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Liquid Proof-of-Stake

Bitcoin has two major flaws with ‘proof-of-work’:

  • Energy consumption
  • Common users are excluded from the mining activity

Therefore,TEZOS introduces ‘Liquid proof-of-stake’ to lift these flaws in PoW and the ones from its predecessors: “Proof-of-Stake" and "Delegated Proof-of-Stake”.

PROOF-OF-STAKE

In Proof-of-Stake, validators replace miners. A validator gathers transactions and creates blocks. Several methods exist to select a validator, which we will review in the following paragraphs. In this consensus mechanism, they have to lock their funds to have a chance to be a validator, which makes it "Sybil resilient". This mechanism represents a low energy cost alternative to PoW. Moreover, a 51% attack would not be profitable as a hacker bets his own money and risks losing it if detected. Therefore validators would not benefit from a decision against the general opinion of the network. In addition, holding 51% of the token would demand enormous amounts of liquidity, making this scenario very unlikely.

Removing PoW isn't without consequences. With the Nakamoto consensus, PoW allows for chain selection, maintains regular blocks' issuance, regulates coins' creation, and selects the miner receiving rewards. PoW consumes too much energy. However, this energy connects to the physical world in return (miners' investments into machines and electricity). Hence, replacing PoW leads to previous fundamental questions about building a consensus to compensate for the losses.

Delegated Proof of Stake

In a Delegated Proof-of-Stake (DPoS) architecture, network participants have the right to delegate the production of new blocks to a fixed number of delegates, they are also known as witnesses. Users determine which delegates will validate new blocks via a democratic voting mechanism in which votes are weighted by the number of tokens locked up in platform crypto wallets. It’s possible to replace ineffective delegates with other validators. This makes it very fluid and forgiving. To stay in the game for long, a delegate will have to be in the best interest of their voters and stakeholders. This is a big motivation for them to do the work diligently. Approved delegates split block production rights evenly among themselves. In exchange for backing a delegate, stakeholders are rewarded with a share of the delegate’s block production rewards in proportion to their token holdings staked with that delegate.

This voting-based delegation process makes it way more democratic than the traditional method. Moreover, the prerequisites to participate in the DPoS voting process are very less. DPoS is widely considered one of the most egalitarian ways to achieve consensus on decentralized networks.

DPoS systems tend to have a higher TPS(transactions per second). This is because a small group of validators can reach consensus more quickly than a system that requires network-wide consensus.But the  DPoS protocols set a hard limit on the number of active delegates that are creating new blocks (typically between 20 and 100), this structure still results in a certain degree of centralization.

DPoS compared to other traditional PoS protocols gives all token holders a significant role in influencing network decisions. As of now, DPoS is the most widely adopted variant of PoS. Several major projects including EOSIO and TRON use DPoS.

Liquid Proof of Stake

Liquid Proof of Stake (LPoS) lets token holders loan their validation rights to other users without relinquishing their token ownership. This is similar to DPoS, but the token holders in a LPoS network make their own choices about whether to delegate their tokenized validation rights to other users or stake their own tokens. It also features a dynamic amount of validator nodes in contrast to the fixed-validator count in DPoS. Tezos, which utilizes LPoS, supports upto 80,000 validators instead of the few dozen or so validators that most DPoS networks allow. Also the Tezos block creation process is free from elections.

LPoS networks thus have highly flexible network participation. Large token holders can become block validators by staking their own funds without needing external approval. And smaller holders who don’t have the resources to validate blocks themselves can support larger holders or gather together to form effective coalitions. Because of the fluid and ever-changing nature of LPoS networks this setup helps to diminish the risk of a majority coalition sabotaging the entire network.

LPoS vs DPoS

LPoS DPoS
Delegation (Purpose) Optional (minimizes dilution of small token holders). Required to elect block producers (enables greater scalability.
Barrier to Entry 8000ꜩ, modest computing power and reliable internet connection. Professionalized operations with significant computing infrastructure. Competition from other delegates.
Validator Set Dynamic (size not fixed). Up to 80,000 bakers (limited by roll size) Fixed size. Between 21 (EOS) and 101 (Lisk).
Design Priorities Decentralization, accountable governance, and security Scalability and usable consumer applications

Why LPoS is an improvement over DPoS

Tezos has developed LPoS which is built over the DPoS structure. In LPoS, a validator is called a "baker" or an "endorser". As opposed to DPoS, all users have the ability to become validators if they have enough coins. If they don’t, then they have the choice to delegate.This results in high inclusion and dilution of activity. The focus is more on governance liquidity rather than the network's scalability. The two roles of delegates are simple:

  • Bakers: create blocks
  • Endorsers: agree on blocks

The number of coins(tezs) to bake or endorse is a very crucial element. Increasing it discourages the Sybil attacks or 51% attacks, decreasing it results in coalition dissolutions.

A validator needs 8,000ꜩ (one "roll") to take part in the consensus. It will be reduced in the near future. The reward probability is proportional to the invested amount, the same as DPoS.

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