Beginning with the Bitcoin (BTC) protocol which specified how a proof-of-work (PoW)-based consensus algorithm could be used to securely validate blocks of cryptocurrency transactions, there are now many different types of consensus protocols. These are being used to manage second and third generation blockchain networks.
Partially due to problems associated with PoW, such as the enormous amount of electricity it requires to function, the proof-of-stake (PoS) consensus algorithm was proposed (for the first time) in 2011. Peercoin (PPC) was the first cryptocurrency to implement a PoS-based blockchain consensus protocol in 2012. As described in Peercoin University’s official blog post, the process of validating blocks of transactions is handled by Block Producers (BPs).
Using Time Instead Of Electricity As An “Alternative Scarce Resource”
In place of electricity, Peercoin’s PoS consensus mechanism uses “time as [an] alternative scarce resource” to “emulate PoW competition.” In order to select the next BP to process batches of transactions, Peercoin’s consensus algorithm works by first multiplying the number of coins a BP has staked on the network by the number of days those coins have resided in their wallet.
A BP who has staked a large number of coins for a long time will have a high “coin age.” By combining coin age with a randomization algorithm, Peercoin’s protocol selects the next eligible BP to validate sets of transactions. As noted in Peercoin’s official documentation, a BP with “a high coin age has a higher probability” of being selected to process the next block of transactions over a BP with a “low coin age.”
Moreover, Peercoin’s PoS consensus protocol does not require that BPs solve computationally difficult problems (which miners have to do on PoW chains). Instead, the cryptocurrency’s protocol has been implemented so that a BP’s “chances of being selected as the next [transaction processor] rely specifically on the number of coins held and time in the form of coin age and some amount of luck.”
Experimenting With Different Variations Of PoS: Delegated Proof-Of-Stake (DPoS)
After the introduction of Peercoin’s PoS algorithm, the developers of many other cryptocurrency platforms began experimenting with various implementations of PoS-based blockchain consensus mechanisms. A variation of PoS, known as delegated proof-of-stake (DPoS), has been proposed and implemented by several leading blockchain platforms.
BitShares (BTS), a decentralized exchange (DEX), uses a type of DPoS consensus protocol to manage its blockchain network. As explained on its official website, BitShares’ blockchain “leverages the power of stakeholder voting, to resolve consensus issues.” BitShares’ DPoS has been implemented by taking into account several network parameters including fee schedules, block intervals, and transaction sizes.
BitShares’ DPoS Protocol Appoints Witnesses To Sign And Timestamp Cryptocurrency Transactions
Elected delegates, which are part of a committee, are tasked with managing BitShares’ network parameters – which helps in the “deterministic selection” of BPs (referred to as witnesses). By using what BitShares’ developers consider a fair and democratic process, BPs are appointed to confirm (validate) transactions – which only takes “an average of just 1 second.”
Witnesses on the BitShares network, which consists of a globally distributed database, are tasked with validating transaction signatures and they are also responsible for timestamping transactions – which is done when sets of TXs are placed in blocks.
Under BitShares’ DPoS, the blockchain network’s shareholders are able to “elect any number of witnesses” to validate blocks. Specifically, each BitShares account is “allowed one vote per share per witness.” BitShares’ protocol developers refer to this process as “approval voting.”
Similar to how miners on PoW networks are paid transaction processing fees (and newly minted cryptocurrency), “each time a witness produces a block” on BitShares’ network, “they are [also] paid for their services.” Pay rate is calculated by BitShares’ stakeholders, a process which is managed by the blockchain platform’s elected delegates.
Lisk’s DPoS Uses “Real-Time Voting” And A “Social System Of Reputation”
The developers of Lisk argue that their version of delegated proof-of-stake is the “least centralized consensus protocol compared to all others as it is the most inclusive.” Each token (or stake) holder on the Lisk platform has the power to “exercise a degree of influence” when it comes to deciding “what happens on the network.”
Stakeholders on the Lisk network vote for delegates who are responsible for validating blocks of transactions and are financially rewarded for doing so on the Lisk platform. The voting power, or voting weight, that an LSK stakeholder has is calculated by determining how many units of Lisk’s native cryptocurrency an account is holding.
As mentioned in Lisk Academy’s blog post, certain versions of DPoS require that a delegate deposit their staked funds into a “time-locked security account” – which can be confiscated in cases of dishonest, unethical, or malicious conduct (by a delegate). This particular implementation of DPoS is called “deposit-based proof-of-stake.”
Duties And Responsibilities Of Delegates
As outlined by Lisk Academy, the delegates on DPoS networks are required to do the following:
Dispute settlement on DPoS-based networks are handled differently depending on which blockchain the dispute has occurred. On the Lisk network, most of the basic dispute resolution (and prevention) methods are built into its DPoS protocol. For example, “delegates do not have the power to change any transaction details” on the Lisk blockchain.
As validators, delegates can “theoretically exclude certain transactions in a block,” however this should not have too much of a negative effect, Lisk’s developers claim. They argue that Lisk’s DPoS algiorithm will simply include the discarded transaction in “the next created block” which gives the “next delegate the fees associated with validating them.”
Even if a delegate intentionally chooses not to include a transaction(s) in a block that they are processing, the transactions “will only be slightly delayed,” the Lisk Academy blog notes. Moreover, the dishonest delegate would eventually “get voted out by the rest of the network,” Lisk’s blog explains.
According to the creators of Lisk’s DPoS consensus mechanism, the protocol ensures “the best interests of the network remain a priority” in a manner which allows all participants to police, or monitor, the blockchain platform. This type of management, Lisk’s team believes, creates a DPoS network that is “self-governed.”
Solving The “Blockchain Trilemma”
At present, blockchain consensus protocols are in their early stages of development. Although it has now been over 10 years since the first distributed ledger consensus algorithm, called proof-of-work, was proposed in the Bitcoin whitepaper, there is still no widespread agreement regarding which consensus mechanism is best-suited for managing a blockchain network.
Blockchain analysts are currently focusing on achieving the highest level of decentralization, security, and scalability. Being able to effectively satisfy all three of the requirements, collectively called the Blockchain Trilemma, is the challenge facing thousands of experienced developers throughout the world.
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