Proof-of-Stake and Delegated Proof-of-Stake for beginners

Blockchain technology has revolutionized the way we store and transfer data, enabling secure and transparent transactions without the need for intermediaries. One of the key components of a blockchain is its consensus mechanism, which determines how new blocks are created and transactions are validated. Two popular consensus mechanisms are proof-of-work (PoW) and proof-of-stake (PoS), with delegated proof-of-stake (DPoS) being a variation of PoS. In this article, we’ll explore PoS and DPoS in detail and their applications in the blockchain ecosystem.

Proof-of-Stake (PoS)

In a PoS blockchain, validators (also called “forgers” or “stakers”) are chosen to create new blocks based on their stake in the network. In other words, the more cryptocurrency a validator owns, the more likely they are to be chosen to validate transactions and create new blocks. Validators are incentivized to act in the best interest of the network, as they risk losing their stake if they act maliciously or validate invalid transactions.

PoS eliminates the need for expensive mining hardware and the associated energy consumption of PoW. It also allows for faster transaction processing, as blocks can be created more frequently. However, PoS requires a large amount of cryptocurrency to participate in the network as a validator, which can create a barrier to entry for small investors.

According to Vitalik Buterin, the founder of Ethereum:

PoS is a way of securing a blockchain network that does not rely on burning electricity to generate security.

Ethereum 2.0 and Casper

Ethereum, the second-largest blockchain by market capitalization, is currently in the process of transitioning from PoW to PoS as part of its Ethereum 2.0 upgrade, which aims to improve the scalability and security of the network. Ethereum 2.0 uses a variation of PoS called “Casper,” which is designed to be more secure and efficient than previous PoS implementations. Casper allows for faster block creation times and lower energy consumption compared to PoW, as validators do not need to solve complex cryptographic puzzles to create new blocks.

Another important change in Ethereum 2.0 is the use of sharding, a technique that splits the blockchain into smaller “shards” to improve its scalability. Each shard can process transactions and execute smart contracts independently, allowing for more transactions to be processed in parallel. Sharding also reduces the amount of data that needs to be stored and processed by each validator, making it easier for new nodes to join the network.

Delegated Proof-of-Stake (DPoS)

DPoS is a variation of PoS that introduces the concept of delegates, who are elected by token holders to validate transactions and create new blocks on their behalf. Delegates are incentivized to act in the best interest of the network, as they risk losing their position if they act maliciously or validate invalid transactions.

DPoS offers faster transaction processing and lower energy consumption than PoW, as delegates are responsible for creating new blocks instead of all token holders. It also offers more decentralization than PoS, as token holders have a say in who is chosen as a delegate. However, DPoS requires token holders to actively participate in the network by voting for delegates, which can create a barrier to entry for less active investors.

Dan Larimer, the creator of DPoS, stated:

DPoS offers a way to have the benefits of decentralization, the benefits of proof-of-work, and the benefits of proof-of-stake without any of the drawbacks.

PoS vs. DPoS

PoS and DPoS share the same basic concept of using validators to create new blocks, but they differ in how validators are chosen and incentivized. PoS relies on the stake of validators to determine who creates new blocks, while DPoS relies on the votes of token holders to elect delegates to create new blocks on their behalf.

PoS has a lower barrier to entry for validators, as it only requires a large amount of cryptocurrency to participate in the network. DPoS, on the other hand, requires token holders to actively participate in the network by voting for delegates.

DPoS offers more decentralization than PoS, as token holders have a say in who is chosen as a delegate. However, this also means that DPoS may be vulnerable to vote manipulation and centralization if a small group of token holders control a large portion of the network.

Use cases

PoS and DPoS are used by several blockchains, including Ethereum, Cardano, and EOS. They offer several advantages over PoW, including lower energy consumption, faster transaction processing, and more efficient block creation.

Ethereum plans to transition from PoW to PoS as part of its Ethereum 2.0 upgrade, which aims to improve the scalability and security of the network. Cardano uses a variation of PoS called “Ouroboros,” which allows for efficient block creation while maintaining decentralization. EOS uses DPoS to allow for fast transaction processing and efficient block creation, while also offering token holders a say in who is chosen as a block producer.

PoS and DPoS have also been used in the development of stablecoins, which are cryptocurrencies that are pegged to the value of a traditional currency or asset. For example, MakerDAO, a decentralized stablecoin platform, uses PoS to maintain the stability of its stablecoin, DAI. Validators are required to hold Maker’s MKR token to participate in the network, and are incentivized to maintain the value of DAI by maintaining a sufficient collateralization ratio.

PoS and DPoS are consensus mechanisms used by blockchains to validate transactions and create new blocks. They offer several advantages over PoW, including lower energy consumption, faster transaction processing, and more efficient block creation. PoS and DPoS have been used in several blockchains and stablecoin platforms, and are expected to play an important role in the development of the blockchain ecosystem. While they have their differences and limitations, they represent an important step forward in the evolution of blockchain technology.