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Guide: Delegated Proof of Stake (DPoS)

One of the major perks of blockchain technology is its ability to maintain an unchangeable record of transactions. It does this through what’s called a ‘consensus mechanism algorithm’ – a way of achieving agreement on a single state of a network, even with that network being distributed among many users.

If you’ve spent any amount of time learning about cryptocurrencies, you’ve probably heard of Proof of Work and Proof of Stake. These are two of the most popular consensus mechanisms out there and help power major players in the crypto space, like Bitcoin, Ethereum, and Solana.

Delegated Proof of Stake is the next step of the Proof of Stake consensus mechanism. Before we learn more about it in this guide, let’s first take a step back and make sure we understand Proof of Work and basic Proof of Stake, so we can fully appreciate the changes that Delegated Proof of Stake brings with it.

Proof of Work (PoW)

Proof of Work (PoW) is the consensus mechanism currently powering the top two cryptocurrencies: Bitcoin and Ethereum (more on Ethereum later). It’s the OG consensus mechanism.

PoW requires the use of computer hardware for ‘mining,’ an intensive process of solving complex algorithmic puzzles to verify data – the ‘Work’ in Proof of Work. As a reward, miners receive the native token of that network, i.e. Bitcoin.

This consensus mechanism is great for decentralization and security, but it does have its drawbacks. As mining hardware becomes more expensive, it can be harder to scale the network globally. PoW also requires a lot of energy, making it a target of environmentalists and politicians.

Proof of Stake (PoS)

Proof of Stake (PoS) first emerged in 2011 as a response to the energy-intensive nature of Proof of Work. 

Instead of mining, PoS requires network node operators to ‘stake’ the network’s tokens, meaning they have to lock their tokens as collateral. In a PoS system, who gets to validate the next block is chosen at random. However, factors like the size of their stake and the age of their stake play a role in the selection process.

Ethereum is currently in the process of switching from PoW to PoS and it’s projected this will cut the network’s energy usage by about 99.95%. Despite its greener approach to block generation, PoS faces its own criticisms. The biggest one is that, due to the size of a validator’s stake playing a role, it potentially favours the rich whales that own the most tokens. 

That’s where Delegated Proof of Stake comes in.

What is Delegated Proof of Stake (DPoS)?

Delegated Proof of Stake (DPoS) aims to provide a more democratic approach to block creation than its immediate predecessor. A few examples of DPoS blockchains are Cardano, TRON, and EOS.

In DPoS, instead of directly staking tokens to validate a block, network users vote and ‘delegate’ the validation of a block to ‘witnesses,’ also called delegates or block producers. Elected delegates are voted on by pooling tokens together in a ‘staking pool’ that is linked to a specific delegate.

This system, in theory, rewards both delegates and a more diverse group of normal users equitably. Elected delegates get the transaction fees of the network as the rewards for block validation. These rewards are distributed among the users of the staking pool.

The Future of Consensus Mechanisms

As blockchains continue to grow with global adoption, the need for consensus mechanism algorithms like Delegated Proof of Stake that can handle increasing transaction speed, throughput, and efficiency will likely grow along with them. 

Let us know your thoughts on Proof of Work, Proof of Stake, and Delegated Proof of Stake in the comments below!

 

For Cryptonary’s transparent opinion on Bitcoin, Ethereum, and other cryptocurrencies mentioned in this guide, check out the Ratings Guide here.

 

Disclaimer: THIS IS NOT FINANCIAL OR INVESTMENT ADVICE. Only you are responsible for any capital-related decisions you make and only you are accountable for the results.

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