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🤔 What is Harmony ?

Harmony is a layer 1 smart contract blockchain that uses effective proof of stake consensus mechanism to achieve high throughput using sharding.

It aims to overcome Etherium’s limitations(scalability trilemma).

Scalability trilemma was first described by Vitalik Buterin, the co-founder of Ethereum. It states that it is very difficult to develop a blockchain that has all three features:

  • Scalability
  • Security
  • Decentralization

A developer can choose a maximum of 2 of the desired qualities.

Harmony aims to solve the scalability trilemma by becoming secure, decentralized and scalable.

💡 What role does ONE token play ?

ONE is the native cryptocurrency of Harmony blockchain. It is used for:

  • Transaction fee: Users pay ONE tokens as transactions fees to include their transactions on the Harmony blockchain.
  • Staking: Node operators have to stake ONE tokens to participate in the process of adding and verifying new blocks.
  • Delegation: ONE holders not having sufficient knowledge, hardware and tokens to run full validator node can delegate their tokens to other validators.
  • Incentive model:
    • Validators receive block rewards for adding a new block to the Harmony blockchain.
    • Validators also share a part of block rewards with delegators to attract delegators to delegate their tokens with their nodes.
    • Dishonest validator’s stake gets slashed for misbehaving.
  • Governance: ONE token holders propose and vote on updates to Harmony protocol.

📝 Origin of Harmony

Harmony was founded in 2018 by Stephen Tse and co-founders ‌Rongjian Lan, Nick White, and Sahil Dewan.

Harmony raised $18.3 million in private round, a $5.5 million in node round (led by Binance Labs and HashKey Capital), and $5 million during initial exchange offering (IEO) through Binance Launchpad in May 2019.

Harmony launched its mainnet in June 2019 and opened staking in May 2020.

👴🏻 Stephen Tse - Founder

  • Education:
    • Did BSc(Mathematics) from Simon Fraser University in 2000.
    • Did MSc(Computational algebraic geometry) from Simon Fraser University in 2002.
    • Did Ph.D. in Cryptographic protocol, type theory and functional compiler from the University of Pennsylvania in 2007.
  • Career:
    • Worked as Senior Engineer at Google from 2006 to 2010.
    • Founded Spotsetter (later acquired by Apple), a social search startup serving personalized venue results in 2011.
    • Worked as Principal engineer at Apple from 2014 to 2015.
    • Founded Voice AI, a sales assistant for engaging customers in 2016.
    • Founded Harmony in 2017. He is the current CEO of Harmony foundation.

😌 What problems does it solve ?

  • Proof-of-stake vs Proof-of-work: Harmony uses effective proof of stake consensus mechanism which has several advantages over proof-of-work:
    • It is much more energy-efficient.
    • Governments cannot ban miners, unlike proof-of-stake in which governments can trace miners depending on excessive energy usage and seize their hardware.
    • It has been observed that proof-of-stake systems get more decentralized over time(Initially Bill Gates had more than 90% of the Microsoft shares, today he has less than 5% of Microsoft shares.Whereas proof-of-work systems get more and more centralized over time around hardware, cheap electricity, favorable jurisdictions, etc.
    • Proof of work miners are not stakeholders. They can use their existing hardware to mine whichever cryptocurrency is most profitable at the moment.
  • Forkless way to upgrade: Harmony blockchain is governed by ONE token holders. Formal governance process ensures that Harmony blockchain’s future is decided by the actual token holders.
  • No downtime: Thousands of nodes running 24 X 7 ensure the network is always online.
  • Higher throughput: Harmony blockchain’s sharded architecture provides high throughput that results in cheaper and faster transactions.
  • No trusted third party: Users do not have to trust Harmony team. The code is open source, anyone can see and verify how the code works.
  • Efficiency gains: Projects building on Harmony do not have to run servers and hire an army of network engineers to run physical infrastructure.

🤖How does it work ?

Effective proof of stake

Effective PoS & Token Economics Harmony features a new version of Proof-of-Stake (PoS), called Effective PoS (EPoS), for network security and a “fair” token distribution.

EPoS allows participants to either stake directly or delegate their holdings to an active validator in exchange for block rewards.

Validators who stake the most tokens receive a slot in the overall Validator Set, which currently consists of 640 community-run nodes.

The effective stake design economically discourages single validators that control a significant number of staked tokens, whereas lower-ranked validators (in terms of stake weight) receive an extra reward. This model aims to prevent the centralization of staked towards the top of the Validator Set.

The Harmony protocol also includes built-in penalties to punish undesired validator behavior, such as double-signing or falling offline when called upon.

  • Double Signing: A validator that gets caught double-signing a proposed block will receive a minimum 2% slashing penalty on their stake. The slashing increases linearly as the number of validators being slashed at the same time (e.g. 33% slashing if 1/3 of the validators double signing).
  • Unavailability: At the end of each epoch, validators that couldn’t maintain at least a 67% uptime will have their status set to “Inactive” and be ruled out from the new election. No slashing is applied to unavailable validators.

Minimum 10,000 ONE tokens are required to run a validator node, whereas min 1,000 ONE tokens are required to become a delegator.

Delegators must also deliberately select validators for delegations as dishonest validators can put delegators’ funds at risk of getting slashed.

Epochs

An epoch in Harmony blockchain is a pre-determined period of time when the validator committees of shards stay unchanged. In Harmony mainnet, one epoch is 32768 blocks which translates to around 18.2 hours. 

When one epoch ends, the election for the new validator committees will be conducted in beacon chain and the result (i.e. shard state) will be written in the last block of the epoch in the beacon chain.

After that, beacon chain enters the new epoch with the new validator committee producing blocks. Once the beacon chain enters new epoch, all the other shards will follow and also enters the new epoch.

The new shard state from the beacon chain will be written in the new block of the shards which also marks the last block of the epoch for that shard.

Sharding

Harmony blockchain is sharded in three dimensions: state, network and transaction:

  • State Sharding: Each shard maintains its own chain of blocks and state database. Therefore, the validators of each shard only need to store 1/N of the global state, where N is the number of shards. The consistency between states from different shards are guaranteed by the property of eventual atomicity of cross-shard transactions, which guarantees that double spending between shards can not happen.
  • Network Sharding: Harmony’s validator network is also divided into shards where each shard involves a separate set of validators connected closely with each other and running consensus between themselves. Most of the time, validators communicate with other validators within the same shard to reach consensus or synchronize blocks. In cases of cross-shard transactions and beacon chain synchronization, validators from different shards send messages across shards through the globally connected network.
  • Transaction Sharding: Transactions in Harmony blockchain are sent to and processed by a specific shard instead of all shards. This way, shards can process transactions in parallel which greatly improves the overall transaction processing capacity of the blockchain. Users need to specify a field named shard_id in the signed transaction which indicates which shard this transaction belongs to. For cross-shard transactions, another field named to_shard_id is needed to indicate the destination shard while the shard_id field indicates the source shard.

Sharding assigns stakeholders randomly to each shard so as to avoid coordinated attempts to take over the network.

Currently, Harmony runs four parallel blockchain networks called shards to reduce latency by around 1,000%.

Crosslinks

Crosslink is an important piece of data that is sent from shard chains and stored in beacon chain. A crosslink contains data for block signatures and block identifier data such as block hash, block number, view id and epoch etc.

When a new block is confirmed in a shard chain, the corresponding crosslink will be created and sent to the beacon chain.

Upon the receipt of the crosslink, the beacon chain verifies its signature and checks that it’s from the canonical chain of the shard.

Successfully verified crosslinks will be added in the new block of the beacon chain to permanently endorse the block of the shard chain as canonical.

Shard chain blocks without corresponding crosslinks endorsed in the beacon chain won’t be recognized by the network and will be deemed as invalid blocks.

Besides serving the purpose of marking canonical blocks of the shard chains, crosslinks are also used to record and tally the signing activity of the shard chain validators.

Since epoch transition and EPoS election happen only on beacon chain, the validator signing activity from shard chains is sent to the beacon chain via the crosslink so it can be used for block reward calculation and uptime calculation which affect the validator’s election status.

⚙️ Harmony ecosystem

🏛️ Governance model

Validators propose and vote on proposals. Following are Harmony governance rules:

  • Only elected validators can create proposals, while unelected validators are still allowed to vote on the proposals, enabling them a voice of their own.
  • The proposal stays pending for the first 7 days after creation, so that all validators have time to get familiar with the topic and the impact of the proposal’s results.
  • After the initial 7 days, the voting period starts and lasts for 14 days. The voting power is equal to a validator’s total ONE token staked(including delegated ONE tokens). If a delegator does not agree with the vote of the validator he/she delegated to, he/she can simply redelegate to another validator.
  • For a proposal to successfully pass, 66% of all the staked tokens is needed to reach a majority quorum.

🤑 How much money does the project have for future development ?

  • The project raised:
    • $18.00M in private seed sale in May 2018.
    • $5.50M  in Node Round led by Binance Labs and HashKey Capital in the first half of 2019.
    • $5.00M during Initial Exchange Offering (IEO) in May 2019.
  • The team has access to around 50% of the total ONE tokens that can be sold to fund future development.

👍 Tailwinds

  • Growing ecosystem: Many projects have decided to deploy their apps on Harmony.
  • Network effects: Harmony ecosystem will become more attractive as more apps join the ecosystem. This positive feedback loop has the potential to result in exponential growth.

😨 Risks and challenges

  • Regulatory pressure: Blockchains and projects built on them are direct threat to the current banking, government and legal system. Governments will resist and  fight the change
  • Competition: There are many layer 1 blockchains trying to capture the same market.

💰 Tokenomics

ONE token had an initial supply of 12,60,00,00,000 tokens, which were distributed as follows:

  • Seed sale – 22.4%
  • Launchpad sale – 12.5%
  • Team – 16.9%
  • Protocol development – 26.4% (Of this total, about 505 million tokens were sold in the Node Round to incentivize early participants to join the network as validators)
  • Ecosystem development – 21.8%

Token Inflation

For ongoing staking rewards, Harmony’s economics model caps the annual issuance at 441 million tokens (about a 3% rate in long term). This model aims to give validators a predictable return.

Harmony also burns all transaction fees and slashed tokens.

Overall, about 3% inflation is a healthy inflation rate as it will incentivize ONE holders to stake their tokens making the network more secure.

Liquid supply curve

ONE tokens will be released as follows:

Demand pressure

Token’s price increases due to demand pressure.

Demand pressure on ONE token will come from:

  • Governance: ONE tokens are required to take part in governance of Harmony ecosystem.
  • Transaction fees: Users will acquire and pay ONE tokens(that are burned) to include their transactions in Harmony blockchain.
  • Staking and delegation: Users will also acquire ONE tokens to participate in the process of block validation.
  • Speculators: They will acquire ONE tokens for future price appreciation.

Supply pressure

Supply pressure on a token decreases its price.

Supply pressure on ONE tokens will come from:

  • Block rewards: ONE token has approximate inflation of around 3% which is issued to validators and delegators. Some of them will sell their rewards.
  • Harmony treasury: Harmony team will sell ONE tokens in their treasury to fund future development.

Market cap

Harmony aims to capture the same market as other leading layer 1 smart contract blockchains like Etherium which have a much higher market cap.

🧐 Indicators to watch out for

  • Youtube channel is growing:
  • Twitter account is growing:

😊 Do further research

You can continue your research by using following resources:

Further reading