Our traditional financial system has worked the same way for a long time.

A central authority has all the power over your assets. It holds, manages and, transfers them on your behalf. This means you have to ask permission to use your own funds. To many people, that may seem a little scary.

Yet with crypto, things are different. You have full control over your assets. It's like becoming your own bank.

Although, for the system to keep working, the participants must have a common agreement. This agreement is achieved on a single state of the network among distributed nodes.  This is called a consensus mechanism.

A consensus mechanism is an algorithm used to coordinate, secure and fault-proof data on a blockchain. It ensures that all users agree on one single decentralized source of truth.

In plain English, it's what stops anybody from spending funds they don't actually have.

Currently, Proof of Stake and Delegated Proof of Stake are two of the most used consensus mechanisms. These allow decentralization and agreement between ‌users on a network.

Before diving into how these work, you need to meet the first mechanism ever used in crypto, Proof of Work.

What is Proof of Work (PoW)?

Proof of Work is the consensus algorithm adopted by Bitcoin and many others to validate transactions and secure their network. It was introduced by Satoshi Nakamoto in 2008 and is considered by many as one of the safest alternatives.

Essentially, PoW verifies the last transactions with the help of miners. Those mineras use a great amount of resources to ensure the security and smoothness of the network. 

This is how it works

In order to achieve their purpose, they need a ton of computational power, energy and expensive equipment to solve a complex mathematical puzzle.

It´s like the Olympics, where miners compete with all their resources for the right to confirm a new block and update the blockchain. The first one to find the right solution, claims the reward 

If you’d like to know more, check What Is Proof of Work (PoW)? article (Soon)

So... what is Proof of Stake (PoS)?


Proof of Stake (PoS) is a consensus mechanism designed as an alternative to fixing Proof of Work (PoW) problems. The purpose is to have a more energy-efficient and accessible way to verify and support the network. Networks like Cardano, Solana and now Ethereum have adopted PoS over PoW mechanisms.

This mechanism allows users to stake (lock) their coins to become a validator in the network. Validators are responsible for the same things as miners in proof of work. Verify new transactions and add them to the blockchain.

Rather than relying on powerful computers to compete for the block validation right, PoS validators rely on their crypto holdings.

How does it work?

In Pos, the servers on the blockchain are called nodes. These nodes have to commit funds to the network, a process known as “staking”, for a chance to be chosen as the next block write.

When a node is chosen to write the next block, now are call “validator”. The validator selection is based on a combination of factors like the number of coins at stake, how old the node is, and randomization.

Now, the validator has the responsibility to verify the last transactions on the blockchain and claim the staking rewards.

Almost like the lottery, the more coins you stake, the higher odds to be chosen as the next validator and receive the prize.

That´s how PoS can help with some of the biggest concerns in PoW. Energy consumpion in PoS is drastically less than PoW. Also, faster transaction speed can be handled and the network can be scaled more easily.

Now that you know how proof of stake works, let's dive deeper into their benefits.

Is Proof of Stake the answer of all our problems?

The short answer, it depends on who you ask. 

Proof of Stake has amazed us with its low energy consumtion. It has a much smaller environmental impact compared to PoW. 

Also, PoS promises greater scalability and transaction speed, since transactions can be approved more quickly without the need for complex mathematical equations to be solved.

Another big advantage is that you don't need to spend lots of money on sophisticated computing equipment to participate. You only need your laptop and coins to stake.

A key distinction in PoS is that ‌stake works as an economic incentive for nodes to well-behave. If the networks detect any fraudulent transaction, the node will lose a part of its stake and the rights to participate in the future. 

However, Proof of Stake still has some improving points to work on.

One of the biggest worries is that PoS may be designed in favor of the wealthiest. Since those who hold the most stake have better odds of being chosen as validators, it could tend toward centralization.

As a solution, other methods for validator selection have been developed. The most notable, the little brother of PoS, Delegated Proof of Stake.

Advantages

Disadvantages

It doesn't require expensive equipment to participate

Security hasn't been proven as much as PoW

Energy-efficient.

It favors the wealthiest validators

What is Delegated Proof of Stake (DPoS)?

Delegated Proof of Stake is a more efficient and democratic version of PoS, where users vote and select delegates to validate the next block on their behalf. It was developed in 2014 by Daniel Larimer and first used on BitShare blockchain, Daniel´s company. Soon after, Steem and EOS adopted this model.

DPoS uses the stake balances as voting power. These votes are used to select the delegates who will manage to validate the next block on the blockchain. Staking rewards are distributed among these selected delegates, who then distribute part of the rewards to their electors proportionally to their individual contributions.

The more you stake, the higher share of the block rewards you receive.

Also, DPoS allows a more democratic voting system. Each delegate presents an individual proposal when asking for votes. This creates a voting system based on earned reputation and not just wealth. If a delegate misbehaves, it will be quickly expelled.

In addition, DPoS model allows to reach consensus faster, because there are a lower number of validators.

Advantages

Disadvantages

Faster validation process

Security not as proven, yet

The most democratic system than all

Lower number of validators tends to centralization

Now, the answer we've all been waiting for.

Which one is the best, PoS or DPoS?

Even though PoS and DPoS use stakeholding as core mechanisms to agree on consensus, they are pretty different. DPoS presents a fresh democratic voting system, where validators are elected by ‌users. It motivates validators to be honest and efficient. PoS has a bigger user base, but DPoS tends to be faster in terms of transaction speed. Both mechanisms are young compared to PoW, so adoption of new blockchains will test the security and scalability of these promising mechanisms. 


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