Varieties of Proof of Stake: LPoS, PPoS, HPoS, PoV

Proof of Stake: A Departure From Proof of Work

A fundamental element of any blockchain network is how it achieves consensus throughout its distributed network when confirming the record of transactions that have taken place. Bitcoin — and many of the blockchain networks that followed — use what’s called a Proof-of-Work (PoW) consensus mechanism. Within a Proof-of-Work architecture, hardware operators referred to as miners contribute computing power toward the validation of network transactions, and receive compensation in crypto for doing so. This process of crypto mining is what drives the execution and recording of transactions on PoW protocols.

However, the proliferation of PoW networks has resulted in a mining hardware arms race among miners, who require more — and increasingly sophisticated — equipment to increase their chances of successfully mining new blocks. This consolidation inhibits the security and decentralization of a blockchain network’s infrastructure. Further, blockchain networks that rely on crypto mining struggle with rigid scalability limitations and are increasingly coming under fire for being energy inefficient.

Most next-generation blockchain networks that followed in Bitcoin’s wake have adopted a newer consensus mechanism using the Proof-of-Stake (PoS) model. First proposed in 2011, PoS consensus mechanisms represent a reimagining of the process of achieving network consensus; a process that’s designed to address the inefficiencies and limitations inherent in traditional PoW transaction verification procedures.

Original Proof-of-Stake Consensus Mechanism

Rather than using energy-intensive hardware mining to validate transactions, Proof of Stake — as reflected in the architecture for the Ethereum 2.0 network upgrade — relies on network devices, or nodes, to verify and record transactions and earn crypto rewards. Instead of hashing data to earn the right to validate transactions, node-based validation is primarily designated by computational randomness, weighted by the amount of financial collateral a node has committed to the network through what’s known as staking.

Anyone can stake tokens to a network, and you can even contribute your tokens to staking pools that administer the process for you. PoS algorithms use several methods to select which nodes will validate transactions:

• Size of the stake: The more tokens you have staked, the greater the chance of being selected to validate.

• Age of the tokens staked: The longer the tokens have been unspent, the better the chance you have of being chosen to validate (once that stake is used to verify a block, its age is reset to zero).

• Random selection: While the PoS validator selection process is tilted in favor of larger token holders, this mechanism is still embedded with a degree of randomness in order to avoid centralization.

Because this pseudo-random selection process is mainly based on passive crypto deposits rather than computational power, PoS is far more resource-efficient than PoW systems, which require mining hardware to expend energy in competition with one another ad infinitum. By eliminating the need for powerful mining equipment, PoS also removes the technical barriers to entry to participate in a network’s validation process. This lowered bar for access results in greater decentralization as nodes are distributed more widely — and with that comes greater security.

While Proof of Stake is a popular consensus mechanism that mitigates many of the issues inherent in PoW protocols, critics have argued that PoS protocols favor large token holders — with the rich getting richer each time they receive rewards as a validator. Although this is a valid criticism, top token holders do have a financial incentive to act honestly as validators: Any damage or disruption to the network would have a negative effect on the value of their own tokens. So this financial incentive further enhances the network’s security.

To become a network validator, most original PoS networks require a minimum staking amount. However, many blockchain projects are intent on mitigating the risk of favoring larger token holders to the detriment of other users in order to maintain optimal decentralization and equitability. Multiple variants of the PoS consensus mechanism seek to improve this validator selection process and enhance network efficiency.

Delegated Proof of Stake

In a Delegated Proof-of-Stake (DPoS) architecture, network participants have the right to delegate the production of new blocks to a fixed number of delegates, often also known as witnesses. Users determine which delegates will validate new blocks via a democratic voting mechanism in which votes are weighted by the amount of tokens locked up in platform crypto wallets. This voting process is continuous and users can replace ineffective delegates with another validator at any time. This means that delegates must behave honestly and effectively to continue receiving the backing of their voters and stakeholders. Approved delegates split block production rights evenly among themselves. In exchange for backing a delegate, stakeholders receive a share of that delegate’s block production rewards in proportion to their token holdings staked with that delegate.

This stake-weighted voting and delegation process arguably makes DPoS’ block creation process more democratic than traditional PoS protocols, and as the threshold to participate in the DPoS voting process is very low, DPoS is widely considered one of the most egalitarian ways to achieve consensus on decentralized networks.

Further, since a small group of validators can reach consensus more quickly than a system that requires network-wide consensus, DPoS systems can generate blocks more quickly and handle more transactions per second (TPS) than many other consensus protocols. That said, given that DPoS protocols set a hard limit on the number of active delegates that are creating new blocks (typically between 20 and 100), this structure still results in a certain degree of centralization.

While traditional PoS protocols are pseudo-random but weighted in favor of large token holders, DPoS allows all token holders to play a role in influencing network decisions. As a result, DPoS is currently the most widely adopted variant of PoS. Several major projects including EOSIO and TRON use DPoS.

Leased Proof of Stake

Leased Proof of Stake (LPoS) is a consensus mechanism used in particular by the Waves blockchain, whereby users lease crypto tokens to a node that intends to act as a network block producer. The more tokens a node has staked, the more likely it will be chosen to generate the next block and receive the corresponding reward, and token owners have the right to cancel their lease at any time. As a result, smaller token holders who otherwise wouldn’t be eligible to participate in the block creation process in a traditional PoS system can pool their assets and increase their chances of receiving a share of the network’s transaction fees. Users can shop around to find the node that best suits their investment strategy, as some nodes may distribute greater rewards.

LPoS protocols are best applied to networks that have high technical requirements to run a full node capable of validating on-chain transactions. This consensus mechanism rewards the best-performing nodes by incentivizing smaller users to support the most efficient validators in a way that is both transparent and sustainably self-serving.

In terms of net effect, this consensus mechanism is fairly similar to DPoS. However, while DPoS validators are selected by the top stake-weighted votes of other network participants, token holders within an LPoS network can borrow and lend tokens directly to participate in the block production process themselves.

Pure Proof of Stake

Pure Proof of Stake (PPoS) is a highly democratized form of PoS used by Algorand, a public blockchain project focused on user-friendly decentralized application (dApp) development. Unlike many other forms of PoS, PPoS consensus mechanisms do not feature a built-in sanction mechanism to prevent malicious node activity or potential security faults such as duplicate block validations. Instead, PPoS offers low minimum staking requirements for participating in and securing the network, which opens the doors to all interested users. This creates a system whereby it would be financially self-destructive for rogue actors to disrupt or hijack the network.

On the Algorand network only one ALGO coin is required to participate in the network staking process. In contrast, Ethereum 2.0 requires a minimum stake of 32 ether (ETH), an amount that establishes a much greater barrier to entry for users. Any Algorand network user may be randomly and secretly selected to propose new blocks and vote on proposals, and the likelihood that a given user will be chosen — along with the weight of its proposals and votes — is proportional to that user’s stake. A PPoS system will operate normally as long as two-thirds of the network’s nodes are acting honestly. Although the low minimum staking requirements involved in PPoS potentially could undermine network security in some scenarios, this protocol has served Algorand well.

Proof of Importance

While traditional PoS consensus mechanisms consider only the amount of capital a node has vested when determining that node’s proportional governance capabilities, Proof-of-Importance (PoI) mechanisms incorporate additional factors when weighing each node’s respective level of on-chain influence. PoI is an iteration of PoS that strives to take a more holistic approach to evaluating user contributions rather than focusing on just capital requirements. PoI was first introduced by the New Economy Movement (NEM) project.

The exact scoring criteria used in PoI varies, though many of these consensus mechanisms borrow features from the algorithms used in network clustering and page ranking. Common factors include the number of transfers a node has participated in over a set period and the degree to which different nodes are interlinked via clusters of activity.

PoI helps mitigate the risk of concentrated excess wealth, as the top token holders do not wield absolute power over the network. Because each node’s importance score is dynamic and based on network activity, this consensus mechanism discourages blockchain forks: Users would need to expend resources to remain active on both forked networks in order to maintain their score.

Liquid Proof of Stake

Liquid Proof of Stake (LPoS) lets token holders loan their validation rights to other users without relinquishing their token ownership. While this might sound similar to DPoS, token holders in a LPoS network make their own choices about whether to delegate their tokenized validation rights to other users or stake their own tokens. Furthermore, the number of active validator nodes in LPoS is dynamic, which differs from DPoS’ fixed-validator count. For instance, Tezos, which utilizes LPoS, is technically capable of supporting as many as 80,000 validators instead of the few dozen or so validators that most DPoS networks allow. Moreover, Tezos’ block creation process doesn’t involve elections.

As a result, users within a LPoS network have a high degree of flexibility in terms of network participation. For instance, large token holders can become block validators by staking their own funds without needing external approval. And smaller holders who don’t have the resources to validate blocks themselves can support larger holders or gather together to form effective coalitions. At the same time, because LPoS validation rights are so fluid and can easily be rearranged, this setup helps to mitigate the risk of any majority coalition taking over the entire network.

Proof of Validation

Proof of Validation (PoV) is a unique PoS consensus mechanism that works to achieve consensus via staked validator nodes. Typically, each node within a PoV system keeps a complete copy of the sequence of transactions in blocks that are created on the blockchain, a copy of all user accounts that can be identified by a user’s public key, and whatever crypto tokens or coins that node owns. From there, users can stake their coins or tokens inside validator nodes. Consequently, the number of tokens staked within each validator determines the number of votes that specific validator possesses.

A new block is confirmed once a set of validators with at least two-thirds of the network’s total voting power sends a commit vote for that block. However, this also means that PoV protocols may not be Byzantine fault-tolerant, in the sense that they can remain healthy only if one-third or less of a network’s total nodes are compromised. The Cosmos network’s Tendermint consensus algorithm is a type of PoV protocol.

Hybrid Proof of Stake

While most PoS protocols are a deliberate departure from PoW, some hybrid consensus mechanisms use elements of both PoW and PoS together to power on-chain operations. In most cases, these hybrid consensus mechanisms (HPoS) rely on PoW miners to generate new blocks housing transactions, which are then passed on to PoS validators, which vote on whether to confirm the blocks and record them to the blockchain’s ledger.

HPoS protocols can help stabilize the price of a network’s native coin, and by allowing PoS participants to vote on new blocks and changes to the network’s consensus roles, miners are less likely to achieve a hash-power monopoly. Therefore, by combining hashing power with stakeholder voting, HPoS protocols can achieve an impressive level of network security and stability. Several notable projects have adopted a hybrid PoW-and-PoS consensus mechanism, including Dash and Decred. Ethereum’s upcoming Casper upgrade will transition the Ethereum network to a HPoS model.

Consensus Mechanisms: Change Is the Only Constant

As blockchain developers mix and match existing protocols and design new ways to streamline on-chain governance, the number of consensus mechanisms — PoS-based or otherwise — will continue to grow. While the protocols described present a broad view of Proof of Stake in practice today, change is the only constant within the blockchain space.

Hundreds of blockchain projects have so far implemented some form of PoS, and by improving network decision-making, scalability, and resource efficiency, this consensus-mechanism category is expected to play an increasingly integral role in the future of the blockchain industry.