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The Hedera platform is built on a set of core technologies that work together to provide a highly performant, secure, and decentralized public ledger. The architecture of the system can be thought of as having three distinct layers: 

• Internet (bottom)
• Hashgraph Consensus (middle)
• Services (top)

Hedera's three-layered architecture model is designed to ensure secure and reliable communication between nodes in the network, fast and secure consensus using the patented Hashgraph consensus algorithm and gossip protocol, and support for decentralized file storage, a native cryptocurrency, and smart contracts.

Internet Layer

Hedera’s system is built on top of its bottom Internet layer, which is responsible for enabling nodes in the network to exchange information with each other. It uses TCP/IP connections with TLS encryption to ensure secure and reliable communication between nodes in the network.

TCP/IP, or Transmission Control Protocol/Internet Protocol, is the protocol suite that is used to enable communication over the internet. It is a set of rules that specify how data is transmitted between devices on the internet. TCP is responsible for establishing and maintaining a connection between devices, while IP is responsible for routing data between devices.

TLS, or Transport Layer Security, is a cryptographic protocol that is used to provide secure communication over the internet. It ensures that data transmitted between devices is encrypted and cannot be intercepted by unauthorized parties. TLS is a critical component of the Internet Layer as it ensures that communication between nodes in the network is secure and cannot be compromised.

Hashgraph

At the heart of the Hedera platform is the Hashgraph consensus algorithm, which is a unique and innovative algorithm designed to provide high throughput, low latency, and finality in consensus. The Hashgraph algorithm is based on a directed acyclic graph (DAG) data structure that allows for the parallel processing of transactions, enabling high throughput and low latency. The algorithm also provides Byzantine fault tolerance (BFT) and virtual voting, ensuring that transactions are final and cannot be rolled back.

A Directed Acyclic Graph (DAG) is a mathematical abstraction for modeling nodes in a network (or a graph). Connections between nodes are called ‘edges’ in network theory, and these edges are directional in DAGs. DAGs are similar to trees, though trees are typically undirected (the connections between nodes aren’t one way or the other, they’re just connected) and don’t allow for closed loops. Trees have the interesting property of being both a graph and a data structure, which lends them naturally to modeling data on networks. DAGs have applications in scientific theory, practice and computation generally, ranging from epidemiology to scheduling.

The idea behind Hashgraph is to solve some of the inherent problems with traditional blockchain, such as transaction processing speed and scalability. Hashgraph is considerably faster than blockchain solutions like Bitcoin and Ethereum, theoretically capable of processing thousands of transactions per second.

The key mechanism that makes Hashgraph possible is the consensus algorithm, which ensures that all nodes in the network agree on the order of transactions. In Hashgraph, each node maintains a virtual voting pool, and nodes can vote on the order of events in their pool. Once nodes have enough votes, they can determine the order of events in the pool. This process is repeated until consensus is reached on the entire network. This consensus mechanism is based on a combination of the gossip protocol and virtual voting. Nodes in the network communicate with each other using the gossip protocol, which involves sharing information with randomly selected peers. This enables all nodes in the network to quickly become aware of all transactions.

Consensus Mechanism

The Hashgraph consensus algorithm is based on a combination of the gossip protocol and virtual voting. Nodes in the network communicate with each other using the gossip protocol, which involves sharing information with randomly selected peers. This enables all nodes in the network to quickly become aware of all transactions. Virtual voting is used to reach consensus on the order of transactions. Each node maintains a virtual voting pool, and nodes can vote on the order of events in their pool. Once nodes have enough votes, they can determine the order of events in the pool. This process is repeated until consensus is reached on the entire network.

The use of virtual voting ensures that the network remains secure and fair. Nodes in the network cannot manipulate the order of transactions, preventing malicious actors from tampering with the network. The use of the gossip protocol also ensures that transactions are propagated quickly throughout the network, making Hashgraph a highly performant distributed ledger technology.

The Hedera Hashgraph network builds on top of the Hashgraph consensus algorithm to provide a highly performant, secure, and decentralized platform that can scale to meet the needs of enterprise clients while also providing the necessary tools and infrastructure for developers to build and deploy complex decentralized applications.

Gossip Protocol

The gossip protocol plays a critical role in achieving consensus on the state of the ledger. The gossip protocol is a type of peer-to-peer communication protocol that is used to disseminate information throughout the network in a decentralized manner. In Hedera, the gossip protocol is used to propagate transactions and consensus events across the network.

The gossip protocol works by having nodes in the network randomly select a subset of their neighbors to share information with. The nodes then exchange information with their neighbors, who in turn share that information with their own set of neighbors. This process is repeated until all nodes in the network have received the information. In this way, the gossip protocol ensures that information is distributed quickly and efficiently throughout the network.

Leaderless Proof-of-Stake (LPoS) Consensus

Hedera Hashgraph uses a consensus mechanism called Leaderless Proof-of-Stake (LPoS), which is based on the concept of PoS, to ensure the security and immutability of its public distributed ledger network. LPoS eliminates the need for a central authority, as it allows nodes to participate in the consensus process through staking, which involves holding and committing a certain amount of cryptocurrency as collateral to secure the network. Each node's influence on consensus is proportional to the amount of cryptocurrency it has staked, and the network can achieve consensus on a transaction when more than two-thirds of the network's voting power participate in voting.

The weight of each node is determined by the amount of HBAR it has staked. Approval from at least two-thirds of the total HBAR staked is required to reach an agreement on a transaction. Currently, the Hedera Governing Council determines when the ecosystem has reached a minimum viable set of integrations to enable staking rewards. Once this is achieved, node operators can earn staking rewards by participating in the consensus process and validating transactions on the network. Staking rewards incentivize node operators to act in the best interest of the network and to ensure its security and stability. Nodes have a maximum stake limit of 1.85 billion HBAR, calculated as the total HBAR divided by the number of nodes, with a minimum stake of one-fourth of the maximum, or 460 million HBAR, required to earn rewards.

In June 2022, the Hedera Network made progress towards decentralization with the implementation of HIP-406: Staking. The first two phases of this proposal were launched in June and July, enabling users to stake HBAR and influence the consensus weight of nodes without earning rewards. Phase 3 of staking was launched in October, allowing for staking rewards. To qualify for rewards, accounts must stake for at least 24 hours. The Hedera Governing Council established a maximum annual reward rate of 6.5%, but the actual reward rate fluctuates depending on the amount of HBAR staked. By the end of Q4 2022, about 21,000 stakers had staked approximately 32 billion HBAR, including staking from the Hedera Treasury, Swirlds, and Swirlds Labs. These entities stake a portion of the Treasury to assist validators in meeting the minimum stake requirement. The final phase of staking, Phase 4, is expected to launch in the future and complete the rollout of staking functionality.

LPoS is a more energy-efficient and environmentally friendly alternative to the traditional proof-of-work consensus mechanism, as it eliminates the need for costly computational resources and mining equipment. LPoS also enables faster transaction processing times and greater scalability, as it allows for more transactions to be processed in parallel. The LPoS mechanism has been adopted by other blockchain networks, such as Ethereum, as a more sustainable and efficient alternative to proof-of-work.