Liquid Proof of Stake (LPoS) is a variation of the Proof of Stake (PoS) consensus mechanism used in some blockchains (some resources use “Leased Proof of Stake” (LPoS) to describe the same concept). Like PoS, LPoS aims to be a more energy-efficient alternative to Proof of Work (PoW) which underpins cryptocurrencies like Bitcoin. But how does it work, and what are the benefits?
Understanding PoS
In a nutshell, Proof of Stake blockchains rely on holders of the cryptocurrency to validate transactionsTransaction Exchange of value, property, or data between two parties. and secure the networkNetwork The set of computers connected to each other, called nodes, on which the blockchain of a specific cryptocurrency is based.. Instead of using massive amounts of computing power like PoW, validators in a PoS system are chosen based on the amount of cryptocurrency they hold. The more coins a user holds (their stake), the greater the chance they have of being selected to validate the next blockBlock A set of encrypted transactions that, in sequence with other blocks, constitutes a blockchain. of transactions and earn rewards.
Liquid Proof of Stake – Increased Participation
LPoS builds on PoS by allowing users with smaller holdings to participate in the validation process. Here’s how it works:
- Leasing Crypto Tokens: LPoS allows users to lease their cryptocurrency holdings to validators (often called nodesNode Device connected to a blockchain, which makes up the network.) on the network. These leased tokens are combined with the validator’s own stake to increase their overall stake.
- Validators vs. Delegators: It’s important to distinguish between validators and delegators. In LPoS, users directly lease their tokens to validators who are responsible for transactionTransaction Exchange of value, property, or data between two parties. validation. In Delegated Proof of Stake (DPoS), users vote for delegates who then validate transactions on their behalf.
Benefits of Leasing
For users with smaller holdings, leasing allows them to contribute to network security and earn rewards even if they don’t hold enough tokens to become validators themselves. Validators benefit from having a larger stake, giving them a higher chance of being chosen to create the next block and receiving transaction fees.
LPoS in Action: The Waves Platform
A notable example of a blockchain that utilizes LPoS is Waves. On the Waves platform, users can lease their WAVES tokens to validators with the potential to earn rewards.
Advantages of LPoS
- Increased Participation: LPoS lowers the barrier to entry for participation in securing the network, allowing more users to get involved.
- Energy Efficiency: Compared to PoW, LPoS requires significantly less computing power, making it a more environmentally friendly option.
- Security: A larger pool of validators with a stake in the network can potentially improve overall security.
Similarities with Delegated Proof of Stake (DPoS)
Some consider DPoS to be a close relative to LPoS. In DPoS, users vote for delegates who validate transactions. While leasing isn’t the main feature, users can often delegate their stake to these delegates. Examples of DPoS platforms include EOS and Tron.
For small investors with limited holdings, DPoS is generally considered a more accessible option for participating in securing a blockchain network. They can still contribute to the network’s security by voting for delegates, even if they can’t directly participate in validation. Here’s a breakdown of how LPoS and DPoS differ in terms of accessibility for small investors:
LPoS (Liquid Proof of Stake):
- Direct Participation: In LPoS, users directly lease their own cryptocurrency holdings to validators.
- Minimum Stake Requirement: Some blockchains using LPoS might have a minimum stake requirement for leasing. This can be a barrier for very small investors.
- Benefits: Offers direct rewards based on the amount leased.
DPoS (Delegated Proof of Stake):
- Indirect Participation: In DPoS, users vote for delegates who then perform the validation tasks.
- Lower Barrier to Entry: There’s no minimum stake requirement for voting in most DPoS systems. Even small investors can participate in securing the network by voting for delegates they trust.
- Rewards: Rewards might be distributed by the delegates they voted for, but the exact mechanism can vary depending on the specific blockchain.
In Conclusion
Leased Proof of Stake (LPoS) is a unique variant of Proof of Stake that allows for broader participation in network validation and security. By enabling users with smaller holdings to contribute, LPoS offers a more inclusive and potentially more energy-efficient approach to securing blockchains.