263: Is Hedera the Best Long-term Alt Coin Investment Today?

Buck: Welcome back to the show everyone. Today my guest on Wealth Formula Podcast, it’s really exciting. His name is Mance Harmon. He is the co-founder and CEO of Hedera, Hedera Hashgraph. I guess we can get some clarification on exactly what’s going on with the name there. And of course, for those of you who are into cryptocurrency, the native coin is HBAR. Mance was on the show a few years ago when really this project hadn’t even taken off and it’s been three or four years and he was kind enough to come back in the show and give us a little bit of an update. And so Mance, welcome back to Wealth Formula Podcast.

Mance: Yeah thank you glad to be back.

Buck: Great. You know I’m gonna start from the basics a little bit because, again, so much of my audience is 40-50 something that are real estate investors. And obviously, you and Leemon are our generation, but you know most of us are not really into this stuff. And so I’d like to talk a little bit, given all of the hype of cryptocurrency and the stuff that you think about that I think that was negative for the space for a long time, the talk of the lambos and the mooning, all that kind of stuff. There is technology known as distributed ledger technology which is presumably a big deal. And, assuming that it is, how does it change our lives? Why is it such a big deal?

Mance: So let’s just start with the basics when people say distributed ledger conceptually it’s useful to think about it just as a database. And when we think about what happened in the 1990s and the 2000s with sort of that first wave of innovation on the internet and we look at the properties the businesses that have been built since then, you know the big brands that we all know, those are all using a centralized business model, a centralized database technically that they completely control. And what was discovered with bitcoin in 2008 was a different approach where you can have a database. But instead of that database being owned and administered by a single party, you can have different parties each running a copy of the database each making updates to the database, this common database, and all of those updates being reflected near-simultaneously in a way that the community of database operators can trust the information. That it’s not possible for a single node operator that’s operating a node in this common database to manipulate the information in such a way to prevent transactions from occurring or to cause the information to be viewed differently by one party than another party. The innovation was the ability to provide security in a way that wasn’t previously possible and that gives rise to new business models where instead of having a single organization that is running a car service or a bookstore or whatever what have you, you can have a community of participants that have sort of disintermediated the need for a trusted third party they can operate it collectively and as a result, the trust both in the integrity of the processes of this business or organization as well as in the representation of the value that is used and transferred between parties in this business. Whatever it is that can be trusted in a way that you can’t trust a single monolithic organization to operate today.

Buck: So it’s really the concept really is about decentralization and that to me can be sort of the big difference whereas you look at in theory right now if you have big tech companies like Facebook or Amazon and you know they’re owned by a central authority and in this situation. You might have something very similar to Facebook or Amazon, but it’s owned by a community and therefore it’s not at the whims of one centralized power center.

Mance: That’s it. And when we say owned, I mean, I use that word loosely. It may or may not be the case that the community literally owns equity in an organization. And in most cases, they don’t. In most cases, it’s a community-operated and run application or endeavor and they may have governance rights, in some cases they may have dividend rights, but it’s not a foregone conclusion that they have either. It’s just that they could be participating in the process of operating this database in a trusted way because it’s just part of the ethos of decentralization.

Buck: So most distributed ledgers use blockchain starting from the bitcoin blockchain and obviously ethereum is probably the next best one known. But hashgraph, and by the way, can you just clarify? Because I’ve seen the words changing around. Are you going just by Hedera now?

Mance: We are. Well, I mean that’s a great question actually. You know when we started the organization, we did call it Hedera Hashgraph and that was because it was a sort of a trademarked version of hashgraph. Hashgraph is an algorithm a consensus algorithm and Hedera is the organization that’s using hashgraph, but over time, we knew that that the hashgraph would eventually be dropped and it would just happen sort of naturally. The community would come to know us and just start calling us Hedera got it and I think we’re near that point.

Buck: Okay well just getting back to my question then, I don’t want to keep saying the wrong name. But can you give us a high-level look at the different sort of technologies? You know, blockchain versus the type of consensus or decentralization mechanism that Hedera uses and shed light on what makes Hedera different.

Mance: Yeah you know it’s not really hard to understand. Blockchain is a term that represents both, what we call a data structure. And in this case, it is a chain of blocks, of transactions. And so you have your miners that each run a rig, a computer. And they have a local copy of the blockchain a chain of blocks of transactions. Of course, this is all ones and zeros in the computer and when transactions get submitted to the blockchain network, whatever flavor that is, could be ethereum or bitcoin or any number of first generation and second generation platforms, when a transaction gets submitted that transaction goes to all the miners all the miners get all transactions and they collect them and put them into a block. And then all these miners compete with one another to solve a really hard math problem, a cryptographic problem. The miner that solves that problem first earns the right to take their block of transactions, send it around to all the other miners, all the other miners receive that block and check that the proof of the work that was done is there. That’s where proof of work is a term comes from, that you know they did solve that math problem and assuming they did then all the other miners take that block and they put it on top of their chain their local copy of the chain. And that’s how the blockchain gets built. Over time, in that cryptographic puzzle problem, it’s calibrated to always take about 10 minutes. In the case of bitcoin for one of these miners to solve the problem so approximately every 10 minutes a new block gets put on top of the bitcoin blockchain for example. In our case it works fundamentally differently there. It’s not linear in the same sense. Hashgraph again is a term that represents both a data structure and a way for the community to come to a consensus on the order of transactions. Hashgraph is a graph. You have all the nodes. They’re not called miners anymore. You have all the node operators in the network and anyone that has a transaction can submit it to any one of those node operators. The node operators sort of gossip those transactions among themselves and as the transactions come in real-time, they sort of pile up. If you want to think of it that way in this graph this mathematical structure that’s called a graph and then the community has a way, without going into the math, on how to come to agreement on the order of those transactions within the graph. But the important point is that it’s operating in parallel, not in serial in the way that blockchain is. And there’s no proof of work, there’s no need to solve a hard math problem, so there’s no delay that is required. It’s just as the transactions flow in, they come to an agreement on the order in real time on all the new transactions and as a result, the hashgraph is orders of magnitude faster in terms of transactions per second and at a much lower cost because you don’t have the proof of work. You’re not wasting all this electricity to solve a math problem the way that blockchain does. And those are the differences. And one that just represents first generation technology and hashgraph is best to breed.

Buck: Now security is also an issue right and you want to talk a little bit about however you want to describe the asynchronous byzantine tolerance to why that’s significant, I mean most people are gonna have no clue what we’re talking about, but just in terms of a non-technical explanation of that and how that’s a little bit unique too.

Mance: Yeah well so the industry, the academic world for distributed consensus has been studying how to have computers come into agreement with one another on this shared database for decades. It’s not new. It’s just what’s new is the discovery of new consensus algorithms that make it far more efficient. And when we talk about asynchronous byzantine fault tolerance, all that means is that you don’t have to make certain assumptions about a potential attacker of the network. For example, those algorithms that are not asynchronous, the asynchronous prefix here is important, for those that aren’t asynchronous means that they have to make assumptions like there are no firewalls in the world. And of course, there are firewalls. And that certain types of denial of service attacks are not going to be executed against the network in certain ways, which of course is not a reasonable assumption. The real world is real and you have to address the full range of potential attacks. But until hashgraph, until recently, the ability to have the maximum level of security, the level of security that makes no assumptions that our real-world assumptions, you know sort of exclude the realities of the world we live in. And the ability to be performant have been, you know you can’t have both. It’s been the case that if you maximize security, that comes at the cost of performance. And what my co-founder Leemon Baird invented was the first algorithm that both maximizes security and maximizes performance simultaneously. And that’s the value of hashgraph. It solved that problem.

Buck: So I’m thinking here, and people are saying, okay so you’re telling me it’s faster, it is less expensive, and it’s the most secure you can possibly be. So there’s criticisms too and maybe you can address those which is I think the idea by some for some reason, again the concept being in general that decentralization is key to this entire technology. There’s some criticism by some who say well you know Hedera and you know HBAR, doesn’t seem particularly central or decentralized because of you know some things such as the inability to fork off of it or because of governance. Can you address that? I mean, I think this seems to be a big misunderstanding from what I read a lot of the criticisms.

Mance: So yeah certainly. When you think about decentralization, you really need to think about it along two dimensions. One is governance and the other is sort of technical decentralization in coming to consensus on the order of transactions. So you have computers all that are executing software that you know transactions flow in and you have a number of computers that are voting on the order of transactions. Think of it that way. And they have to come to agreement. And so that’s what we’ll call consensus or decentralization involving consensus. And then there’s decent decentralization of governance. Those are the two categories that need to consider if we start with governance. When we talk about governance, what we’re talking about are the decisions that are made with respect to the software and what changes or new features are going to be added to the software. How that code that operates the network evolves over time. And we might also include in there, legal and regulatory posture, use of treasury those types of complex decisions for any global platform. Any global network that is running a distributed ledger in terms of governance. What we have, what we’ve intentionally done, is chosen a council of some of the largest most trustworthy organizations globally to provide the oversight and governance of the platform, in other words be involved in that decision process. And when we’ve chosen those organizations, we’ve intentionally chosen organizations that are both distributed across the industry so that it’s not a bunch of banks or not a bunch of tech giants but we’ve got a broad range of industries that are represented on the council that oversees the platform. It’s distributed across geography. It’s not all from you know US or Europe or whatever. It’s global in terms of these organizations that are on the council. And then finally distributed through time. The council members can stay members up to two three-year terms. We’re at 20 council members today growing to 39 and we’re adding some on roughly a monthly basis and you know so sometimes it’s a little more, sometimes a little less, but it’s on that order. So we’re growing to 39. And when you think about that governing body compared to say bitcoin’s governance or ethereum’s governance, the comparisons are pretty stark. And in the first generation platforms, and most of the platforms out there today, what you have is a group of software developers that have come together to create a software, a network. You know the software that runs the network whatever the network might be, and there may be lots of developers contributing to that codebase, but in reality, there are a handful of developers that control it, that decide what goes in and what doesn’t go in. So I would argue that our governance model is one of the most decentralized, if not the most decentralized governance model in the whole market now. To be fair, there are some platforms out there that allow anyone that holds one of the tokens of the platform to vote on these types of issues. I personally believe it’s a bad approach when it comes to governance of these kinds of complex systems. And I’ll just be very brief, 30 seconds here sort of theory governance theory. You can think of governance models. There are dictators right? The problem with the dictator is that if they’re a good dictator, if they’re benevolent dictators, sometimes it works out. But it’s really easy to compromise a dictator. It’s a single source of failure. So to sort of think of it in those terms, there are pure democracies. Pure democracies are fine if the decisions that are being made are not complex. If they’re very simple decisions then fine let the whole democracy vote and you know up or down. When it comes to really complex decisions of the type that we just described, you don’t really want a pure democracy. What you want is sort of a representational democracy. A representative democracy where experts in those fields like law and marketing and tech and finance etc. You want the experts to representatively participate in a governance process. And that’s what we do. So I think that our governance model is by design the most decentralized, in my opinion, the best in the market.

Buck: You have some pretty interesting names in that council already including Google, IBM. Do you want to talk about some of them?

Mance: You know so we have google and IBM and LG, and Boeing from the banking side, we got Nomura out of Japan, Standard Bank out of South Africa, Shinhan in South Korea, we have FIS Worldpay out of Europe at Magalu Magazine Luiza like one of the largest retailers in South America. So there’s a large group of them.

Buck: And are they currently all the council members using the technology or in the process of trying to utilize it into whatever they’re doing right now?

Mance: The vast majority are working on projects, I think is the right way to say it. Some of those have gone to market. DLA Piper is a good example. One of the largest law firms globally has launched a token issuance platform called TOKO as an example and they’ve been one of our council members nearly from the beginning. And so the different organizations are in different stages with different interests for the reasons they’re participating.

Buck: You know we talk a lot about macroeconomics as it relates to investing and you know all the different moving parts in the government. I keep hearing about central banks in general, interest in issuing digital currencies that are essentially you know decentralized, but you know one of the questions I think a lot of people have is well, isn’t most of the currency that’s in circulation actually digital anyway? And if that’s the case, why do we need decentralized coins or tokens or whatever you want to call them, decentralized dollars, or what’s the idea behind this with the central banks?

Mance: Well that’s a really good point and it’s exactly right. You know in most cases, I don’t know every government how they issue their fiat. But in most cases, yes the currency is already in digital format and it is a very fair question. It’s a question that’s often debated and considered when it comes to these sovereign currencies, whether or not they need to use distributed ledger technology. There is a case to be made that modern distributed ledger technology, even if operated say by the fed. You know the participating banks in the fed is more secure in some ways than old architectures, old database architectures. Now that has less to do with sort of the decentralization value prop that most people think about when they think about distributed ledger technology, more to do with just providing cybersecurity for a database that’s managed by a single organization. But there’s a case to be made there. It’s also the case that you know most of these organizations most of these countries are going to completely control the network. Now it might be the case that for some of the smaller countries, rather than managing launching and managing their own distributed ledger currency based currency their central bank digital currency on a distributed ledger, they potentially would use or partner with some of the commercial platforms that are in the market. And so there is an opportunity for commercial platforms to participate in that way but I think that by and large for organizations like Hedera who have a global distributed ledger network we will work with those central banks to sort of augment what they already have, maybe providing an integration layer between central bank digital currencies. That’s a possibility as well. But yeah, it’s coming. And you know we’re right on the edge of that transformation and it remains to be seen exactly how that plays out

Buck: What role do you think right now, I mean you know with the technology you guys have, I assume there’s in your dealing with banks already the largest bank in South Korea I believe et cetera. Has Hedera worked with any central banks on these types of solutions?

Mance: Yeah I’m not at liberty to say the specifics of what we’re doing with our council members in this regard but it is the case that we have council members that care deeply about CBDC’s and you know it’s going to be interesting to see how that plays out over time.

Buck: Yeah. One of the things that I would say along the lines of just banks in general, large organizations, government, Hedera is sort of uniquely positioned there because there’s a lot of regulatory issues involved with those larger organizations. Would you agree with that?

Mance: Oh yeah. Well, so when we started the organization back in 2017 and we were you know Leemon and I were just sort of initially hiring our first team members one of the very first hires was my general counsel, fantastic attorney Natalie Furman is her name. And that’s because we understood for the industry to go mainstream meant that there needed to be both regulatory clarity and that the platforms that would benefit are those that tried to be as compliant as possible. And so you know against sort of conventional wisdom we decided to incorporate in Delaware. So we’re a US-based organization, Delaware-based LLC. All the council members that I mentioned before, they’re LLC members. It’s very real in a legal sense. It’s not just a marketing agreement we’re talking about here. And we initially immediately engaged in conversations with the various regulators, because I think that compliance is a selling feature. It goes against the ethos they just sort of the roots of this industry. It is just exactly the opposite. But it’s been central to our strategy from the very beginning.

Buck: Obviously you guys are focusing on the technology and there’s these other you know second-generation distributed ledger projects coming up, but my group will probably kill me if I don’t at least try to address this a little bit because so many people invested in the initial offering, and I won’t ask you about specific numbers or anything, but I’m curious. HBAR investors like me are also looking at the current you know cryptocurrency bull run and while HBAR’s done pretty well, it seems like we ought to be doing even better in terms of market cap compared to most of the projects that are higher in market cap. I mean you just listen to the story here and the trajectory and everything that the technology and to me, the only thing I can think is that it’s just a matter of a lack of investor awareness at this point. Do you think that’s true? Do you think just people just don’t know about it and that other what is it that drives the price of a token?

Mance: Well yeah there are a lot of things that will affect the price of a token right. We don’t focus on price, but we do understand that we’ve made decisions that set us apart from the rest of the industry. And the reason we’ve made certain decisions is because we’re trying to build a hundred-year company. You know this is not a get-rich-quick scheme. We’re in this to create then the trust layer, the internet for the next generation, that’s been the goal from the very beginning. When I talk about decisions, there’s some things that we just don’t do and the rest of the industry does. For example, we don’t do market-making and most nearly all of the other platforms do market-making.

Buck: What do you mean by that? Can you clarify market-making?

Mance: Yeah you know so there will be organizations that go in and provide liquidity to the markets that will help close the spread between buyers and sellers often that is manipulated to drive the price up or down. Not always legitimate market-makers out there, but that’s the kind of thing that token issuers like ourselves maybe shouldn’t be involved in and would be viewed negatively by regulators potentially. We don’t do that kind of thing. We don’t provide staking rewards today. Nearly everybody in the market provides staking rewards. When we talk about staking rewards, what this means is if you hold the token, you can go to an organization, lock up that token, and get an enormous interest rate. Think of it like a certificate of deposit that pays 20 percent. These are the kind of activities that a lot of the market does engage in that does cause short-term investor behavior to drive up a price, but is unsustainable. And in addition to that, we’re not yet listed on some of the top exchanges in the US, which is where a lot of the demand is. So you know they’re just a whole range of reasons why the token may or not may not perform the way that the others are, but again we’re not focused on that. Our decision process has always been to take the long view and the value that gets created is not value that gets created by us, it’s value that gets created by the community of developers and organizations and enterprises. They’re building real applications on top of the platform. And so we operate an operating system, think of it like an operating system, and the community is the one that creates the value.

Buck: One last question for you just in terms of you know in terms of this new generation of distributed ledger technology. Obviously, there are other projects out there that seem interesting. They’re vast, they do unique things, you know some of the ones that come to mind for me that you know I’m interested in seeing how they do or like you know polkadot or this upcoming launch of the internet computer with DFINITY, how do you see this in the next five years? And. obviously, not asking you to make any sort of picks. I’m just curious like if you had this crystal ball and you’re looking in five years, how do these things interact with one another based on what they do? Because a lot of people, I think, think about this and say well they kind are doing the same thing right? I mean maybe the DFINITY’s a little bit different. Obviously, bitcoin’s kind of on its own. But the rest of the projects seem to have a common goal. Can you kind of talk a little bit about how you see that interplay in the future?

Mance: Yeah well most of the projects have some focus area right you know they go in they want to identify a use case or category and really focus in on those categories we from the beginning have wanted to make sure that we are the enterprise-grade public network our council members are all the top you know fortune 500 caliber organizations that in across the globe and we work with them to ensure that we’re providing the platform that they would be willing to spend millions of dollars building their applications on top of. We’re unique in the industry in that we have a council like I described and that’s been an enormous lift. If you think about where we started for 2017, you know when we pitch this vision, we’re going to get the largest companies in the world to work together to create a global public network. We were laughed at because it’s just such an incredibly hard thing to do for a startup. But I think that it’s all important. And while others may focus on you know sort of lower-level consumer applications, we of course care about consumer applications. But we’re wanting to enable the enterprises and the businesses of the world to be able to build on top of us to go to market with those. And so if we win the enterprise market, I think we win it all. And that’s been the strategy from the beginning. It doesn’t seem like there’s any of the other projects are really focused on enterprise at all. They’re not, well I hesitate to say that. I don’t know what the other projects are doing behind the scenes. But what I can say is that the volumes, the transaction volumes, the large transaction volumes are enterprise. You know there are a lot of use cases that require tens or hundreds or thousands of transactions per second which means that you have to have a platform that can handle that kind of load and that’s where we’re focused. We’re focused on those really high-end high-performance requiring use cases that are deployed by ecosystems of organizations that are global.

Buck: Well this is really exciting stuff. I don’t want to take up too much more your time and just, congratulations. I mean I as somebody who’d read about this technology back in 2016 and had been looking forward to seeing what would happen, it’s just pretty unbelievable I think just to see the partnerships and the fact that even with the transactions, I believe now it got the most transactions of any distributed ledger right?

Mance: And we crossed the billionth transaction last month. And to be fair, I think only ethereum has done more than a billion transactions. So we’re now number two behind ethereum in total number of transactions. But we did it in 18 months. It took them about seven years.

Buck: Right exactly. Yeah. Fantastic stuff. So thanks again Mance and you know hopefully when the next phase comes along we can get you back as an update again.

Mance: Great. Thank you for having me.

Buck: Thank you.