Monday, 03 August 2020

Achieving distributed consensus using DPoS (delegated proof-of-stake)

Delegated proof-of-stake (DPoS) is a type of consensus protocol used to secure a cryptocurrency platform’s network.
Developers of BitShares – an open-source, public blockchain-powered “real-time financial platform”- describe their version of DPoS as a distributed consensus algorithm that aims to “solve the problems of both Bitcoin’s traditional proof-of-work (PoW) system, and the proof-of-stake system of Peercoin and Nxt.”

According to BitShares’ official documentation, DPoS may be used to “offset” the undesirable “effects of centralization.” As explained in a blog post published by Lisk Academy, DPoS can help “maintain irrefutable agreement on the truth across the network” as the consensus mechanism is able to verify transactions and serve as a “form of digital democracy.”

In this introductory article on how DPoS is designed to work, we mainly look at how this distributed consensus mechanism is implemented by the developers of Lisk, a cryptocurrency network we’ve covered extensively.

How DPoS Has Been Implemented On Lisk’s Platform

Lisk, a blockchain-based platform for developing scalable dApps with JavaScript, implements its version of DPoS through “real-time voting combined with a social system of reputation.” Lisk’s development team claims their implementation of DPoS is the “least centralized consensus protocol compared to all others.”

Similar to how DPoS works on other major dApp creation platforms, Lisk’s token (LSK) holders can vote for “active delegates.” The “voting power”, or “voting weight”, that LSK holders have depends on the amount of the platform’s native currency they’re holding in their wallets. Community members of some of the largest DPoS-based cryptocurrencies, including EOS and Tron (TRX), among others, choose delegates that they believe will act in the best interests of the network.

Deposit-Based Proof-of-Stake

Certain versions of DPoS require that delegates “show commitment” by depositing their funds into a “time-locked security account,” Lisk Academy’s blog post explains. The locked funds may be “confiscated in case of malicious behavior.” DPoS protocols that are implemented in this manner are referred to as “deposit-based” PoS.

Delegates must perform certain network management tasks that include ensuring their node (for validating blocks of transactions) is always online and working properly. Known as block producers on EOS and masternodes on Tron, delegates are responsible for collecting the transactions broadcasted on a cryptocurrency network and placing them into blocks.

After transactions have been consolidated into blocks, delegates sign and broadcast the blocks.

Resolving Issues “Democratically”

Issues related to consensus regarding the authenticity of transactions are resolved in a “fair and democratic way”, Lisk Academy’s blog explains. However, the manner in which dispute resolution occurs varies from one version of DPoS to another.

Although delegates cannot alter any transaction details, they can theoretically exclude transactions from blocks on networks that use DPoS. However, other delegates on the network will likely include all legitimate transactions in the next few blocks generated on the blockchain.

Moreover, delegates are monitored regularly and may lose their stake and/or be removed in cases of malicious or dishonest behavior.

More Efficient & Effective Than Proof-of-Work?

Ideally, a DPoS-based cryptocurrency network should be self-governed and closely monitored by all of its participants in order to ensure the best interests of all stakeholders. Proponents of DPoS, such as the developers of Lisk, argue that it is a “more democratic”, and also more efficient and effective consensus protocol compared to other types of distributed consensus mechanisms.

Cryptocurrency transactions can be processed faster on DPoS-based blockchains mainly because there’s no proof-of-work (PoW) related mining required on these networks. However, many analysts think that DPoS networks may be vulnerable to security risks, prone to centralization, and it is also possible that delegates engage in collusion.

Delegates, or full-node operators, are compensated for validating blocks as they may receive transaction processing fees, and “monthly rewards for maintaining the network” on certain DPoS networks including Lisk. Rewards given to delegates for their network management duties may also be reduced over time.

Allowing Only A Certain Number Of Delegates At Any Given Time

Most DPoS-based blockchains only allow a certain number of delegates at a given time. For instance, there may only be 101 delegates on Lisk’s network “at any one time.” The Tron blockchain is managed by 27 delegates called “super representatives” or masternodes. Meanwhile, the EOS network is managed by 21 block producers.

As mentioned, there’s a chance that delegates may collude on DPoS networks which reportedly occurred in September 2018. Twitter user Maple Leaf Capital (@MapleLeafCap) shared a leaked spreadsheet (last year) showing that Huobi, one of EOS’ block producers (BPs), had allegedly voted for “20 other BPs candidates where 16 of those [had] voted for Huobi as well.”

Maple Leaf Capital, an EOS investor, revealed that Huobi received substantial returns (large amounts of EOS tokens) from several other EOS BPs.

There’s No Perfect Consensus Protocol

Acknowledging that there’s no perfect consensus protocol, Lisk’s development team explains that block validators, or forgers, are incentivized to work diligently by validating blocks as quickly as possible. Most DPoS protocols, including the one used by Lisk, employ an “inflationary reward system.” In this type of system, additional tokens are created every time a new block is generated in order to compensate delegates who are forging, or verifying the transactions on the network.

Lisk’s reward system for delegates has been programmed to compensate “5 LSK per block … during the first year.” The reward is gradually reduced over a period of time on the Lisk network. After “every 3,000,000 validated blocks”, the rewards are reduced by 1 LSK, “concluding at 1 LSK” at the end of “5 years.”

Cryptocurrencies Are High-Risk Investments

If the value of Lisk’s native tokens appreciates over time, then “5 LSK tokens” received in “year 1” that “were worth $1 each meant a return of $5.” Assuming a steady increase in the token’s price, “receiving 1 LSK token in year 5 that is worth $100 means a considerably higher return.”

However, investors must be informed that cryptocurrencies are highly speculative investments as their underlying technology and supporting ecosystem is in its preliminary stages of development. Bill Miller, the founder and chief information officer at Miller Value Partners, a Baltimore, Maryland-based investment management company, has warned investors (during a recent interview with CNBC) that bitcoin and other cryptocurrencies are still “an interesting technological experiment.”

Although running a full-node as a delegate can be quite profitable, with EOS’ block producers reportedly earning $10,000 per day (at one point last year), most investment advisors, such as Anthony Pompliano at Morgan Creek Digital Assets, still only recommend investing no more than “1 to 2%” of one’s total portfolio assets into digital currencies.

Updates On Consensus Protocols

In future posts about DPoS and other distributed consensus mechanisms on CryptoInsider, we shall look into the advantages and disadvantages of these protocols in terms of their overall security and scalability. We may also examine the extent to which different consensus protocols are decentralized.

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