DPoS

Is DPoS an Improvement over PoS?

Author: 
Michael R.
Date: 
September 28, 2018
Read time: 
10 minutes
DPoS
PoS
consensus

In this article, we will dive into a newer consensus mechanism called DPoS: Delegated Proof of Stake. DPoS is a new concept that the crypto community has been asking about. This new consensus mechanism is stirring up some confusion. In reality, though, it is quite simple to understand.

DPoS was proposed after Proof of Stake (PoS). So, before jumping into DPoS and DPoS vs PoS, we will take a step back and review the blockchain consensus algorithms that preceded it. Covering Proof of Work, Proof of Stake, and their general purposes will provide helpful context to allow us to fully explore DPoS.

What is consensus?

Any consensus is a general, majority agreement. The inability for decentralized systems (like cryptocurrencies) to reach an agreement is what prevented them from prospering - before consensus mechanisms were invented. 

Generally, peer to peer transactions have risks that can only be mitigated through verification and trust. Before consensus mechanisms, we had no other option but to rely on central banks and governments to act as our sources of consensus. Thanks to the blockchain, there is a whole transaction validation process in place to add trust to these networks. 

In this article, we will dive into a newer consensus mechanism called DPoS: Delegated Proof of Stake. DPoS is a new concept that the crypto community has been asking about. This new consensus mechanism is stirring up some confusion. In reality, though, it is quite simple to understand.

DPoS was proposed after Proof of Stake (PoS). So, before jumping into DPoS and DPoS vs PoS, we will take a step back and review the blockchain consensus algorithms that preceded it. Covering Proof of Work, Proof of Stake, and their general purposes will provide helpful context to allow us to fully explore DPoS.

What is consensus?

Any consensus is a general, majority agreement. The inability for decentralized systems (like cryptocurrencies) to reach an agreement is what prevented them from prospering - before consensus mechanisms were invented. 

Generally, peer to peer transactions have risks that can only be mitigated through verification and trust. Before consensus mechanisms, we had no other option but to rely on central banks and governments to act as our sources of consensus. Thanks to the blockchain, there is a whole transaction validation process in place to add trust to these networks. 

 

Why is Consensus Important?

Let’s use a historical example to illustrate the importance of consensus. If I want to trade you salt for sugar, how do we ensure that one of us is not ripping the other off? If we don’t implicitly trust each other, you can’t be sure that I am giving you real salt or the exact quantity I am claiming to give. Likewise, I can’t be sure that your sugar is legitimate, either. Ultimately, this is why centralized escrows and banks came to exist - to act as trusted third parties.

what is DoPs

Consensus algorithms take the place of trusted third parties in peer-to-peer networks. Now, there’s no need to trust a bank or a centralized escrow. Instead, we can trust a decentralized system of individual nodes that come to an agreement. In our salt and sugar example, the best way to exemplify a decentralized system of individual nodes would be to imagine a group of salt and sugar experts that could competently validate our goods prior to the trade.

 

The Importance of Honesty and Integrity in Consensus

To achieve proper and honest consensus, participants must have fair and honest intentions. The issue is that many individuals choose to be active nodes (‘voters’ in consensus) only for the rewards they can receive. In other words, they participate in consensus out of greed. Unfortunately, greed often fuels corruption. 

For example, many people abuse Proof of Stake because there are often no penalties. This means that a staker can not be staking for a month, then begin staking and receive full rewards with no penalty, and sometimes receive backdated rewards. It is important to reward nodes on many factors, one being consistent uptime. Ethereum’s Casper proposes solutions to keep stakers in check.  

 

Three Main Consensus Algorithm Types

Decentralized networks achieve consensus through different algorithms or logical schemes. Three main blockchain consensus algorithms, in order of popularity, are Proof of Work (PoW), Proof of Stake (PoS), and Delegated Proof of Stake (DPoS). Proof of Work is the oldest, most tested, and most utilized blockchain consensus algorithm. 

Let’s briefly dive into each of these consensus algorithms. Doing so will provide a basic understanding and lay the groundwork for explaining the purpose of DPoS. 

 

What is PoW?

Proof of Work is the consensus algorithm that was made famous by Bitcoin. Proof of Work is accomplished with hardware. Miners, individuals that choose to participate in Proof of Work, build mining rigs that continually attempt to find the next block of Bitcoin’s blockchain. 

Source: Cryptocurrency Virtual Summit Youtube Channel
 

Basically, mining is like solving a difficult math problem through guessing. The more guesses per second one can spit out, the better chances they have of finding the answer first. The person (or group of people) that finds the next block first receives a block reward. This is how blockchain transaction validation is completed in PoW schemes. Miners and nodes validate newly proposed blocks. People invest anywhere from hundreds to millions of dollars in mining equipment (generally GPU’s, fans, and lots of electricity). 

      What are PoW’s shortcomings?

  • It is expensive to start.
    • Many believe that cryptocurrency’s main mission is to offer a low barrier of entry solution that’s inclusive to everyone, thereby financially empowering the people. If any new user needs to invest large sums of money to be part of the network, the high financial barrier to entry defeats the entire purpose. Worse yet, high financial barriers to entry further empower the wealthy... 
  • Expenses present the opportunity for 51% attacks.
    • Wealthy individuals can afford to invest large amounts of money in mining rigs to dominate the network and potentially reach their own consensus. Controlling more than half of the mining power of a network is referred to as a 51% attack. 51% attacks ruin consensus and destroy the integrity of networks.
  • At times, mining is simply not profitable. 
    • If a network’s mining is not profitable, people are disincentivized to contribute to that network. Non-profitable mining is a threat to the existence of networks and ultimately slows down or stops the facilitation of transactions and general security.

what are PoWs

Source: elitefixtures.com
 
  • Mining can be manipulated. 
    • Since the advent of ASIC rigs (machines designed specifically for solving a certain coins’ algorithm), people have been made aware of the fact that engineers can try to game the system. By creating computer cards that can generate more hash power than the normal person purchasing GPUs to build their rigs, these engineers can gain unfair advantages. Essentially, they can create super rigs. 

In a DPoS environment, only elected nodes are allowed to stake and contribute towards consensus.

What is PoS?

After Proof of Work came Proof of Stake (PoS). Proof of Stake is technically different than Proof of Work in a number of ways, but in this article we will briefly explain it from a more conceptual point of view, much like we did with PoW. The blockchain transaction validation process differs from PoW. 

Proof of Stake is a method of achieving consensus through stakeholders who ‘vote’ on the next blocks of a blockchain. As a reward for contributing to the network, stakers receive more coins - much like how PoW miners are rewarded for their efforts. 

The main advantage of PoS over PoW is that blockchain consensus is reached digitally, without the need for hardware. As mentioned, users can contribute to networks simply by staking coins in their wallets. With PoS, users do not need to buy and build expensive, physical mining rigs. Instead they can invest directly in a coin they believe in and gain rewards for holding that coin. The barrier to entry is considerably lower than in PoW.

       
      What are the downsides of PoS?

  • Some argue that there is ‘nothing at stake’ in Proof of Stake. 
    • The ‘nothing at stake’ argument is that PoW is superior because PoW miners have serious investments in their hardware. Let’s say PoW miners choose to act maliciously (by attempting a 51% attack, for instance) and they succeed. In the end, the honest chain will fork into a new chain. The malicious miners wasted significant electrical cost and computing time for nothing. On the other hand, bad actors in old PoS schemes do not have to sacrifice any time, effort, or money to attempt attacks of any sort.

 What are the downsides of PoS

  • Individuals may be able to receive unearned rewards.
    • Another upside to PoW related to the ‘nothing at stake’ argument is that as long as a PoW miner is not mining at a chain, they cannot receive rewards. In some PoS environments, on the other hand, individuals can simply turn their computers on once a month and successfully stake without penalties. Sometimes, they can even receive backdated rewards - all without actually contributing to consensus. 
  • Risk of centralization.
    • A very wealthy person (or group of people) could potentially buy a majority of a cryptocurrency’s coins and achieve their own consensus. This is essentially the 51% attack in a PoS environment. However, this is much less likely than in a PoW system due to the higher cost. Additionally, a PoS attacker is completely invested in the coin. This means they will need to liquidate for profits, which cannot be done if they own a majority. 

 

What is DPoS?

After Proof of Work and Proof of Stake were implemented in various cryptocurrencies, Delegated Proof of Stake (DPoS) was introduced. In traditional PoS, anyone can act as a staking node. In DPoS, however, there are elected delegates. Delegates, in any context, are chosen by their peers to act in a certain role. In a DPoS environment, only elected nodes are allowed to stake and contribute towards consensus

     
      DPoS vs PoS?

  • DPos potentially carries more risk of centralization than PoS.
    • Just like with PoS, it’s possible that wealthy individuals could dominate a network. It must be noted, though, that this is not likely. It’s generally too expensive to be feasible, but it is still possible. 

what is DPos

Source: cryptobriefing.com
 
  • DPoS may not truly solve the problem of bad intentions.
    • Since a DPoS system has elected nodes, it is possible for a delegate to gain a solid reputation and appeal to other nodes, even though they ultimately have bad intentions. This type of scheming completely undermines the whole point of DPoS.
  • If the problem of bad intentions is not solved, DPoS may suffer worse than PoS.
    • Some individuals have argued, “If I don’t trust nodes in general, then why would I trust nodes to vote on other nodes?” While this thinking is a bit pessimistic, its logic is valid. Not only is each individual node potentially untrustworthy, but allowing people to then vote on delegates gives them even more power. 

 

Which Projects use DPoS and Why?

Despite its downsides, DPoS does have its advantages. If a group of nodes votes against their own interest, it is a waste of their time and money; DPoS provides incentives for nodes to act honestly. It is also believed that DPoS provides for added scalability. 

Some major projects using DPoS are Ark, EOS, and Bitshares. Bitshares was the first to use DPoS, then Ark began utilizing it, and finally, EOS turned to DPoS, as well. These are three big projects with major reputations to uphold. 

To really illustrate DPoS, we’ll explore EOS’ motives for using it. Keep in mind, EOS is a massive project. If the team behind EOS has chosen the wrong consensus mechanism, it will be truly devastating for them.

who use DPoS and Why

 

Why is EoS (specifically) using DPoS?

EOS utilizes DPoS for its flexibility. In PoW schemes, if someone gains majority power of a network, then the project owners can create a hard fork. As seen in Ethereum and its fork, Ethereum Classic, some miners still choose to stay with the original project - but not all will. Ultimately, the fork makes the main project less secure since the entire group of miners becomes fractured. 

On the other hand, with DPoS, a bad actor can lose its power quickly through the democratic voting process. This is considered an advantage over PoW which relies on the processing power of a few major authorities. Simply put, in PoW schemes, miners cannot be outvoted. This is actually the essence of the debate DPoS vs PoW. The teams using DPoS believe that its voting process makes it more decentralized and more flexible to defend against attacks. Yet in our opinion, we feel the opposite. We believe that the voting in DPoS actually centralized the environment. For example, EOS has 21 delegated nodes as compared to Ethereum’s 14,000 nodes.

Only the Future Will Tell if EOS DPoS is Effective

Despite all of the noise DPoS and its proponents are making, we are skeptical of DPoS and its proposed advantages. It will be interesting to see how EOS fares with DPoS as its consensus mechanism. I would not be surprised if EOS actually employs a bunch of their own delegated nodes to start, creating a centralized environment. 

 

What’s “At Stake” for EOS DPoS?

EOS has a big reputation to uphold. The project competes with Ethereum as a platform for developers to create and launch decentralized applications (dApps) on top of. EOS earned mainstream headlines by holding the largest ICO yet and raising a record $4 Billion. EOS is in the spotlight, so it’s critical that their EOS DPoS technology performs extremely well. If EOS, $4 Billion backed company, cannot achieve consensus and cannot scale with onboarding dApps and users, EOS’ reputation will take a huge hit

Biggest ICO

 

Ready to Dive Deeper into the Crypto Space?

Now, when someone mentions “DPoS” or “EOS DPoS” you should have a broad understanding of what it is they are referring to and how this new consensus mechanism came to be. In summary, it is a Proof of Stake scheme in which only delegated nodes can achieve consensus. Unfortunately, I do not see the advantage to DPoS over traditional PoS, especially considering Ethereum's Casper proposal. 

Knowledge is power when it comes to investing. Most people do not understand the differences between DPoS, PoS, and PoW, but having a stance on these will give you an edge over other investors. For example, if you do not agree with the philosophy behind DPoS, then perhaps you will stay away from those projects. To continue gaining that investor edge and learning more about cryptos, check out our blog
 

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