CoinMarketCap dives into the workings of PoS and dPoS blockchains, understanding the difference in systems of each consensus mechanism.
- Proof-of-Stake (PoS) and Delegated Proof-of-Stake (dPoS) are the most popular staking-based consensus protocols.
- Consensus ensures network participants validate transactions without central authorities.
- Mining involves verifying transactions in exchange for rewards, while consensus algorithms enable transaction validation.
- PoS requires staking assets to become a validator, with higher stakes increasing the chance of selection.
- DPoS involves voting for representatives who validate transactions, offering speed and scalability.
- PoS and dPoS differ in block creation (staking power vs democratic election) and governance (rigid vs democratic).
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What Are Consensus and Mining?
What Is Blockchain Consensus?
The core ethos of blockchain technology prioritizes a decentralized approach to bookkeeping. The concept ensures that each participant or node of a network can access a copy of an electronic ledger (blockchain) and confirm the validity of its content in real-time.
This model stamps out central authorities like banks such that participants or network nodes collectively confirm that the data entered into the blockchain is valid. And for this to work, the network must incorporate a means of harmonizing all the copies of the ledger held by individual members. Only then can consensus be achieved.
What Is Mining?
Different Types of Consensus Algorithms
It is worth noting that there are several protocols specially designed to enable blockchain consensus. The following are some of the popular options:
- Delegated Proof-of-Stake
- Nominated Proof-of-Stake
All the above consensus mechanisms share a similar trait in that they look to enable a transaction verification system governed by the participants of a network. However, what sets them apart is the way they go about establishing consensus and picking validators. For instance, the Proof-of-Work mechanism requires the would-be validators to commit their computing power to the network. On the other hand, Proof-of-Stake allows validators based on their willingness to lock an amount of cryptocurrency on the blockchain.
Why Blockchain Needs Consensus Mechanisms
As mentioned earlier, consensus protocols enable decentralized systems for validating the data entered into blockchain ledgers. They ensure that blockchains are not reliant on central authorities. Instead, they ascertain that network participants, due to the incorporation of consensus protocols, can play important roles during the validation process.
Consensus protocols implement and manage systems for randomly picking validators responsible for adding new transactions to the blockchain. The protocols also incentivize participants to work in tandem with the goals of the blockchain at large. Hence, activities that contribute to the security of the ecosystem are rewarded. On the other hand, some consensus protocols penalize validators for downtimes or malicious activities.
What Is Proof-of-Stake (PoS)?
And so, the need for energy-efficient alternatives to PoW birthed the Proof-of-Stake mechanism. Unlike PoW, Proof-of-Stake requires users to stake certain crypto assets to prove their commitment to becoming validators.
In essence, the would-be validators need to lock assets on the blockchain as a sign of commitment toward the well-being of the network. The whole idea revolves around the reasoning that it will be irrational for participants to compromise the validity of the network if their money is on the line.
The PoS mechanism randomly selects validators from the pool of stakeholders. Think of this as a lottery-based selection system whereby the lucky winner gets to add new batches of transactions to the blockchain. Every time a new block of transactions is added, the lottery kickstarts again to pick the next validator.
Note that the chances of emerging as a validator tend to rise as the number of staked coins increases. In other words, nodes with higher stakes (the number of tokens locked on the blockchain) tend to have a higher chance of being selected as validators. Another factor that influences the selection process is the duration of the stake.
Additionally, successful validators receive the newly minted coins native to the PoS network as rewards. This is in addition to transaction fees.
Another important detail about PoS is that it poses penalties to discourage malicious acts. Defaulters – validators who fail to complete their task or add invalid transactions – risk losing part or all their staked funds. Defaulters may even receive a ban after losing their stakes. An example of a blockchain that uses the PoS mechanism is Ethereum.
Advantages and Drawbacks in Proof-of-Stake
The following are the advantages of the PoS consensus mechanism
- PoS offers a significant improvement in terms of energy consumption when compared to the Proof-of-Work algorithm. The staking-based validation process of PoS blockchains makes them far more energy-efficient than PoW networks.
- The PoS consensus mechanism establishes an economy that incentivizes or penalizes validators. This system, to a large extent, prevents the occurrence of fraud and nonchalance on the part of validators.
- Since the computational requirements for staking are not as technical as that of the PoW mechanism, more blockchain users can partake in the validation process. Going by our definition of consensus, the more people involved in keeping the network safe, the more decentralized the blockchain becomes. Hence, staking is a more inclusive model compared to the mining mechanism in PoW-based ecosystems.
Drawbacks of PoS
- The PoS consensus algorithm tends to restrict the validation process to high net-worth participants, considering that stakers with high stakes are usually prioritized. However, some solutions have found a way around this. They set up a platform where users can pool and jointly stake their assets. These solutions allow network participants, who ordinarily can not meet the minimum financial staking requirement, to do so as collectives. It also improves their chances of being picked as a validator.
- It is also worth mentioning that blockchains are susceptible to a threat called the 51% attack, which usually occurs when an entity controls over 50% of the network's resources. In the case of PoS consensus-based blockchains, the 51% attack occurs when an entity owns more than half of the total amount staked by the entire network. During such attacks, it becomes possible to manipulate the blockchain's historical data.
What Is Delegated Proof-of-Stake (DPoS)?
Delegated Proof-of-Stake (DPoS) is another variant of staking that borders on speed and scalability. Unlike the PoS consensus mechanism, DPoS sets up infrastructures that open the transaction validation system to the entire network. It looks to get everyone involved, even those who are unable to meet the minimum requirements for becoming validators.
The concept tries to democratize the network so that the average user can vote for representatives that will take up validation-related tasks on their behalf. As its name implies, DPoS allows the average blockchain user to vote for representatives who are ready to take up the technical requirements of validating transactions.
How Does DPoS Work?
As mentioned earlier, voting is a vital component of DPoS. The protocol assigns voting powers to users based on the number of the blockchain's native tokens they have staked. In some cases, stakers can transfer their voting power to other users instead of voting directly for a validator node.
Witnesses are node operators elected to add new blocks of transactions to the blockchain. They have to meet the required hardware specifications for block producers. More importantly, they ought to have a good reputation in order to attract enough votes. Once witnesses successfully add new blocks of transactions, they receive rewards, which they can share among the stakers who voted for them.
The transaction time of dPoS is a lot shorter than that of PoS. This is because most DPoS blockchains maintain a small network of witnesses – usually between 20 and 100. As such, it takes less time to verify a block of transactions.
Delegates are core elements of the governance of DPoS blockchains as they propose changes that would shape the future of the blockchain network. The proposed changes are then put up for a vote. This governance voting exercise is open to all participants of the network as long as they have staked the network's native token.
Limitations of Delegated Proof-of-Stake (DPoS)
Having explained the workings of a DPoS consensus mechanism, you may be wondering: what are its limitations?
Since a limited number of nodes power the verification process, dPoS blockchains tend to become centralized. This is particularly true for blockchains that rely on a handful of witnesses to verify transactions.
Differences between Proof-of-Stake (PoS) and Delegated Proof-of-Stake (DPoS)
The PoS protocol bases its validator selection process on the staking power of users. In other words, users become eligible to become validators when they lock assets on the blockchain. In contrast, dPoS enables a democratic system whereby token holders elect validators. Since dPoS assigns transaction verification roles to a handful of participants, the block creation time – the time it takes to add a new block of transactions – is usually shorter.
PoS, on the other hand, allows just about any node operator to compete for the role of validators as long as they fulfill staking requirements. Hence, it takes a lot more time to select validators.