What Is Delegated Proof Of Stake and What Does Staking Have to Do With It?

Delegated Proof of Stake (or DPoS) is a consensus algorithm created by developer Dan Larimer in 2014. Here is a list of famous projects using DPoS:

• Bitshares
• Steemit
• Lisk
• Ark
• Eos

If PoS resembles direct democracy then DPoS emulates representative democracy.

Classic PoS allows coin holders to do staking. Coin holders confirm transactions, receiving new coins as a reward.

Rewards in the PoS network depend on the number of coins owned by the holder (“staker”). The larger the stake, the greater the reward.

PoS encourages “whales” to stake and fosters inequality similar to the uneven distribution of mining capacities in the Bitcoin network: a miner who invests more in equipment gets a greater chance of finding a block.

The Delegated Proof of Stake makes the distribution of coins and influence on the network more uniform and provides a greater degree of decentralization.

In DPoS blockchains each wallet with coins can vote for the so-called “delegates” (a.k.a. Block Producers, Validators) – designated community representatives who have the right to generate blocks and receive an award in the form of transaction fees.

DPoS is resistant to the attack of a corrupt minority. If delegates attempt to harm the network or go offline, network members elect new delegates until the number of honest block producers returns to 100%.

The delegate’s main task is to set and enforce the network’s basic rules, maintain stable operation of the blockchain and generate blocks. Delegates also receive profits from transaction fees. Each member of the network can become a delegate but only for a short time.

The network pays delegates to generate new blocks and includes new transactions in them. Delegates may opt to spend these funds on marketing or lobbying the community’s interests but can not spend them on his personal needs. Coin holders decide how much a particular delegate will receive for their work. It depends on the network rules and the reputation of the delegate in question. Delegate’s reputation is underpinned by the voices of individual users who, with the help of their staked coins, continuously participate in the elections. One user can give a delegate only one vote but it is also possible to vote for several candidates at once.

When delegates are elected each of them is elevated into a special group. People in this group have access to the genesis account.

This is a multi-signature account through which you can change:

• block reward;
• block generation time;
• block size;
• witnesses reward;
• transaction fees.

These parameters that are under the authority of delegates should not change too often: instability and novelty scare away newcomers and investors. Genesis account can also perform standard functions: use smart contracts, receive funds, form a stake.

After important decisions are made and before they come into force, the DPoS blockchains have a short period of time during which new delegates can be elected. This is a necessary precaution for if the new rules suggested by the delegates are not approved by the majority of users.

The number of delegates can be reduced or increased, they can be fully replaced, still, this will not affect the stability of the network.

The list of active delegates is updated after the vote count. The system then queues delegates in random order. Each delegate gets the opportunity to generate a block after which the queue is again randomly reorganized. A delegate may choose to skip a specific transaction, postponing its confirmation. This feature requires a lot of trust in the delegates and makes the system somewhat vulnerable to manipulation.

If a delegate did not generate a block or did not include certain transactions in it, the next block, generated by another delegate, will be twice as large to include unconfirmed transactions. This mitigates the malicious attempt to block or delay the generation of blocks.

In the long run, it is impossible to block specific transactions: if a delegate abuses his authority other network members can replace him through voting.

Users who are engaged in staking and have a chance to temporarily become a delegate are called witnesses (a.k.a. Witness Node, Validator, Block Producer, since they are witnesses of transactions and at the same time network nodes). DPoS uses a reputation system and real-time voting to elect witnesses and delegates. Witnesses generate blocks, confirm transactions, stake coins and vote. Unlike delegates, they can not configure basic network rules.

They also check:

• incoming blocks and transaction signatures;
• smart-contract execution results;
• whether delegates are legitimately elected;
• distribution of user transactions.

Each full node can provide read access to blockchain data which makes the system look like a decentralized content delivery network (CDN).

All coins in DPoS blockchains are designated as free (in circulation) and staked. Each person determines the size of his stake and is unable to spend it. Staked coins allow one to become a witness, vote for delegates and take part in managing the network through smart contracts. What are the benefits of staking?

• No need to invest in expensive equipment to mint new coins;
• No high power consumption;
• Infeasibility of the “51% attack”: the attacker must own at least 51% of all tokens;
• During airdrops many projects distribute coins faster among the stakers;
• Staking in DPoS is used not only to make money but also as a tool to influence the network.

DPoS certainly does have some major flaws. To mention the most important ones:

• The deanonymization of witnesses (as these are often public companies, not private individuals).
• Network nodes are susceptible to DDoS attacks.
• Most users do not have an incentive to vote as their stake is too small.
• The danger of centralization: a really large stake can allow a whale to re-elect himself indefinitely.
• Voting with a wallet carries high financial and political risks: voters are more likely to be bribed or not vote at all.
• Some implementations recommend using multi-core processors for validation, otherwise, the delegate may miss the block reward.
• Staked coins are frozen for a while so if the price drops much it is impossible to sell the coins right away.

The famous bitcoin maximalist Nick Szabo expressed concern about one of the DPoS implementations:

“In EOS a few complete strangers can freeze what users thought was their money. Under the EOS protocol, you must trust a “constitutional” organization comprised of people you will likely never get to know. The EOS “constitution” is socially unscalable and a security hole.”

in April 2019 EOS network members voted to replace the interim constitution with a user agreement (EUA). At the time of the vote, the turnout was a meager 1.7%. The decision had to be eventually made by block producers which caused a torrent of criticism concerning centralization and crudeness of some DPoS implementations.