The XS in SAP HANA XS Engine stands for Extended Application Services. While the acronym itself may not entirely...
make sense, the role of the SAP HANA XS Engine is fairly clear. It is a lightweight application server embedded in SAP HANA that can be used to layer procedural logic and Web services on top of HANA tables and views. Applications that run on the SAP HANA XS Engine can be written by developers in HANA Studio, and they also can be generated by SAP's River Rapid Development Environment. XS Engine allows for the creation of applications on HANA using only HANA and a front-end application library, such as SAPUI5. No separate application server is necessary.
Primarily, XS Engine works on the level of incoming HTTP requests and outgoing responses. A request comes in to a given XS Engine service (which lives at a URL on the HANA system), and the service has complete control over evaluating the request and building the response it wants to send back.
That said, the design and vision of XS Engine are very clearly that it be used to support the development of lightweight services and applications in HANA. Developers considering heavier-weight applications should consider using a standalone application server running alongside their HANA system.
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