Proof of Stake: what is the difference between PoS and LPoS?

Not everyone knows this, but there are different forms of Proof of Stake (PoS). 

Proof of Stake is an alternative method to Proof of Work (PoW) of validating transactions on blockchain. 

The world’s first blockchain, Bitcoin’s blockchain, has always been based on PoW, but this method turns out to be relatively slow and especially very expensive. In fact, securing a PoW-based network requires miners to do a lot of work, and that work consumes electricity. 

The Proof of Stake (PoS)-based consensus mechanism

To speed up, and more importantly make validation of transactions on blockchain less energy-intensive, Proof of Stake, or an alternative validation method to PoW, was invented. 

PoS does not require miners to perform any work, so much so that it does not even require miners to exist. In fact, when Ethereum switched from PoW to PoS in September 2022 ETH mining simply ceased to exist forever. 

The concept behind PoS is that those who want to participate in transaction validation (so-called validators) must stake their cryptocurrencies to increase the odds of generating a block. 

In fact, the people who generate the blocks that validate transactions by adding them to the blockchain are precisely the validators who have staked, that is, staked their cryptocurrencies. They receive a reward in return. 

Staking on nodes

PoS-based networks work well if many holders of the network’s native cryptocurrency are staking many of their coins. 

For example, on Ethereum there are more than 28 million ETHs in staking, out of about 120 existing ETHs in the world. 

The original PoS simply requires validator nodes to staking their own cryptocurrencies on their own node, and to incentivize them to staking many of them, mandatory minimums are often introduced. 

For example, in order to run an Ethereum validator node, 32 ETH, or nearly $63,000, must be staked. 

This effectively precludes small ETH holders from having a validator node, and so staking-as-a-service was born, i.e., nodes that also allow other coin holders to add their own in staking on the node. 

Such a service is offered by many exchanges, for example, or by decentralized services such as Lido. 

Leased Proof-of-Stake (LPoS)

Staking-as-a-service on traditional PoS is offered by private initiatives that allow third parties to put their coins in staking on the node owned by the service provider. 

There are, however, some networks, such as Tezos and Waves, that are not based on simple PoS, but on LPoS. 

So-called Leased Proof-of-Stake natively allows those with a validator node to borrow their coins from third parties, so as to increase the coins in staking on the node and increase the likelihood of generating blocks and getting rewarded. 

This also helps those who do not have enough coins to open their own node to participate in staking using a native, decentralized methodology. 

Of course, those who lend their coins to a node receive in return a portion of the rewards received by the node in proportion to the amount of coins lent. 

In this way, even those who lack, for example, the technical know-how to launch and operate a validator node can participate in the staking process. 

Thus LPoS is a variant of PoS that natively makes coin lending to nodes based on a decentralized system, unlike staking-as-a-service which is generally based on centralized services. 

Those who lend coins to nodes doing LPoS can still freely withdraw them, however, precisely because the system is decentralized and thus withdrawal cannot be blocked. In fact, the rented coins never actually leave the user’s wallet, which merely links the node to his wallet, without transferring his coins to the node.

Delegated Proof of Stake (DPoS)

There is actually also a third variant of Pos, which is the so-called Delegated Proof of Stake (DPoS).

In DPoS, validator nodes are selected through a kind of election, by the entire network, thanks to a system of representative democracy.

Votes are cast by users by staking their coins.

The reason behind such a strategy should be found in the fact that by using many fewer validators, consensus can be established faster. This makes validation of transactions faster. For example, the Tron network is based on DPoS, and in fact it is now the preferred one for USDT transactions, for example. 

In fact, Ethereum has shown that PoS alone is not really able to lower transaction fee costs, whereas Tron has shown that DPoS can reduce them significantly. 

While lately the median average fee per transaction on Ethereum is about $3, on Tron it is about $0.1, which makes the difference very obvious.