Security on the blockchain has always been one of the key issues facing digital currencies. With no centralized provider, cryptocurrencies like Bitcoin and Ethereum had the potential to become playgrounds for malicious hackers looking to exploit the system for personal gain. However, securitizing the blockchain can now be achieved through multiple methods, some of which were never even envisioned by Satoshi Nakamoto when he developed the original proof of work (PoW) system for Bitcoin in 2009.
Delegated proof of stake (DPoS) is one of those security alternatives, a so-called “consensus algorithm” used by digital currencies like EOS or Cardano. Consensus algorithms sit at the heart of all cryptocurrency transactions. Thorough consensus algorithms, a system of trust is developed across the blockchain and transactions are properly cataloged. Designed as an improvement on the proof of stake (PoS) system, delegated proof of stake allows coin holders to vote on who mines new blocks, rewarding only the best miners instead of those who can amass the most coins or harness the most computing power.
What is DPoS?
Delegated proof of stake was designed by cryptocurrency guru Dan Larimer in 2014. Unsatisfied with the way proof of stake rewarded only those with large accounts and trading platforms, Larimer developed a more democratic system where the wealthiest miners held fewer cards.
Delegated proof of stake nominates “delegates” or “witnesses” to maintain security and mine new blocks on the chain based on a simple vote. Coin holders can stake their holdings to delegates in order to boost their standing in the community. By staking their coins, members of the community vote for who controls the network and validates new blocks. Note that staking a delegate or witness doesn’t trigger a transaction — the coins never actually leave the wallet of the owner, they just symbolically become attached to the delegate.
What happens if an elected delegate performs poorly or tries to execute some kind of fraud? Coin holders can remove their stake from the delegate and essentially vote them out of their position. This ensures compliance among delegates because voting is frequent and competition for spots can be fierce.
Of course, delegated proof of stake isn’t without criticism. Since voting is limited to a small number of eligible delegates and witnesses, the power within the network becomes fairly centralized. Additionally, coin holders with small accounts can often become alienated by the large stakes required to make real changes in the system. Delegated proof of stake might be the most democratic way to reach consensus, but it still leaves primary control to those with the most coins.
What is PoS?
Proof of stake was the second iteration of the consensus algorithm and it attempted to cut the energy costs needed to mine under proof of work. A proof of stake system doesn’t require miners with advanced computing power. Instead, miners (or “forgers”) are determined by who holds the most coins of a particular cryptocurrency.
Take Peercoin for example. If you accumulate a large amount of coins, you can stake them to the next block in the Peercoin blockchain. The honors of verification are chosen at random based on the size of the stake and the selected forger gets to sign the block and reap the transaction fee. Unlike proof of work, proof of stake systems don’t produce new coins for the miner.
What is PoW?
Proof of work is the original consensus algorithm developed by Bitcoin creator Satoshi Nakamoto. Under proof of work, the blockchain is secured by digital cryptography. To create new blocks and verify transactions, miners need to solve complex equations that only powerful computers can calculate. Each equation is unique and helps verify on the digital ledger that coins haven’t been double-spent.
Proof of work creates security from a decentralized source since miners are rewarded for their work. Miners receive new coins as payment for their equation-solving skills, which helps perpetuate the chain and build trust. Of course, the miners with the most computer skills and energy supply reap the most rewards, which is why later developers turned to proof of stake and its derivatives.
An Example of DPoS
Most cryptocurrencies still operate under the proof of work algorithm, but a few coins using delegated proof of stake are available on the market. One of the most popular DPoS coins would be EOS, which has a $2.2 billion market cap and widespread availability on most digital currency platforms.
EOS was created by Dan Larimer, who designed the first delegated proof of stake system. To create a new block in the EOS chain, witnesses are required to verify the transaction. These witnesses are elected based on votes from the community. Like most DPoS systems, coin holders stake their preferred witnesses. However, EOS only has 21 witnesses to verify transactions, which has drawn criticism for being overly reliant on a centralized cabal of coin holders.
But regardless of the critiques, EOS boasts superior transaction speed over Bitcoin or Ethereum thanks to the reduction in computing power needed to create new blocks in the chain. EOS aims to be the main competitor to Ethereum by harnessing the power of smart contracts and building multiple applications (called d-apps).
Securing Blockchains Through Democratic Votes
Using a delegated proof of stake system feels like the right way to divvy up control over a blockchain ledger. The delegates and witnesses are voted upon via staking and anyone who performs poorly will quickly find themselves replaced. Cryptocurrencies like EOS and BitShares use delegated proof of stake and have transaction speeds far greater than coins using proof of work of the original proof of stake system.
But delegated proof of stake does pose a risk to blockchain networks. Since the entire point of digital currencies is to place power into decentralized sources, having a small group of elected delegates calling the shots seems counterproductive. While DPoS is fast, efficient and secure, it remains relatively unpopular. Bitcoin still runs under the proof of work system and Ethereum has yet to make its long-awaited jump into the proof of stake world. Crypto is still mostly run by proof of work.
Still, developers of consensus algorithms have yet to reach, well, a consensus on the best way to secure the digital ledger. Delegated proof of stake has the potential to be both fast and fair, but the most cryptocurrencies adopting it has a few kinks to work out.
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About Dan Schmidt
Dan Schmidt is a finance writer passionate about helping readers understand how assets and markets work. He has over six years of writing experience, focused on stocks. His work has been published by Vanguard, Capital One, PenFed Credit Union, MarketBeat, and Fora Financial. Dan lives in Bucks County, PA with his wife and enjoys summers at Citizens Bank Park cheering on the Phillies.