In this article, we will dive into a newer consensus mechanismConsensus
A general agreement among participants using and mining a cryptocurrency.
DPoS was proposed after Proof of StakeProof of Stake
PoS. A method of minting new coins and securing a platform by allowing users to stake their coins and receive more coins as a reward. Introduced as an energy efficient alternative to PoW (Proof of Work).
Blockchain
A digital, distributed ledger which contains data for all the transactions that have ever taken place using a given cryptocurrency.
Proof of Work
The consensus algorithm introduced by Bitcoin. PoW requires miners to compete against each other to add new block and earn rewards.
What is consensus?
Any consensus is a general, majority agreement. The inability for decentralized systemsDecentralized
Distributed amongst its users rather than controlled by one group or within one certain area.
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 mechanismConsensus
A general agreement among participants using and mining a cryptocurrency.
DPoS was proposed after Proof of StakeProof of Stake
PoS. A method of minting new coins and securing a platform by allowing users to stake their coins and receive more coins as a reward. Introduced as an energy efficient alternative to PoW (Proof of Work).
Blockchain
A digital, distributed ledger which contains data for all the transactions that have ever taken place using a given cryptocurrency.
Proof of Work
The consensus algorithm introduced by Bitcoin. PoW requires miners to compete against each other to add new block and earn rewards.
What is consensus?
Any consensus is a general, majority agreement. The inability for decentralized systemsDecentralized
Distributed amongst its users rather than controlled by one group or within one certain area.
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.
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.
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 escrowsEscrow
A third party used to facilitate transactions and increase security.
Consensus algorithms take the place of trusted third parties in peer-to-peer networksPeer to Peer
Decentralized networks in which individuals interact with each other directly.
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. MinersMiner
An individual that volunteers computing power to verify transactions on a blockchain in exchange for block rewards.
Source: Cryptocurrency Virtual Summit Youtube Channel
Basically, miningMining
The process by which new coins are created as transactions on a network are verified.
Node
A computer that runs a cryptocurrency’s software and validates transactions.
ASIC Miners
Highly specialized computing machines that are far more efficient for mining than CPUs and GPUs. Jihan Wu (a Chinese businessman) is responsible for creating and selling many ASIC Miners.
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.
51% Attack
A hypothetical attack in which a malicious individual gains control of more than half of a cryptocurrency’s hashing power and is then able to re-write old blocks, allowing double-spend.- 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.
- 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, stakersStaker
An individual that volunteers to lock some of their coins or tokens up to verify transactions on a blockchain in exchange for staking rewards.
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.
- 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 StakeDPoS
Delegated Proof of Stake. A consensus mechanism that has a blockchain's nodes vote on the correct version of the blockchain.
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.
- 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.
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 (dAppsdApps
Distributed Apps. Applications without centralized control.
ICO
Initial Coin Offering. An event in which a cryptocurrency project “goes public,” selling early coins in exchange for funds.
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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