Recently during our article where we reviewed how Binance DEX will work, we briefly touched on different consensus algorithms and discussed what could be the most likely set up for Binance Chain. For cryptocurrencies, the consensus algorithms are an integral part of every blockchain network, it is the way that they ensure every transaction made is verified and secured. So you could definitely argue it is the most important part of a blockchain network, as it is responsible for maintaining the integrity and security of these distributed systems.
The first cryptocurrency consensus algorithm created, is one that you are probably already familiar with, was the Proof of Work (PoW). It was designed by Satoshi Nakamoto to be implemented into Bitcoin, and if I have already lost you: don't worry! Just start here: What is Bitcoin and Blockchain? Today, we are going to learn about the Delegated Proof Of Stake (dPoS) consensus algorithm which you find in TRON or EOS.
To truly understand how Delegated Proof of Stake works, we first need to have a look at the basics of its predecessors: the Proof of Work and Proof of Stake algorithms.
Proof Of Work (PoW)
Proof-Of-Work or PoW is the first and original consensus algorithm used in a blockchain network. Through a process referred to as mining, the algorithm is used to securely confirm transactions and add new blocks to the chain.
A network of mining nodes is responsible for maintaining a Proof of Work system, this is normally done with specialised hardware such as ASICs which compete against each other to solve complex cryptographic (mathematical) problems. A miner can only add a new block into the blockchain if the solution for that block is found. Essentially, only by completing a proof of work can a miner do so. In return, the miner is rewarded with newly created coins and also all the transaction fees for that block. Overall this can still become a high cost for the miner as it requires a lot of energy & failed attempts before finding a solution and ASIC hardware is becoming increasingly expensive.
PoW blockchains are the standard in crypto for a fault-tolerance solution as they are considered the most secure and reliable. That being said they do see worries over the amount of effort(electricity) required to maintain the system and also regularly see debates on how they can continue to scale. Bitcoin, for example, has a very limited amount of transactions per second (though this limit does help it stay secure).
Proof of Stake (PoS)
The Proof of Stake consensus algorithm was designed to solve some of the emerging problems that have been noted on PoW-based blockchains. Specifically, it aims to solve the problem of cost that is associated with PoW mining (power consumption and hardware). You will not find any mining in a PoS system as the validation of new blocks happens in a deterministic way. New blocks are validated depending on the number of coins being staked, and the more staking coins a person holds, the more chance they have of being picked as the block validator (also referred to as minter or forger).
The key difference here is that while a PoW-based blockchain will rely on an external investment such as paying for power consumption or better hardware, a Proof of Stake blockchain is secured by the cryptocurrency itself (which would be an internal investment).
Another benefit of a PoS system is that it makes attacking a blockchain way more costly, as any successful attack would need the ownership of at least 51% of the total existing coins. Huge financial losses would be incurred for any failed attack. Yet despite the positive arguments for a PoS-based chain, we are yet to really see them being tested on a big scale.
Delegated Proof of Stake (DPoS)
The Delegated Proof of Stake (DPoS) consensus algorithm is seen in many cryptocurrency projects today such as Bitshares, Steem, Ark, TRON, EOS or Lisk and was developed by Daniel Larimer in 2014.
A DPoS-based blockchain makes use of a voting system where stakeholders decide to outsource their work to a third-party. Coin holders are able to vote and decide which third parties secure the network on their behalf, generally, these third parties are referred to as delegates or witnesses. It is these delegates that are responsible for securely confirming transactions and validating new blocks. The voting system can vary from project to project, but generally, we see that the voting power is proportional to the amount of coins a user holds and that delegates have to submit a proposal when asking for votes. Usually, delegates receive rewards for securing the network which they also share with their respective electors.
In this way, the DPoS algorithm produces a voting system which is heavily tied to the delegates' reputation. If an elected node does not work as expected or is simply not up to the task, they will quickly be expelled and another delegate will be chosen. We also note that so far, DPoS blockchains appear to be much more scalable and capable of processing a much higher amount of transaction per second (TPS) than PoW or PoS based chains.
DPoS vs PoS
While both algorithms are very similar due to the stakeholding aspect, DPoS provides a democratic voting system where block producers are elected. Delegates are motivated to stay honest and provide an efficient system, or they will simply be voted out. Furthermore, DPoS blockchains tend to be faster than PoS simply because these block producers have created their infrastructure in mind for the task at hand (think enterprise-grade systems with datacenter connections) whereas PoS-based chains are relying on Bob and Alice staking their coins from home or setting up a VPS.
Not to say the latter cannot work, and you can definitely argue it would be more decentralized, however, you can understand why venture capital groups are not going to make that gamble. Which could be another reason why we see more development groups choosing to develop a DPoS-based chain as it is potentially easier to seek investment?
DPoS vs PoW
Where we could say that PoS was simply created to solve the emerging problems of PoW, DPoS is also trying to provide a streamlined approach to the block production process. It is for this reason we find that DPoS systems are able to process large amounts of blockchains transactions in a short amount of time. PoW is still considered to be the most secure consensus algorithm which is why we see the most amount of money transmission going through PoW-based blockchains. PoS is still faster than PoW and potentially has more use cases. But, DPoS is not really used in the same way as PoW or PoS.
DPoS only uses staking to decide or elect the block producers, its actual block production is predetermined and no one is really competing against each other for a reward. Every delegate or witness will get a turn at block production, which is why there have been debates that DPoS should actually be considered a Proof of Authority system.
DPoS is substantially different from any Proof of Work based blockchain and even a PoS-based one. It only incorporates stakeholding for voting as a mechanism to keep the elected block producers (delegates) honest and efficient. Yet the actual block production is very different from any PoS system which is why in most cases it provides a higher performance in terms of transactions per second.
1. Fault-tolerance solution: The ability to continue operating properly in the event of failure of some (one or more) components. [↩]
2. Money transmission: the act of moving money between bank accounts or from one person to another, or between organizations. [↩]