Alternative to PoW and PoS: Delegated-Proof-of-Stake

Without a consensus algorithm, blockchain would be impossible. Some algorithms enable the construction of decentralized systems with high reliability, while others enable the construction of blockchains with high throughput and scalability. The most well-known Proof-of-Work consensus method served as the foundation of the Bitcoin network and gave rise to the mining phenomenon.

Why is a Сonsensus Algorithm Necessary?

Together with hash functions, block size, and network bandwidth, the consensus method is one of the primary parameters of blockchain systems. A consensus algorithm in computer science is a way through which scattered nodes in a network reach consensus over a data element.

The topic of agreement amongst the nodes of a distributed network has been explored at least since the 1960s, when distributed and parallel computing research began. In April 1985, Fisher, Lynch, and Patterson released The Impossibility of Distributed Consensus with a Single Defective Process, one of the most influential publications in the field of distributed systems.

Without a consensus mechanism, the nodes of the blockchain system will be unable to determine which transactions are valid and who will be rewarded for their processing. Picture a bunch of friends arguing about where to go every Friday evening after work. Thus, they devote all of their attention to it. To determine who and how will select the meeting location, a consensus procedure is required.

The development of consensus methods in distributed ledger systems

Proof-of-Work was the first consensus algorithm employed in the blockchain system (PoW). The Bitcoin blockchain relies on Proof of Work. The concept of such an algorithm was initially described in 1993 by Cynthia Duard and Moni Naora in their scientific paper on the strategy of combatting email spam.

The PoW method became well recognized after the Bitcoin whitepaper was published in 2008. There, Proof of Work prevents double spending of coins. To produce a new block of transactions, the participant must randomly select a number that, when combined with information about the block, yields the value of the SHA256 hash function that conforms to the network’s regulations.

In other words, the rate of Bitcoin mining is solely dependent on processing power and chance. The first cryptocurrency was first mined on home computers by hobbyists, but as its popularity grew, entire companies began to mine it. Bitcoin’s network has caught up with the Czech Republic in terms of energy consumption.

In 2012, Peercoin project members Sunny King and Scott Nadal announced Proof of Stake (PoS), an alternative to Proof of Work (PoW) and a response to the high electricity costs associated with bitcoin mining. Yet, the concept of PoS was discussed on the Bitcointalk forum as early as 2011. In PoS, network participants instead freeze a set number of tokens in their wallets.

Depending on the size of the bid, the algorithm then selects the next block producer among the participants. Hence, participants reinforce network integrity not with the cost of computing but directly with network assets.

Yet, the Nothing at Stake dilemma is applicable to PoS. Participants can serve as validators on both chains at no additional expense in the case of a fork. This increases the chance of repeated forks in the system, which devalues the coin and undermines the system’s credibility.

PoW and PoS algorithms allowed monopolies to exist. Participants with more processing power in Proof-of-Work and players with a larger quantity of tokens in Proof-of-Stake earn greater profits and system control.

In 2013, Daniel Larimer created Delegated-proof-of-stake (DPoS), a sort of Proof-of-Stake that is conceptually analogous to representative democracy in contemporary nations. In DPoS systems, players elect validators who validate and add blocks in exchange for a payment using their tokens. Larimer utilized the algorithm in his blockchain ventures BitShares, Steem, and EOS.

Advantages of DPoS

The primary benefits of DPoS are its democratic management structure, scalability, and relatively low energy requirements for network maintenance.

Versatile on-chain governance structure

DPoS is an instance of on-chain self-government. Participants elect delegates (validators) and can at any time withdraw and redistribute their votes in this variant of representative democracy. The capacity to arbitrarily select and remove validators places the true power in the hands of all token holders. The validators serve as a type of employee who is compensated for their diligent data processing.

Scalability and speed of transaction processing

The DPoS algorithm enables faster consensus on fresh blocks than PoW and PoS. In fact, a relatively small number of network nodes in a DPoS system must agree on the validity of a block for all of its transactions to be deemed part of the main chain.

Resource conservation

It is crucial that DPoS-based blockchain systems utilize much less energy than their PoW counterparts over the long term.

Simply put, DPoS validators use their processing power directly to execute transactions, whereas PoW miners spend the majority of their power and energy solving the problem, which is only required to match the system’s artificial circumstances.

Moral Ambiguity and Uncertain Prospects for DPoS

A zero-sum game appears to exist between transaction processing speed, security, and decentralization. PoW is the most secure and decentralized consensus algorithm, at least in theory, at the expense of scalability. PoS scales well, however its centralization has been challenged. DPoS could surpass PoS in terms of scalability, however it has been critiqued for its centralization risks.

The developer of bitcoin aimed to establish a digital democracy prototype in which each user would have one vote. Whoever Satoshi was, he declined to vote on IP, reasoning that a single individual can simply seize control of a huge number of IP addresses and subjugate the network.

“Proof-of-Work also overcomes the problem of voter representation in the decision-making process. If the majority were determined according to the principle of one IP address, one vote, a participant with access to a large number of IP addresses may manipulate the vote to their benefit. According to Proof-of-Work, one computer processor is equivalent to one vote.” – Bitcoin whitepaper.

Ideological arguments over centralization and decentralization are a perennial issue of discussion in the cryptocurrency community. Yet, systems that emphasize scalability and universality rather than decentralization are gaining popularity. The DPoS algorithm and its variations are one method for attaining these advantages.