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Hedera is an open-source, enterprise-focused distributed ledger platform that utilizes the hashgraph consensus algorithm. This technology is designed to deliver fast and secure transactions, making it attractive for developing decentralized applications (dApps), tools, and other blockchain-related services. The Hashgraph consensus mechanism, based on gossip-about-gossip and virtual voting, allows the network to process thousands of transactions per second, bypassing the need for mining or proof-of-work like in the Bitcoin protocol.

Hedera offers EVM-compatible smart contract capabilities, token issuance, and support for non-fungible tokens (NFTs) like other household names such as Ethereum, Solana, and BNB Chain. However, the platform's performance surpasses many traditional blockchain systems, offering a reliable, high-speed environment suitable for applications requiring high throughput, low latency, and regulatory compliance.

Traditional blockchains such as Bitcoin and Ethereum face scalability, speed, and fairness challenges, making them unsuitable for decentralized applications that require high network bandwidth and fairly ordered transactions. In contrast, the Hedera network addresses these issues with a more efficient and provably fair consensus process, making it an attractive option for businesses and developers who want to build mission-critical, high-throughput applications. 

Other key differentiators of the Hedera network are its unique governance model and predictable fee structure - two important considerations for enterprises looking to explore applications of distributed ledger technologies. The Hedera Council, an elected group consisting of industry-leading global organizations, provides trusted, transparent governance for the network, while the fee structure ensures cost predictability for web3-enabled solutions.

Hedera Use Cases

Hedera's technology supports a wide range of applications across various industries. The Hedera network is well-suited for payment applications, enabling fast, secure, and low-cost transactions. From micropayments to cross-border transactions, Hedera provides the necessary infrastructure for efficient payment processing. In supply chain management, Hedera improves transparency by providing a decentralized ledger that records each step of the supply chain process, ensuring accurate and real-time information access for all stakeholders, reducing fraud risk and increasing efficiency.

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In data integrity and AI, Hedera ensures the reliability of data used in AI models by providing a tamper-proof, verifiable log of data inputs and outputs. This mitigates the “garbage in, garbage out” issue that can adulterate any model or system. The platform also facilitates the tokenization of real-world assets, enabling the digital representation of physical assets such as real estate, commodities, and art. In doing so, RWAs can enhance the liquidity of previously illiquid or infrequently traded assets while also simplifying notoriously cumbersome and costly transactions (like real estate). Hedera also supports various decentralized finance (DeFi) applications, offering a platform for creating services such as lending, borrowing, trading, and payments.

Finally, in the world of decentralized identity, Hedera empowers users to manage and share their personal data securely. The network provides a framework for creating and verifying digital identities via familiar wallets and private keys, which can be used for secure access control, regulatory compliance, and user authentication. Users store their personally identifiable information in a wallet, similar to how cryptocurrency wallets function with cryptographic keys for security. When users authenticate their identity, they use their private key to sign a message, which the distributed ledger then validates. This system allows users to selectively share their information with websites and businesses, eliminating the need for these entities to store sensitive data such as addresses, phone numbers, and credit card details.

Overall, Hedera provides a comprehensive solution for building and deploying decentralized applications, addressing the needs of both developers and enterprise clients. The platform's innovative consensus mechanism and versatile use cases make it a valuable tool for advancing technology in multiple sectors.

Business Model and HBAR Utility

Hedera's business model is designed to attract both enterprise clients and developers by offering a high-performance, secure, and scalable decentralized platform. The network facilitates the development and deployment of complex decentralized applications (dApps), oftentimes beyond traditional DeFi use cases seen on other chains that only offer smart contracts. Central to Hedera's model is the HBAR token, which is essential for staking, paying for transaction fees, and also paying for other network services. Using HBAR for API payments is comparable to paying for Google Cloud computing services credits. However,  unlike with Google Cloud service credits, an HBAR holder can sell HBAR back in the market if they do not need to consume the HBAR for the API calls.

Developers benefit financially by charging transaction fees for their dApps and earning royalties through the Hedera Token Service (discussed in a later section). This dual income stream incentivizes developers to create and maintain applications on the network.

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The network itself generates revenue through transaction fees associated with services such as transaction validation and smart contract execution. According to the website, “The determination of fees reflect the burden a particular transaction places on the network – particularly the amount of bandwidth, CPU/GPU, RAM, and hard drive storage that a transaction or query consumes. The greater the consumption, the greater the fee. Additionally, because the above resources vary in their scarcity, transactions that use proportionally more of a scarce resource will pay proportionally more.” 

Developer Tooling

For developers, Hedera offers the necessary tools, infrastructure, and revenue model to build scalable dApps. For instance, Hedera charges for the use of its Token Service, which enables the native, fast, and cheap issuance and management of fungible and non-fungible tokens. Revenue from the Token service model, as well as HCS and Smart Contract Services, all go towards the sustainability and growth of the entire Hedera ecosystem.

Hedera also provides developers with a comprehensive suite of tools, infrastructure, and SDKs necessary for building the future of Web 3. Among these is the Hedera Custodians Library, a TypeScript utility that streamlines the management of custodial wallets and associated accounts, facilitating seamless integration with the Hedera network. This utility offers a robust foundation for developers to manage custodial wallets within their TypeScript applications. Furthermore, Hedera offers various SDKs for languages such as Java, JavaScript, Go, Python, and more, easing the transition from Web 2 to Web 3 for developers.

Additionally, Hedera is also compatible with the leading Web 3 virtual machine and programming language, the Ethereum Virtual Machine (EVM). In 2022, Hedera achieved EVM compatibility with the launch of its Smart Contract 2.0 mainnet. This update integrated the Hedera Smart Contract Service with the Hedera Token Service (HTS), allowing it to run Solidity and be fully compatible with the EVM. 

This compatibility allows developers to deploy Ethereum smart contracts from EVM-compatible blockchains on Hedera without significant changes, saving time and effort. Furthermore, EVM compatibility grants access to a vast pool of Ethereum developers and resources, including the ability to use the same Ethereum developer tools and services they are used to. By establishing a standard for smart contract execution, it reduces fragmentation and enhances efficiency within the blockchain ecosystem. Developers can also leverage the proven security and reliability of the Ethereum network, which has been thoroughly tested over time. 

Technology

Hedera Consensus Service (HCS)

The Hedera Consensus Service (HCS) is a crucial component of the Hedera network, forming the foundation of its services layer. HCS is designed to provide secure and rapid consensus for a wide range of applications, acting as a decentralized digital notary for a wide range of applications across a number of industries. The architecture of HCS includes several key components. The Hedera network consensus nodes are responsible and optimized for processing transactions, maintaining the ledger's state, and participating in consensus. These nodes work together to ensure the integrity and security of the network. Additionally, mirror nodes store historical data and provide real-time, auditable data streaming to users. This separation of concerns (consensus and archival) allows users to access transaction history and ledger state without the need to query the consensus nodes directly.

HCS also provides a comprehensive set of APIs, enabling developers to interact with the Hedera network, submit transactions, and retrieve information from the ledger. These APIs facilitate the integration of Hedera's consensus capabilities into various applications, ensuring that developers can build and deploy solutions that leverage the platform's high performance, security, and scalability.

Hedera Token Service (HTS)

The Hedera Token Service (HTS) is a pivotal offering from the Hedera platform, enabling developers to issue and manage digital tokens that inherit the scalability and performance benefits of the native token and the hashgraph consensus algorithm. Additionally, the HTS design provides low and predictable transaction fees, upwards of 10,000 TPS, for users while offering programmable royalties at the native layer for developers. Hedera’s royalties design solves traditional issues with royalties and payments to creators, which were seen previously in numerous industries, by making it fully automatic and (near) instantaneous.

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The HTS is fully compatible with the Hedera Smart Contract Service (discussed in the next section), which provides enhanced programmability and automation. Developers can use HTS to create, issue, and manage both fungible and non-fungible tokens with customizable properties such as name, supply, and decimal places. Beyond that, token creators can set rules and policies for minting, burning, and transferring tokens, providing comprehensive control over token functionality. 

 This allows for precise customization to meet specific needs. For instance, the ability to freeze and unfreeze tokens can be crucial for regulatory compliance, while setting treasury accounts aids in managing token distribution and governance.

HTS simplifies the token creation and management process, offering a user-friendly interface and configurable compliance features like KYC (Know Your Customer) requirements and transfer restrictions. This ensures that tokens can meet regulatory standards and business requirements, providing an edge over competitors with more cumbersome token creation processes.

The advanced compliance tools provided by HTS allow token issuers to integrate regulatory requirements directly into the token’s logic, including native KYC and AML (Anti-Money Laundering) account flags. This enables developers and enterprises to customize and deploy tokens with considerations of compliance standards, which are essential in cases and jurisdictions where regulatory clarity is lacking.

HSCS (Smart Contract Service)

For developers considering a transition from Ethereum, the primary challenge has been the need to essentially start from scratch. This involves mastering new programming languages, tools, token standards, and quality control procedures, leading to a significant time investment and potential impacts on code security and functionality. Moreover, adapting to different SDKs and less mature development tools introduces a steep learning curve. Ethereum's well-established ecosystem offers a comprehensive suite of tools and libraries that streamline application development and testing, making it difficult for developers to abandon it.

The Hedera Smart Contract Service enables developers to create and deploy EMV-compatible and smart contract-enabled dApps on the Hedera network. By supporting Solidity, the programming language used in Ethereum’s ecosystem, Hedera enables the easy porting of existing EVM-based dApps to its platform.

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Any contract deployable on Ethereum can be launched on Hedera at a lower cost, with a reduced carbon footprint, and obtain a higher TPS. Hedera's Smart Contract Service is designed for scalability and security, providing high throughput, low latency, and low transaction fees that Ethereum mainnet cannot match. 

Transaction Schedule Service

Hedera's Schedule Service enables the scheduling of transactions on the Hedera network, addressing the challenge of collecting required signatures before execution. Users can schedule any transaction type and collect the necessary signatures at a later time, unlocking flexibility that is impossible on traditional blockchains like Ethereum. Anyone can subsequently provide the needed signatures independently, meaning transactions can be executed whenever the signatures are collected or scheduled for a specific time in the future.

Finally, on the developer UX front, the Hedera API, which facilitates the creation of scheduled transactions, supports various programming languages, enabling developers to interact with high-speed services and low, predictable fees, leveraging the efficiency of hashgraph consensus. ​​

Hedera APIs

Hedera provides a comprehensive suite of services and APIs designed to empower developers to create decentralized applications that are fast, fair, secure, and scalable. These offerings enable developers to meet the diverse needs of users globally. 

Hedera Network Services offers APIs that allow developers to perform various functions such as creating accounts, minting tokens, writing data to the ledger, and calling smart contracts. These services are designed for efficiency, with predictable transaction fees based on processing and storage requirements. To facilitate ease of use, Hedera also provides SDKs in multiple programming languages, simplifying API access.

The Hedera Schedule Service allows any type of transaction on the Hedera network to be scheduled for later execution. This service collects the required signatures independently after the transaction has been scheduled. Accessible via the Hedera API, the Schedule Service enables the upfront submission of transactions without all required signatures, providing flexibility in transaction management.

Staking

From an end-user perspective, staking HBAR tokens is vital to the Hedera network, enabling token holders to participate in the platform's consensus mechanism and governance processes. This involvement is facilitated through Hedera's Proof-of-Stake (PoS) consensus mechanism, helping to secure the network while participants earn rewards for contributing their HBAR to the consensus process. The Hedera Council has established a maximum annual reward rate of 2.5%, though the actual rate depends on the total HBAR staked.

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Token holders can delegate their tokens to one of the 31 nodes operated by Hedera Council members or to another account via proxy staking. Both direct and indirect staking increase a node's consensus weight, but rewards for indirect staking go to the intermediate account.

Notably, there is no lock-up period for accounts staked to a node, allowing the entire account balance to remain liquid and automatically staked and enabling asset flexibility for users. Nodes must meet specific minimum and maximum stake thresholds to be eligible for rewards, and these thresholds can be adjusted as more nodes are added or by the Council's decisions.

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Q2 2024 Network Developments

Onchain Use Cases and DeFi

The Hedera ecosystem is an expanding network that integrates distributed ledger technology into traditional business models to fundamentally disrupt legacy industries using web3. Currently, the ecosystem comprises over 50 projects and applications, spanning multiple sectors such as:

• Artificial Intelligence
• Privacy
• Data Integrity
• Payments
• Healthcare
• Supply Chain Logistics
• Gaming
• Decentralized Identity

Accounts

The first quarter revealed a notable expansion in the average daily active accounts, while the second quarter growth dropped significantly to < 6,000 accounts per day.

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Developer Community

The developer community contributes to and maintains developer tools and SDKs, which can be used to make bootstrapping one's own project easier. Hedera has a public Github repository that welcomes contributions from the community. The repository includes services offered by nodes in the Hedera public network, implementation of Hedera services on the platform, and libraries to estimate resource usage of service operations.

Hedera has roughly 75 full-time developers working on the project, per the Developer Report 2024. This number does not account for the number of community contributors who contribute to the project in their free time. Additionally, the project boasts another 190+ monthly active developers and has crossed over 900 thousand code commits. Overall, this translates to a relatively active developer community, firmly putting Hedera in the top ~40 projects by full-time developer count.

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DeFi

If we analyze Hedera through the narrow scope of DeFi, one notable project emerges: SaucerSwap. After its launch in 2023, SaucerSwap has rapidly achieved over $60 million in TVL. However, all other projects have yet to gain any meaningful TVL/traction.

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In total, Hedera only holds ~$64 million in TVL, excluding liquid staking from Stader. It is important to note that LSDs in Stader are deposited into another protocol and, depending on the methodology, may not be counted by all reputable sources as part of Hedera’s TVL. 

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DePIN

While nascent, the Decentralized Physical Infrastructure Network (DePIN) ecosystem in the blockchain has become a “hot” narrative, with dozens of projects launching in 2024 across numerous blockchains. Neuron, a DePIN play on Hedera, is aiming to reshape the landscape of data transmission and service delivery through innovative decentralized pathways. In late June 2024, the company introduced its first sensor in Australia, thus expanding its flight-tracking capabilities across four continents. The company's sensors, comprising RTK base stations and advanced GPS capabilities, furnish drones and other devices with accurate, real-time data essential for navigating airspace and executing tasks without disruption.

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Neuron operates as a DePIN by creating direct, minimal-hop pathways for data transmission. Unlike traditional networks that depend on centralized servers, Neuron's infrastructure utilizes the Hedera Network to facilitate peer-to-peer communication among machines, humans, computers, and devices. This decentralized approach eliminates single points of failure, enhances efficiency, and lowers costs compared to systems reliant on intermediaries.

Updating the Hedera Token Service via HIP-540

HIP-540 seeks to introduce crucial updates to the Hedera Token Service (HTS), enhancing both flexibility and security in token creation and management. While the Hedera Consensus Service and Hedera File Service already allow for the removal of administrative keys to ensure immutability, HTS lacks this essential functionality. HIP-540 proposes enabling admin keys for tokens created with HTS to sign update transactions that can modify or permanently remove any key from the token. 

Currently, token creators on Hedera often set various keys like Admin, Wipe, Freeze, and Pause during the minting process to manage potential issues. For instance, the Wipe key allows the creator to destroy and remint tokens if necessary. However, after the minting process, these keys pose significant risks to token holders. Currently, the only way to change these keys is through a TokenUpdateTransaction signed by the admin key, which does not allow for their complete removal. This creates uncertainty and security concerns among token collectors.

The HIP-540 Proposal

HIP-540 aims to address these challenges by allowing token creators to remove or modify keys after they have served their initial purpose. This ensures greater security and trust in the tokens, eliminating risks associated with these keys and providing reassurance to new users and collectors in the broader NFT ecosystem.

Key Elements of HIP-540:

1. Admin Key Management: Admin keys can now remove themselves or other keys. This feature prevents ongoing administrative control over the token, ensuring that the decision to change or remove keys lies with the tokens themselves, supporting a transition to an admin-less model.
2. Key Modification: All keys, except the admin key, can change themselves to another valid or unusable key. An unusable key refers to a public key, which is practically impossible to derive a matching private key. This functionality allows individual keys to modify or remove themselves independently, providing better token management capabilities.
3. Enum Field Addition: A new enum field in the update transaction will indicate whether the system should require signatures from the updated keys. The current policy mandates that a new key must sign an update transaction unless altered by the admin key. This protects users from unintentionally updating to a public key without possessing the corresponding private key. The default value will maintain the current behavior, requiring new keys to sign unless a higher-privilege key signature is already present.

Conclusion

Hedera stands out for catering to the diverse needs of both enterprises and developers in the cryptocurrency space. Its unique consensus mechanism, Hashgraph, addresses the common challenges faced by traditional blockchains, such as insufficient scalability, slow confirmation times, and manipulable transaction ordering. Hedera's leaderless consensus mechanism ensures that there are no frontrunning or sandwich attacks, maintaining the integrity of transaction ordering. This is crucial because the primary purpose of a ledger is to order transactions accurately. Finally, Hedera's asynchronous Byzantine Fault Tolerance (aBFT) security ensures that the network can achieve honest consensus even in the presence of attacks and malicious actors and remains resilient even if the internet itself is under attack.

Hedera's comprehensive service offerings, including smart contracts, token issuance, and data integrity solutions, showcase its capability to drive innovation across multiple industries. From payment processing to supply chain management and decentralized identity solutions, Hedera provides the necessary infrastructure to enhance efficiency, transparency, and security in numerous business processes.

The platform's ability to process thousands of transactions per second, combined with its secure and low-latency environment, positions Hedera as a competitive choice for developing dApps and use cases that require high-frequency onchain transactions. Beyond offering high scalability, Hedera’s unique governance model (a Governing Council comprised of global organizations) and predictable low-cost fee structure make it an attractive offering for enterprises looking to build, test, and deploy decentralized solutions on the network.

Despite lagging behind in some decentralized finance (DeFi) metrics, Hedera's ecosystem is steadily expanding, integrating innovative projects across various sectors. The emergence of Decentralized Physical Infrastructure Networks (DePIN) like Neuron highlights Hedera's potential to revolutionize data transmission and service delivery through decentralized pathways.

Ultimately, Hedera’s innovative technology, comprehensive service offerings, and strategic pro-compliance governance make it a formidable player in the alt-L1 space. Its focus on scalability, security, and regulatory compliance provides a solid foundation for the future growth and adoption of decentralized applications across industries.

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Disclaimer: This report was commissioned by Hedera. This research report is exactly that — a research report. It is not intended to serve as financial advice, nor should you blindly assume that any of the information is accurate without confirming through your own research. Bitcoin, cryptocurrencies, and other digital assets are incredibly risky and nothing in this report should be considered an endorsement to buy or sell any asset. Never invest more than you are willing to lose and understand the risk that you are taking. Do your own research. All information in this report is for educational purposes only and should not be the basis for any investment decisions that you make.