Proof of Stake vs. Delegated Proof of Stake

Blockchain Consensus Algorithms 

A central facet of any blockchain is its consensus mechanism, which refers to how all the stakeholders in a decentralized network agree on the validity of shared data (typically some kind of transaction, but not always) and secure that data on the blockchain. Consensus must be achieved before a blockchain network can move on and process new transactions. Proof of Stake (PoS) is an algorithm employed by cryptocurrency protocols to reach consensus. In PoS blockchains, an individual or group is algorithmically chosen to verify transactions with computer hardware based on the tokens they have staked, or locked up, in the network as a form of collateral.

To understand the increased efficiency that is achieved from PoS algorithms, you must first understand Proof of Work (PoW), the original blockchain consensus algorithm.

PoW algorithms demand work from the computers around the world that comprise decentralized networks. In the case of Bitcoin, this work is the computer processing power that solves a computational puzzle and the computers that carry out this process are called miners. When miners solve the computational puzzle, their block of data is deemed valid and added to all copies of the blockchain, thus achieving consensus. As a reward for their efforts, miners are granted a block reward in the form of bitcoin and then turn their attention to the next block of data. While this method is energy intensive, it has proven very successful at ensuring the security and stability of various blockchain networks.

History of Proof of Stake (PoS)

The concept of PoS was first theorized on the Bitcointalk forums in July 2011 as a way to make the process of verifying blocks more efficient than employing PoW consensus algorithms. Instead of thousands of computers competing and expending energy to confirm network data, as is the case with PoW, data verification is assigned to network nodes that have staked, or locked, their tokens as collateral in PoS. The concept has been iterated upon by the global blockchain developer community and is widely considered to be the successor to PoW as decentralized technology grows.

The Ethereum network is working toward replacing its PoW mechanisms with PoS in its Ethereum 2.0 update, which is expected to launch in 2021. Tezos, Cosmos, Cardano, EOS, Algorand, and Synthetix Network are just a few of the blockchains that currently utilize versions of PoS.

No energy-intensive mining is required on PoS networks. Instead, the PoS mechanism randomly chooses a validator to validate blocks of data where the cost of an intended malicious error is greater than the block reward. PoS algorithms use several methods to select who will validate the next block.

• The size of the stake: the more tokens staked, the higher the chance of being chosen to validate 

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

• Random selection: the lowest hash value (the string of numbers created by a hashing algorithm to represent data) combined with the largest stake is chosen to validate the next block

Incentives and Disincentives in Staking

As a way to keep validators from acting maliciously or adding fraudulent transactions into the block, the total value of tokens staked needs to exceed the transaction fees earned. If fraudulent activity is detected, the validator loses their stake and will not be allowed to participate in the validation process in the future. This is why larger stakes are favored, since the validator stands to lose more from acting maliciously. This system helps create trust between the respective parties.

PoS is particularly notable because it doesn’t require the hardware energy consumption required by PoW networks. On PoS networks, there is significantly less computation required. Further, PoS eliminates the barrier to entry of expensive computer hardware, instead placing priority on tokens locked up in the network. Theoretically, PoS also allows more users to participate in the creation of new blocks.

One criticism of the PoS methodology is that its design favors the wealthy — those who hold the most cryptocurrency — since it chooses validators with the most tokens staked. To combat this discrepancy, other methods for validator selection and iterations on the concept of staking have been developed: the most notable is delegated PoS.

Delegated Proof of Stake 

Delegated Proof of Stake (DPoS) is a popular evolution of the PoS concept, whereby users of the network vote and elect delegates to validate the next block. Delegates are also called witnesses or block producers. Using DPoS, you can vote on delegates by pooling your tokens into a staking pool and linking those to a particular delegate. You do not physically transfer your tokens to another wallet, but instead utilize a staking service provider to stake your tokens in a staking pool.

A limited number of delegates (most protocols choose between 20 and 100) are chosen for each new block, so the delegates of one block might not be the delegates of the next. Elected delegates receive the transaction fees from the validated block, and that reward is then shared with users who pooled their tokens in the successful delegate’s pool. The more you stake, the higher a share of the block reward you receive. The rewards are shared based on each user’s stake; so if your stake represents 5% of the total staking balance, you would receive 5% of the block reward.

The first iteration of DPoS was developed in 2014 by former EOS Chief Technology Officer (CTO) Dan Larimer. Larimer first implemented the consensus algorithm on decentralized crypto exchange platform BitShares in 2015. Today, a number of blockchains, including Cardano, EOS, and TRON, use DPoS.

According to its proponents, DPoS is a more democratic way of choosing who verifies the next block, allowing a more diverse group of people to participate in the process since it’s based on earned reputation as a lawful staker and not overall wealth. Additionally, because there are a limited number of validators, DPoS allows the network to reach consensus more quickly.

Testing and experimentation continue on PoS algorithms, including delegated PoS. This concept has shown immense promise for increasing the efficiency, transaction speed, and throughput of blockchain protocols, which is necessary for more enterprise uses as the industry grows and looks to disrupt more complex and larger markets. The switch from PoW to PoS-based consensus mechanisms is a watershed development for blockchain technology, and an iteration of PoS will likely become the dominant form of consensus in the future.