One of the things that most defines a cryptocurrency is the way it achieves consensus. Because blockchains are decentralized, there must be a method by which all network participants agree on which transactions are valid. Accomplishing this task is referred to as achieving consensus, and that is typically done with either a proof-of-work (PoW) algorithm or a proof-of-stake (PoS) algorithm.
Where PoW uses large numbers of computers to perform “work” to confirm transactions, with PoS network nodes that have locked up or “staked” tokens as collateral are randomly assigned the task of verifying transactions.
PoS has been expanded upon in recent years, and has been increasingly adopted within the global blockchain community. Numerous variations upon the original PoS concept have been developed, including delegated proof of stake (DPoS).
What Is Delegated Proof of Stake (DPos)?
In DPoS, network users vote for “delegates” who will serve to validate the next block. Delegates can also be referred to as “block producers” or “witnesses.”
With DPoS, users get to vote for witnesses by adding their tokens to a staking pool and linking those tokens to the witness of their choice. Tokens aren’t transferred to another wallet but are staked in a pool by use of a crypto staking service provider.
By letting users choose the people they want to validate the next block and make decisions about the network’s future, it’s thought that the system will be fair and equitable.
Example of DPoS
Several popular blockchain networks use the DPoS consensus mechanism. One example, and one of the first to use this consensus method, is Steemit.
Steemit is a blockchain-based social media network that rewards users for creating and curating content. Rewards are distributed in the platform’s native token, STEEM. The platform is based on blogging and commenting and may be compared to Reddit or Medium. Steemit is managed by a private company called Steemit, Inc.
For a number of years, the Steemit experiment and its DPoS consensus worked wonderfully. But in 2020, Justin Sun (founder of the Tron network) took over the network by acquiring a large number of STEEM tokens.
To summarize a months-long drama that occurred over the course of 2020, here’s what happened:
• Justin Sun somehow managed to acquire a large amount of STEEM tokens.
• This empowered him to elect enough Steemit witnesses to control the entire DPoS network. This, of course, is the opposite intent of a decentralized network — no one person or entity should have controlling interest.
• Sun elected his own witnesses who would then control the network in a manner of their own choosing.
• Some Steemit users revolted by initiating a hard fork, creating a new network called Hive.
DPoS networks work well when tokens are distributed in an equitable fashion and users elect witnesses they believe will work in the network’s best interest.
But if one person or group acquires enough tokens — as Justin Sun did — they can put their own witnesses in charge. By doing this, they’re circumventing — and basically upending — the entire delegation process. Because delegates change from block to block, those who hold the most tokens can keep their chosen witnesses in power indefinitely.
It can end up working a lot like a democracy where politicians have no term limits and can be bought for a certain price to support certain causes.
Proof of Work (PoW) & Proof of Stake (PoS): The Predecessors
PoW is the original method of achieving consensus pioneered by Bitcoin creator Satoshi Nakamoto. Practically since it was created, developers have sought a way to improve upon what they perceive to be flaws in the Bitcoin network’s method of achieving consensus. This led to PoS — and when it became clear that PoS heavily favored those with the most wealth, DPoS was developed.
Proof of Work (PoW)
PoW involves nodes called miners performing work to validate transactions on the network. Each miner contributes hashing power, solving complex mathematical problems in an attempt to find the next block.
Each block comes with a reward of newly minted coins. Those who put in the most work have the greatest odds of finding a block and reaping the rewards.
Recommended: How Bitcoin Mining Works
Proof of Stake (PoS)
Instead of miners proving their work, in PoS, the nodes that validate transactions are called “validators,” and they prove they have staked a certain amount of coins. PoS doesn’t require energy-intensive mining. The PoS mechanism randomly chooses a validator to validate the next block.
PoS algorithms choose the next validator using several methods. In general, the more tokens staked on a node, and the longer those tokens have been locked in, the greater the odds that node will be chosen to validate the next block. The process is somewhat like a lottery, if you imagine the tokens staked are like lottery tickets.
How Delegated Proof of Stake Works
With DPoS, users vote for delegates or “witnesses” in a process that resembles representative democratic governments.
These delegates then receive the next block rewards (which are also distributed to those who staked tokens on the network in proportion to the amount of tokens staked) and have the power to make decisions impacting the network’s development.
Criticisms of Proof-of-Stake
Critics argue that PoS leads to centralization and favors the wealthiest token holders, who have greater opportunities to become network validators. It was this criticism, in part, that led to the creation of DPoS, in an attempt to make the process more democratic.
Unfortunately, things don’t always work out in practice the way they ought to in principle. What happened to the Steemit network is a good example.
Another criticism of PoS is that the coins must be pre-mined, meaning they are all brought into existence at one time, assuming the network begins as a PoS network. This requires users to trust the creators of the project, hoping that they didn’t hoard tokens themselves or engage in some other kind of corruption. By comparison, PoW networks don’t have this issue because new coins must be mined.
Some people believe that a version of PoS will one day be the main way that blockchains achieve consensus.
But for now, the only blockchain that has remained secure, decentralized, and trustless from its inception is Bitcoin, with its 12-year track record of success. Many PoS networks are only a few years old.
DPoS is an innovative variation of the original proof-of-stake protocol. It’s thought that delegated proof of stake creates a more democratic network than traditional PoS, which tends to favor the wealthiest token holders.
Proof of work isn’t perfect, but so far, any attempts to improve upon PoW have proven to be vulnerable to centralization. Perhaps future variations of proof of stake will be more resilient.
Looking to invest in crypto? With SoFi Invest®, investors can trade cryptocurrency online from more than two dozen coins, including Bitcoin, Chainlink, Ethereum, Dogecoin, Solana, Litecoin, Cardano, and Enjin Coin.
Photo credit: iStock/Bobex-73
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal. Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or pre-qualification for any loan product offered by SoFi Lending Corp and/or its affiliates.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.
Third-Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.