximizes performance. It’s not possible to better in terms of performance than what we’re doing in if you maintain the same level of security. That’s the value proposition, if you will, the contribution of Hashgraph.
VentureBeat: What’s the origin of this?
Harmon: Leemon Baird is my co-founder. He has a Ph.D from Carnegie Mellon in computer science. He and I have been working together for 25 years. We grew up in the Air Force together and followed each other from assignment to assignment, and then became entrepreneurs. In 2012 he went to work on this problem of achieving asynchronous BFT at scale. Coincidentally, Bitcoin was coming around at the time, but there’s no inspiration in this from Bitcoin. It’s a totally separate, orthogonal path to Hashgraph.
He worked on that for years, and in 2015 he had a breakthrough that made it possible to achieve that goal, that vision. That’s what today we call the Hashgraph. It was invented by Leemon, and he published a tech report at an academic level in 2016. It’s been available for review for years now.
VentureBeat: How soon did you start the company?
Harmon: Almost immediately. In 2014 he was working on it and we were thinking about the implications of what could be done, if he was able to solve that problem. Of course then, in 2014, the Bitcoin craze was in full swing. What was interesting to us about that is that Bitcoin had created the market for Hashgraph, even though Leemon didn’t start with a vision of creating a distributed cryptocurrency. His vision was much broader than that. Bitcoin created the market, but that was coincidental to his research. He was just doing the research because it was a cool math problem.
He had the discovery in the spring, maybe May, of 2015, the innovation, and then proved it formally, in a math sense. We got our first funding to kick off the company in Q4 of 2015.
VentureBeat: When you were out looking for money at that time, was it relatively to find that funding, or did you have to do a lot of work?
Harmon: It was pretty easy, because of Bitcoin. Back then, you probably remember. Blockchain as a term was relatively new. Bitcoin was at the top of the hype cycle, but blockchain as a term was new. Everybody believed there was huge potential here, though. We didn’t do an ICO or have a cryptocurrency or anything like that. We got traditional VC financing. From the very first presentation, there was enormous interest.
We quickly closed some financing for that company, which was Swirlds. It’s worth mentioning that there are two different companies here. Swirlds is the one we started in 2015. We first addressed permissions networks for enterprise use cases. That is VC-backed, led by New Enterprise Associates. And then last year, the summer of last year, we got to a point where we had enough market validation for the technology, and enough traction in Swirlds, that we realized we could begin to think about a public ledger.
We approached this very differently than the rest of the market. Most of the market started with public ledgers. If you look at the big platforms today, they started with public ledgers and then moved into the enterprise space with the permissions variant, where they get rid of proof of work and replace it with a less secure algorithm. We went the other direction. We had the most secure algorithm for enterprise, and then we decided to create the public ledger.
There was a logic behind that, because of our vision for what a public ledger should look like. That has everything to do with this council we can talk about. But that’s the history here. Last fall we spun out Hedera Hashgraph from Swirlds. Hedera Hashgraph is focused on the creation of this public ledger. It has its own governance body. It’s a separate organization with a different market and different use cases. Swirlds continues to focus on permissions and enterprise use cases.
VentureBeat: How did you raise the money, then? Is it qualified investor money, or is it a larger group than that?
Harmon: If you’re talking about Swirlds, that was just traditional VC. If we’re talking about Hedera Hashgraph, it’s accredited only, and institutional.
VentureBeat: But it’s not a token sale, an ICO.
Harmon: It’s not an ICO, but it’s what we call a SAFT, a Simple Agreement for Future Tokens. It’s not equity in the company. It’s an investment, a security in the technical sense. But it will convert into tokens for the public network. There are no tokens today, technically. They have not been generated. There’s a whole discussion here about the regulatory environment and the SEC, how we go from where we are today to broad distribution of the token in the future, when it’s not a security.
VentureBeat: What is the regulator-friendly nature of this, then?
Harmon: We’re as clean as you can be. The metaphor we use is a bridge. Prior to stepping on the bridge, we’re raising money. The money we raised is in the SAFT, which is clearly a security. Once we step on the bridge, we’re not taking any more money. The definition of stepping on the bridge is we stop raising money through the use of the SAFT and we create the tokens. We have a token generation event.
There’s a period of operation of the network for at least six months, some reasonable amount of time, and then stepping off the bridge is when we open the network up for general public use. The network will be operational while we’re on the bridge, but it will be restricted to developers, partners building applications. It’s a closed environment. When we open it up broadly to the public, we step off the bridge, and then the tokens are in the market. At that point our expectation is that they will not be considered a security.
VentureBeat: And then you have this council, a governing body?
Harmon: The council is 39 global blue-chip organizations. The governing council was designed to be the most decentralized governing body of any of the public platforms. When I say that, I mean we are choosing these council members to be representative of 18 business sectors. It’s not a bunch of banks that do two or three things. It’s all of the market across 18 sectors, and all geographies. We have council members today that signed letters of intent from Australia, Japan, the U.S., Europe, South America, India—I think we’re missing the Middle East, but we’re looking at the Middle East as well.
These are organizations that represent tens of billions in market cap. These are the best companies in the world, with the best brands. Collectively they represent the entire market of potential use cases. They manage, through oversight, the organization. They’re term-limited, so it’s not the case that they can be members forever. So they’re geo-distributed, market-distributed, and term-limited, so the representation will be reflective of the latest changes in the market over time.
Comparing that to the other platforms, the justification for the claim that it’s the most decentralized is that this is not a group of core developers making all the decisions, or a single foundation with a few people in it, or a single company. This is designed to be the most decentralized governing body of all the public platforms. They have oversight on all areas of the business. It’s like a board, except there will be subcommittees. There will be a board-level council of managers, and then subcommittees for legal and regulatory, a technical steering committee, coordinated marketing and PR, and so on, these kinds of committees that will, through an advisory function, and oversight function, help us build a world-class global organization.
VentureBeat: How would you say you got so much money raised here?
Harmon: It’s revolutionary tech. It’s the best tech in the market. It’s two things, right? Look at how it compares in terms of performance. Bitcoin today processes roughly five transactions per second. Ethereum today can process maybe 15-20 transactions per second. What we’re demonstrating is millions transactions per second.
It’s the difference between a calculator and a computer. If you think about the range of applications you can do on a calculator, that’s where we are today with the first generation of distributed consensus. When you hit thousands, you open up a whole new range of use cases.
VentureBeat: For commerce, don’t you want to get to something like millions per second?
Harmon: Absolutely. Here’s the way it works. You somehow have to scale to millions or even more. When you see these claims in the market of platforms doing millions or billions of transactions per second, it’s important to understand how many transactions are being done by a single cluster of computers or sub-network of computers. We’ll call them shards.
In our case, a single shard – for example, the 39 members will each be running a node in the first version of the network, and that will be the first shard – those 39 computers will be able to process 100,000 transactions per second. If you add another shard and scale by adding more and more shards, there are some applications that parallelize their operations and take advantage of those shards in parallel. If you have 10 shards, you can do a million transactions per second, rather than 100,000. But if your application can’t be parallelized, and there are some that can’t, then you’re limited to the performance of a single shard. Even in the case of a single shard, by comparison, we’re an order of magnitude faster than the fastest in the market today.
In the worst case we’re faster than anything else by an order of magnitude. In the best case, we can scale up to millions and billions of transactions per second, because we can do it in parallel.
VentureBeat: As far as where it’s going to get used, do you see any obvious places where people are going to move fast to implement this?
Harmon: An application we directly enable is micropayments. By definition that’s the ability for one party to pay another party a fraction of a penny. That’s not practically been possible previously, certainly not on an internet scale. There are various reasons for that, both technical and economic. There’s nothing in place that allows me to pay you a tenth of a cent. But if you can do that, create that payments layer that supports micropayments for the internet, then you can realize new business models.
For example, you’ve probably seen that every January, Wikipedia gives you the pop-up asking for three-dollar donations to support the operations of Wikimedia Foundation. If my browser had a plugin with cryptocurrency in it, and every time I go to read a Wiki article, seamlessly, without my being involved, a tenth of a cent was paid to the Wikimedia foundation automatically, then the Wikimedia Foundation suddenly has a much better revenue model that supports them. Maybe it gives them far more revenue than they get today with donations.
The ability to have micropayments is going to be critically important for the internet of things. For IOT to realize its full potential, things need to be able to discover other things and engage in commerce directly, making micropayments in this thing economy. This is critical piece for IOT in the long term, or even in the short term, if you think about what’s happening in social media. Surveillance capitalism, the idea that the social media tech giants take your information and monetize it to marketing to advertisers. We are a product, in a very real sense. If it’s possible to have a payments layer, with micropayments that pay for services, this is a different revenue model that could mitigate the surveillance capitalism business model. Maybe it doesn’t go away, but it’s possible for consumers to have an alternative to the advertising model.
Micropayments is huge. The whole public ledger industry has been trying to achieve this and can’t do it with Bitcoin. A single transaction for Bitcoin today is 50 cents, but it changes daily. I’ve seen it as high as $60 per transaction. The bottom line is you’re not going to spend a quarter to pay a tenth of a cent to somebody. There have been proposed additional layers of infrastructure to put on top of Bitcoin or Ethereum to achieve all this, but it reduces security. It’s clunky. We enable it directly, natively. That will be available in the very first version of this. Micropayments is a killer app that we’re going to enable.
VentureBeat: How many people do you have working for you right now?
Harmon: Roughly 50. We’re growing pretty quickly. I’d have to check. We literally add people on almost a weekly basis now.
VentureBeat: How much money have you raised altogether to date?
Harmon: It’s about $100 million. There’s still some money coming in, but the milestone here is $100 million. But that’s independent of Swirlds. We’re going to kick off an accredited crowd sale. Everything we’ve done, as I’ve said before, is in the United States. I’m in Dallas, Texas. We’re being ultra-conservative when it comes to the regulatory environment and playing by the rules. What that means is, the only financing we’re accepting is from accredited investors. We’re opening an accredited crowd sale to kick off on August 1. It will run up to August 15, and that’s it. At the end of that we’re taking no more investment.
VentureBeat: The part about Ethereum that was interesting to me was the simple contracts you could build on top of it, the programming. One of the smart guys I talk to in games, Tim Sweeney from Epic Games, talked about seeing the world building this Metaverse, the virtual world of virtual worlds, and he thinks blockchain will be essential to that, but it has to run much faster. You have to get things like those contracts on top of Ethereum to run at 60Hz in order to build games and worlds that are enabled for that universe. I wonder about that side, whether you guys have thought about that. Do you think you can enable that kind of vision?
Harmon: Gaming has been a central focus for us from the very beginning. Back when Leemon was still working on the algorithm, back in 2012 and 2013 and 2014, we were thinking about how to integrate that with VR. Oculus was all the rage back then. Facebook was just at the point of acquiring Oculus. We’ve given it a great deal of thought. We think what we have is ideal for gaming. We’ve built in special features that pretty much only gamers would take advantage of.
We see a hybrid model. We agree that there needs to be really fast, high throughput for games, but I’m not sure I would agree—like I say, we see a hybrid model where you could have 10, 20, 30 people all running their game, built on this distributed consensus platform, on their computers. That network is just their network, a peer-to-peer mesh network, where they’re playing in this virtual environment. Let’s call them a shard, a shard of 20 or 30 gamers.
You may have thousands of shards, but what you want is a common set of resources for the entire universes. You want that to be fixed. Managing those resources – maybe there’s a limited number of coins in the whole universe – all those game resources, that’s managed by the public ledger, what Hedera would be. In doing so, you make it possible to achieve that Metaverse, a fully distributed gaming network where there are no central servers. It grows organically, and the public ledger ensures that you can’t cheat. It holds the world together in terms of the environment and the resources contained in it. Gaming is a huge vertical for our tech.
VentureBeat: Being able to run the universe fast enough is a big part of what makes that realistic, right?
Harmon: Exactly. That was one of the original motivations. Like I say, the beginning of this had nothing to do with cryptocurrency. There was a lot of motivation here to create a new version of cyberspace.
The vision was for individuals to reach out, grab a piece of cyberspace, hold on to a piece of cyberspace, and play together in that world, work together in that world, exchange goods and services together without having to trust a central third party with their privacy and data. That was the goal. And so it’s literally—the vision was to change the face of the internet. It’s at least two generations past Second Life.
VentureBeat: It’s also a world without a Facebook or a U.S. Mint, I guess?
Harmon: [laughs] Exactly! No central organizations you have to trust not to damage you in some way. The trust model is fundamentally different. You don’t have to trust that no large organization or large group of the community is evil and going to attempt to damage you. It’s a much better trust model.
VentureBeat: That’s where we get into some big significance in what you’re doing. You seem to have kept your eye on that at the same time as you’re doing all the math.
Harmon: To be successful in any business, you have to find a path through the market, from where the market is today to where you want it to be with your vision. We have a huge vision. We have a vision for how the internet should work. But we can’t start there. We have to start where we are today and incrementally get there over time. We’re finding that path.
That’s why we started with enterprise permission use cases. We knew we couldn’t create a council of 39 global blue chips without having demonstrated that the technology actually works, that big enterprises are willing to pay for it and use it. It’s a step too far. We’re being very thoughtful about finding the path for our vision.
VentureBeat: I wrote about Machine Zone partnering with you guys. What’s the nature of that?
Harmon: Satori is a product from Machine Zone. I guess the best way to describe Satori is it makes it possible to collect a lot of information from a lot of different sources and use AI to sort that information in real time. To achieve the kinds of use cases they want to achieve – for example, the equivalent of a decentralized Uber – they needed a payment system that could scale at the level they needed it to scale, with the number of transactions per second and the price point they needed. They partnered with us to use our public ledger for payments, initially.
VentureBeat: Is that in the testing stages now?
Harmon: I don’t know the answer to that. I know they worked internally with the tech, but I haven’t spoken them to know where they are in their work. Now, to be clear, in our work, in the creation of this public network, separate from Swirlds, we’re at a stage now where we’re almost feature complete. We will be feature complete within weeks. Developers will begin building products on this public network using these APIs at that point in time. Roughly about the same time we finish the financing. We’re getting ready to step on to that bridge.
VentureBeat: Could you summarize what you’re delivering to developers?
Harmon: We’re delivering a set of public APIs that make it possible for a developer to use one of three or all three different services. The first service is cryptocurrency as a service with native support for micropayments, as we’ve talked about. The second service is distributed file storage. You need a way to have files stored in this global network that can be used by smart contracts in your applications. The third service is smart contracts.
Ethereum, of course, has a smart contract engine that support Solidity, their scripting language. What we’ve done is taken that Ethereum engine and we’re using it with direct support for Solidity. All of those Solidity scripts that exist in the market, we will support them on our platform. We’re backward compatible with Solidity. Those are the three services. That’s what makes it possible for developers to build arbitrary distributed applications on our network, on Hedera Hashgraph.