All public DLT platforms need computers to serve as nodes in the decentralized network. These nodes serve two purposes: (i) they maintain a shared ledger of the balances in each network user’s account, and (ii) they verify and execute new transactions and place those transactions into chronological order, so that user account balances are updated on an ongoing basis. Each node must provide computing power to run the platform’s consensus algorithm and process transactions.
To incentivize nodes to participate and to cover basic operational costs — as computing power is not free — DLT platforms typically compensate nodes with payments, often in the platform’s native cryptocurrency. On the Hedera network, hbars are used as a “fuel” to pay for network services (i.e., to submit transactions, run smart contracts, and store files) and to reward nodes for providing their computing resources (bandwidth, processing power, memory) to the network. The fees per transaction are very low, requiring the ability to make micropayments in a form – an hbar – that is divisible to less than a penny. For example, transactions using the cryptocurrency service or Hedera Consensus Service are expected to cost approximately US$0.0001.
The economics of a transaction on the Hedera network have been designed to balance the costs and incentives to create an efficient flow of funds. This flow consists of (i) transaction fees paid by end users (or third-party applications as or on behalf of end users) into a Hedera account and (ii) reward payments paid out of a Hedera account as (a) node reward payments to node hosts and (b) eventually, proxy-staking payments to hbar owners who proxy-stake their hbars to nodes (though proxy-staking payments are expected to be de minimis). Node reward payments and proxy-staking payments are not yet being made.