Whether you’re a hardened crypto advocate or just entering the space, you’ll need to know about Proof of Work (PoW) and Proof of Stake (PoS). But what exactly do these terms mean? And, for that matter, what does Delegated Proof of Stake involve? Here, we’ll take a look at the most common consensus methods for cryptocurrencies and examine the pros and cons.
Proof of Work vs Proof of Stake
Let’s start at the beginning. Proof of Work (PoW) and Proof of Stake (PoS) are the most common consensus algorithms in the world of cryptocurrencies. They are both used to help network nodes agree on a single accounting system.
Bitcoin and most other major cryptocurrencies use the Proof of Work algorithm. However, this is an expensive and energy consuming system that requires miners to handle intricate puzzles to verify the integrity of a transaction and add it to a block.
The miner who solves the puzzle first receives a block reward, which is a part of the transacted currency. The Bitcoin block mining reward halves every 210,000 blocks. This means that the current block reward of 12.5 Bitcoins will decrease to 6.25 coins in the near future.
On the other hand, in the Proof of Stake consensus algorithm, miners become forgers. They don’t need to put in the same amount of work to create blocks. Instead, they build blocks based on their stake in the currency and the time they’ve been in the network.
This algorithm reduces energy consumption significantly and increases transaction speed, among other benefits. That’s why networks like Ethereum are developing new protocols to move from a PoW system to a PoS one.
What is Delegated Proof of Stake (DPoS)?
Delegated Proof of Stake (DPoS) is the democratic version of the Proof of Stake consensus algorithm since it includes a voting process. Token holders vote in real time for witnesses and delegates. They then become responsible for validating transactions and keeping their nodes continuously running to maintain the blockchain.
Witnesses are paid for their role in generating and adding blocks to the blockchain. And, as in any democracy, they need a solid reputation to maintain their popularity across token holders. Delegates, on the other hand, are responsible for maintaining the blockchain.
As the voting process is continuous, any witness or delegate that has lost credibility can be voted off. That’s because all witnesses and delegates are chosen with the network’s best interest in mind.
How does the Delegated Proof of Stake consensus work?
Delegated Proof of Stake, as a new method of securing a network, was created by Dan Larimer, who also founded Bitshares in 2014. According to its creator, DPoS can handle a higher transaction volume and provide faster confirmation times than PoW and PoS systems while being more energy efficient.
This is possible thanks to the smaller number of trusted witnesses required to verify each block in the chain. A lower number of users means each block can include more transactions, which automatically leads to an increased transaction speed. This is important as blockchains look to scale to onboard more users.
There are several safeguards in place to guarantee the integrity of the network. These include:
- Witnesses share the power equally. None of them can use their resources to gain more power inside the system.
- When a witness signs a block, it must have verification that another trusted node signed the block before it.
- Witnesses that miss their turns can lose their votes and positions in the network. This leaves a free place for another user to be elected.
This system gives all token holders the chance to become delegates, regardless of their resources.
Networks also build a reputation score to help voters make educated decisions when choosing their delegates.
In DPoS, a token holder’s reputation is the most important asset because delegates get rewards based on their status. It takes a long time to build up trust, and any misstep can have disastrous effects on someone’s credibility.
DPoS pros and cons
Like any new technology, this consensus algorithm comes with a series of advantages and disadvantages.
DPoS pros:
- The network processes more transactions in a given period.
- DPoS blockchains are more scalable than networks with PoW or PoS since they don’t require high computational power.
- The digital democracy gives more token holders the chance to decide the block producers, compared to PoW where miners with more capital produce more blocks.
- The system is energy efficient, which means it’s also environmentally friendly.
DPoS cons:
- Decentralisation is often hard to maintain, as the decision lays in the hands of a limited number of holders, leaving room for conspiracy and censorship.
- Low participation in the voting process can generate centralisation, by placing the power in the hands of a limited number of token holders (like any democracy).
Besides BitShares, other cryptocurrencies that use the Delegated Proof of Stake consensus or similar systems derived from it are Lisk, Nano, EOS, Steem, Ark, Golos, PeerPlays, Cardano, and Tezos. Each one of these networks implements the system differently.
The takeaway
PoW is still the most popular and trusted consensus algorithm, but its sustainability is often thrust into the spotlight due to its dependence on a high amount of power. While Proof of Stake and Delegated Proof of Stake are currently not without their issues, they look to be good systems for cryptocurrency sustainability in the future.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.