Liquid Proof of Stake and Proof of Stake blockchains are different - but do you know why? Find out now.

Proof of Stake and its variants – a guide

October 22, 2021
Liquid Proof of Stake is Tezos' preferred consensus mechanism, but what is it, and how does it compare to other Proof of Stake algorithms?

First, what is a blockchain ‘consensus’? In essence, consensus is the method the computers (or nodes) running a blockchain's ledger use to track transactions, communicate with one another, and maintain network security.

Within the broad blockchain church, there are two primary consensus mechanisms. The first, Proof of Work, is used by Bitcoin and Ethereum (although Ethereum is slated to change to a Proof of Stake algorithm sometime soon). Proof of Work validates transactions by solving computationally-complex problems, with the first node to solve the problem receiving rewards for doing so.

The second mechanism is Proof of Stake. Proof of Stake (PoS) comes in several varieties, which we will examine shortly.

Tezos runs on a variant of Proof of Stake called Liquid Proof of Stake (LPoS) – see section below. There are multiple reasons that make LPoS a compelling consensus mechanism for a blockchain to operate on. However, the primary benefit is that LPoS allows delegators to maintain ownership over their tez when they assign voting rights to a validator (or ‘baker’). LPoS is also considered superior to other PoW mechanisms because it is less energy intensive to run the network and to validate nodes. To understand how LPoS works, how it compares to other PoS variants, and why PoS is inherently better than Proof of Work, read on.

The issues with Proof of Work

Proof of Work is computationally intensive, requiring a lot of energy, as the nodes must solve a hash (or a cryptographic problem) to add blocks to the blockchain. The node (or miner) that solves the hash first receives rewards for validating the block in the form of additional cryptocurrency. As noted, Proof of Work is very energy-intensive, with some estimates placing the energy costs of Bitcoin in the region of USD $1 million per day.

Another problem is that it takes a long time to validate transactions using PoW, and the gas fees (that is, the transaction fees), are often very high, disincentivizing the use of the network. A third issue is that only the miner who solves the hash gets the reward, meaning other competing nodes will have consumed power for nothing.

All in all, the shortcomings of the Proof of Work system are not easy fixes, which has made room for a more efficient alternative.

Proof of Stake and its variants

Proof of Stake is a different consensus method, where token holders are incentivized to validate blocks using a semi-random process. In this process, the network votes on who will validate the block. The selected node (or baker, in Tezos parlance) gets to approve the block and add it to the blockchain. The baker also receives additional tokens as a reward for 'baking' the block, usually through transaction fees. Bakers also receive incentives for attesting to other validators' blocks.

Researcher Sunny King introduced the concept of Proof of Stake (PoS) in 2012. Under PoS, validators stake tokens to secure the network – as noted, this contrasts with the PoW concept where the miner with the greatest amount of computing power wins.

The Tezos PoS protocol gives bakers who stake a minimum of one roll to the network (currently valued at 8000 tez) the opportunity to participate in the consensus mechanism.

There are a few positives relating to PoS. These include:

  • PoS is less computationally intensive than PoW. This means lower energy costs, which is a plus for the environment. This is somewhat negated by miners operating in geographies where renewable energy is abundant but is a moot point where energy is fossil fuel-based.

  • PoS is inherently more decentralized than other networks. This is because PoW networks require large amounts of computing power, which incentivizes miners to invest in large mining pools. Because PoS doesn’t incentivize validators to pool their resources, the network can remain more decentralized.

There are a few PoS variants. Tezos uses Liquid Proof of Stake (LPoS), while related PoS consensus mechanisms include Delegated Proof of Stake (DPoS), Bonded Proof of Stake (BPoS), Nominated Proof of Stake (NPoS), and others, which we will examine in turn.

Liquid Proof of Stake (LPoS)

Tezos uses what's known as a Liquid Proof of Stake (LPoS) as its consensus mechanism. With LPoS, delegation is optional. Token holders (in the case of Tezos, those with less than 8000 tez, or one 'roll') can delegate voting rights to bakers. With the 'liquid' methodology, token holders retain custody of their tokens when they delegate their voting rights. Simply put, this makes the network more egalitarian as it enables anyone to vote either directly (as a baker) or indirectly by delegating their vote to a baker. Delegators are also able to change which baker they stake their tez to in a relatively easy manner, so their tokens are not locked in with a particular baker.

Delegated Proof of Stake (DPoS)

DPoS is similar to LPoS, but with a key difference. Under DPoS, users stake their tokens and vote on which delegates get to create the new block on the blockchain. Each token holder gets to vote on who validates transactions on the network, and the power of the vote is determined by the number of tokens held by the delegate. In essence, the more tokens you hold, the more likely you are to become a validator and reap the rewards (of more tokens) from being delegated.

Bonded Proof of Stake (BPoS)

BPoS is very similar to LPoS in that token holders can delegate their voting rights, and the tokens are non-custodial. This means, like LPoS, token holders, regardless of their stake, can take part in voting for protocol amendments.

Where BPoS differs from LPoS is when there is a safety or liveness fault, some of the validators and delegators' stake is slashed as opposed to LPoS, where only the validator faces slashing. This means that if a delegator tries to engage in underhand activity, which runs against the protocol, they lose part of their stake.

Nominated Proof of Stake (NPoS)

NPoS varies from other PoS consensus mechanisms because validators are automatically selected, but those validators need to build their reputations for reliability within the broader community. NPoS validators build their reputation by offering lower gas fees for transactions, and voting in the interests of the community. They also need to stake their native tokens, which get slashed if they do not adhere to the protocol.

There is some slight terminology deviation with NPoS too – delegators are called ‘nominators’ (hence the term NPoS). The nominator selects a validator and supports them by locking up a number of tokens. Validators are also limited in number by the overall protocol governance, and like other PoS mechanisms, they are selected by their total network stake.

NPoS lets all token holders continuously participate in the network.

H2: Hybrid Proof of Stake (HPoS)

HPoS is, as its name suggests, a hybrid between Proof of Work and Proof of Stake, where both mechanisms work together to ensure network security. Under these rules, miners produce new blocks and validators vote on their validity.

Why choose LPoS over other consensus methods?

One answer is that LPoS is less environmentally taxing than competing consensus mechanisms, offering an order of magnitude improvement over the Proof of Work algorithms used by Bitcoin and Ethereum.

Developers writing smart contracts will enjoy lower gas fees, greater energy efficiency and enhanced security. These elements of a PoS blockchain’s design mean validators can afford to minimise the fees they charge, making it more affordable for the end user.

This makes LPoS, and the Tezos network in particular, more attractive than rivals. LPoS also encourages broader participation and the creation of more nodes, which helps to further secure the network.

Image via Unsplash. Credit: Tezos

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