A consensus algorithm is one of the significant pillars of blockchain technology. Proof-of-Work (PoW), developed by Satoshi Nakamoto in 2008, was the first consensus mechanism. In essence, nodes compete against each other to validate a transaction on the network and get rewarded. PoW is used in Bitcoin and Ethereum.
Proof-of-Stake was developed later as a solution to PoW challenges, including time consumption and high power consumption. PoW uses an algorithm to randomly pick the validator of a transaction from a pool of nodes. The higher the stake, the higher the chances of being selected. This article is about one of the versions of PoS - Leased Proof-of-Stake (LPoS).
What is Leased Proof-of-Stake?
Leased Proof of stake (LPoS) is a modified version of Proof-of-Stake (PoS). It allows users to lease out their stake to miners. Mining nodes, in return, share a part of their earnings with the leaser. LPoS is a new way to make a profit from mining without having to mine yourself.
The Waves platform currently supports LPoS. Unlike regular PoS that requires that a node holds a certain amount of coins to mine a block, all LPoS nodes can participate in mining by leasing their Waves to full nodes in what is called Account-Leasing.
How It Works
In Waves, only full nodes can validate transactions. The platform's lite users can't hold a full node. Validators are picked from full node owners based on their stake. To participate in mining, a lite user can choose to shift to a full node or help a full node owner get selected as a validator by leasing them WAVES tokens.
LPoS involves two main types of transactions:
- Lease transaction – it activates the leasing process. The token holder initiates a Lease transaction, specifies the node address (recipient address), and the number of funds to lease.
- Lease cancel transaction – stops the leasing process.
Features of LPoS
- Balance Leasing
LPoS allows users to passively make a profit by leasing coins from their wallets or other cold storage to miners.
- Fixed Tokens
Mining in LPoS doesn't add any tokens to the network. Tokens are fixed and leasable. Leased tokens are locked in leasers’ accounts; therefore, they cannot be traded or transferred unless the leaser stops the leasing.
Most blockchains give incentives to users who join a mining pool creating a centralized system. In LPoS, however, rewards are linearly distributed based on the amount of stake; hence no mining pool required. Besides, leasing follows a P2P protocol to ensure no third-party involvement.
- Transaction Fee As Rewards
Miners in LPoS receive transaction fees as a reward for processed blocks contrary to block rewards given in most blockchains.
Benefits of Leased Proof-of-Stake
- Validate With Less Stake
In a PoS network, the validators are picked based on their stake. That may challenge the fairness of the system where some nodes are chosen repeatedly. With LPoS, you can boost your chances of being picked by accepting a lease from other users.
- Earn with Fewer Tokens
LPoS allows minor token holders to earn by leasing their limited tokens to full node owners. Token holders get a percentage from the profit generated by the full node.
- Control Over Funds
Leased tokens are locked in the leaser's wallet. They can neither be traded nor transferred. While the leaser can't spend the locked funds, they can decide to stop the lease and make the leased money available for spending.
- Fewer Energy Consumptions
A lease transaction can be activated using a phone. A handful of nodes can now do the process that requires multiple nodes with high computing power with the support of phone users.
- Higher Processing Speed
LPoS-based systems are fast and efficient since a few nodes are involved in validating a transaction at a given time. LPoS is an excellent alternative to Bitcoin's PoW that makes 4.6 transactions per second.
- Possible Cartel Formations
Malicious activities can be orchestrated on the LPoS, where members lease to a single full node. This node will always be in front of the validators' pool, giving it an advantage over other nodes.
- New Technology Shortcomings
LPoS is still a new technology whose vulnerabilities are not yet fully exposed to help users make sound decisions. It is subject to weaknesses of any new technology such as doubt and lack of regulations that affect adoption.
A consensus mechanism is vital in the blockchain. Consensus helps network peers to reach an agreement. It helps in keeping the network safe and active. PoW, although powerful, has seen slow adoption given the high power requirements and slow processing speed. PoS provides solutions to PoW challenges to attract the attention of networks as big as Ethereum.
LPoS is a more effective wing of PoS. LPoS enhances the functionalities of PoS to give users more benefits, including balance leasing, passive income generating, and secure transactions. Implementation of LPoS in the Wave platform has unleashed a new capability of the decentralized ledger technology.
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Source: Complete Guide LPoS
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