Is Delegated Proof Of Stake is The Proper Solution to Main Crypto Industry Problems or Just a New Cute Idea to Squander Money?
What is the difference between PoS and DPoS?
Delegated Proof of Stake (or DPoS) is a consensus algorithm created by developer Daniel Larimer in 2014. A list of notable projects using DPoS:
PoS is like direct democracy, while DPoS is like a representative. Classic PoS allows coin holders to “stake.” The coin holder confirms transactions and receives new coins as a reward.
Rewards in the PoS network depend on the number of coins owned by the holder (“staker”). The larger the stake, the greater the reward.
PoS encourages holders of large sums to stake and creates an inequality similar to the distribution of mining capacity in the bitcoin network: a miner who has invested more in equipment has a greater chance of finding a block.
Delegated Proof of Stake makes the distribution of coins and influence on the network more even and provides a greater degree of decentralization.
In DPoS blockchains, each wallet with coins on the balance can vote for the so-called “delegates” (Delegates, Block Producers, Validators) — special community representatives who have the right to generate a block and receive a reward in the form of transaction fees.
DPoS is resistant to attack by a corrupt minority. If delegates harm the network or go offline, network members re-elect and appoint new delegates until the number of honest block producers returns to 100%.
What are the functions of delegates in DPoS blockchains?
The delegates’ authority is to set up the basic rules of the network, maintain the stable operation of the blockchain, and generate blocks. They receive transaction fees as profit. Any member of the network can become a delegate, but only for a short time.
The network pays the delegate to generate new blocks and includes new transactions in them. The delegate can spend these funds at will on marketing, lobbying the interests of the community, but not for personal purposes. The coin holders decide how much a particular delegate will receive for their work. It depends on the rules of the network and the reputation of the delegate. The reputation is reinforced by the votes of users who, using their coins in the steak, constantly participate in elections. One user can give only one vote to a delegate, but vote for several candidates at once.
When the delegates are elected, each of them falls into a special group. People in this group have access to a genesis account.
This is a multisignature account through which you can change:
- block reward;
- block generation time;
- block size;
- remuneration for witnesses;
- transaction fees.
The parameters that are within the competence of delegates should not be changed too often: instability and novelty discourage newcomers and investors. A genesis account can also perform standard functions: use smart contracts, receive funds, and form a stake.
After making important decisions in DPoS blockchains, there is a short period of time during which new delegates can be re-elected. This is necessary if the rules set by the delegates are not approved by a majority vote of the users.
You can reduce or increase the number of delegates, replace them, but this will not affect the stability of the network.
How to become a Delegate?
The list of active delegates is updated after the vote count. The system then randomly selects delegates and queues them up. Each delegate gets the ability to generate a block. After all, delegates have taken advantage of the queue, their order is randomized again.
The delegate can not skip transactions in the block, postponing their confirmation. This approach requires trust in delegates and makes the system itself vulnerable to manipulation.
If the delegate did not create a block or include a transaction in it, then the next block is generated by another delegate and will be twice as large to include unconfirmed transactions. This eliminates a malicious attempt to block or delay block generation.
In the long term, blocking specific transactions is impossible: if a delegate abuses his authority, the rest of the network has mechanisms to remove him.
Who are the Witnesses?
Users who are staking and have a chance to temporarily become a delegate are called witnesses (Witness, Witness Node, Validator, Block Producer, since they are witnesses of transactions and at the same time network nodes). DPoS uses a reputation system and real-time voting to elect witnesses and delegates.
Witnesses generate and distribute blocks, confirm transactions, hold coins in the stake, and vote. Unlike delegates, they cannot configure basic network rules. During transaction confirmation, witnesses and delegates cannot change transaction details such as amount, sender, recipient, ID, and so on.
They also check:
- incoming blocks and signatures for transactions;
- the results of the smart contract execution;
- whether the delegates are legally elected;
- distribution of user transactions.
Each full node can provide read access to blockchain data, which makes the system look like a decentralized content delivery network (CDN).
How does DPoS staking work?
All coins in DPoS blockchains are divided into free (in circulation) and those in staking. Everyone determines the size of the steak himself, and you cannot spend it. With the help of such coins, one can become a witness, vote for delegates, and take part in the management of the network through smart contracts.
What are the pros of staking?
- No need to invest in expensive equipment to mine new coins;
- No high power consumption;
- The complexity of the attack is 51%: the attacker must own at least 51% of all tokens;
- During airdrops, some projects distribute coins among the stakers faster;
- DPoS staking is used not only for making money but also as a tool to influence the network.
Does DPoS have significant drawbacks, and what?
There are the following disadvantages:
- De-anonymization of witnesses, since they are often public companies, not private individuals.
- Possibility of carrying out DDoS attacks on network nodes.
- Most do not have enough incentive to vote because their stake is too small.
- The danger of centralization: the owner of large resources can re-elect himself.
- Voting with a wallet carries high financial and political risks: voters are more likely to take a bribe or not vote at all.
- Some implementations recommend using multi-core processors for validation, otherwise, the delegate may miss out on the block reward.
- During staking, the coins are fixed for a while, so if the price drops too much, you won’t sell the coins right away.
Renowned Bitcoin maximalist Nick Szabo expressed concern about one of the DPoS implementations:
“In EOS, a few strangers can freeze what users think is their money. As part of the protocol, you need to trust a constitutional organization made up of people you will never know personally. The EOS Constitution is not socially scalable and is a security hole.”
During the April 2019 vote to replace the interim constitution with a user agreement (EUA), the turnout was 1.7%. The decision had to be made by block producers, which led to accusations of centralization and dampness of some DPoS implementations.